Shell admits Arctic drilling defeat, for now

LONDON Tue Sep 18, 2012 3:20am IST

Snow covered Shell logo is seen at a petrol station in Istanbul February 17, 2012. REUTERS/Osman Orsal

Snow covered Shell logo is seen at a petrol station in Istanbul February 17, 2012.

Credit: Reuters/Osman Orsal

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LONDON (Reuters) - Shell's offshore drillers have lost their race with the Arctic winter and abandoned hope of striking oil this year but will drill wells before the ice closes in to prepare for a 2013 search for the region's elusive riches.

Shell had until September 24 to drill into oil reservoirs in the Chukchi Sea, according to U.S. rules designed to accommodate the dangers of drilling in increasing ice and deteriorating weather in the environmentally sensitive region.

But Shell's U.S. offshore Arctic expedition has cost $4.5 billion since 2005, almost one sixth of Shell's annual capital spending budget, and has faced a series of setbacks.

The latest came on Monday when the company said its containment dome, a giant metal box on a barge that is standing by to help contain any oil spill resulting from a well blowout, had been damaged during tests.

"In order to lay a strong foundation for operations in 2013, we will forgo drilling into hydrocarbon zones this year. Instead, we will begin as many wells, known as `top holes,' as time remaining in this season allows," the company said.

By October 31, Shell must halt all operations, including top hole wells which stop short of the oil reservoirs but prepare the way for drilling in earnest next year.

Last week, Shell was forced to unhook its drilling vessel from anchors holding it over a drill site to escape encroaching ice, just a day after it started drilling the first hole in the Chukchi seabed for more than two decades.

The work had begun after a series of delays having finally won permission from the U.S. Interior Department and the Environmental Protection Agency. U.S. regulatory oversight of the Arctic has long been intensive, but it has stepped up a gear since the Macondo oil spill in 2010.

The absence of a certificate for the barge itself from the U.S. Coast Guard delayed operations earlier in the summer. Ice cover in unexpected quantities has also been a complication.

Shell's activities in the Beaufort Sea, another Arctic province, have been hit by some of the same issues and by the need to avoid disturbing the autumn whale hunting season nearby. Drillers there have yet to get a drill bit into the seabed.

IS IT WORTH IT?

The remoteness, the extreme cold, and the threat from ice floes crushing equipment pile more costs on top of those imposed by restrictions on drilling during hunting and breeding seasons and requirements for expensive emergency equipment to be on standby.

And industry executives acknowledge that the economics of Arctic exploration is shaky.

"The Arctic has a high cost of supply and it is going to take high oil prices to keep it competitive until we can drive down the costs," ConocoPhillips Chief Executive Ryan Lance said last month.

In July, BP, Europe's second largest investor-controlled oil company behind Shell, indefinitely suspended a $1.5 billion offshore oil project in Alaska due to cost overruns and technical setbacks.

And last month, the Shtockman consortium that had been looking to exploit a huge gas field in the Russian Barents Sea put the plan in mothballs, saying it is too costly for now.

Nevertheless, Shell and other international oil and gas companies are moving into the Arctic because of increasing resource nationalism and dwindling production in their traditional heartlands of the Middle East, South America, the United States, the North Sea and elsewhere.

Persistently high oil prices are also making the huge engineering challenges of working in such a hostile environment look more worthwhile. In addition, the climate change that burning hydrocarbons contributes to has pushed back the ice, opening up access to, and markets for, the hydrocarbons there.

The prize of success could be huge. The International Energy Agency (IEA) estimates that some 30 percent of the world's undiscovered natural gas and 13 percent of its oil is waiting to be exploited in the Arctic.

Norwegian oil producer Statoil, another Arctic pioneer which recently teamed up with Russia's Gazprom and others, is working on a prototype of a gas compressor the size of a football field and 20 meters (66 feet) high designed to sit on the seabed beneath the ice and operate all year round.

Drilling in the Arctic Barents Sea, off Norway, has continued unabated this year after a string of major discoveries recently and the government will offer 72 Arctic blocks in a licensing round later this year.

Statoil already operates the Snoehvit LNG facility in the Barents and Italy's ENI is putting the finishing touches to the $6.4 billion Goliat facility, which will start up in 2014.

ENVIRONMENTALISTS PLEASED

Campaigners are worried about the potential threat to wildlife, the environment and traditional Arctic communities from drilling noise and pollution and the chance of a spill.

Greenpeace hailed the failure of the Shell safety equipment to get through the testing stage as a victory for its campaign to keep the oil companies out of the region.

"Nearly 2 million people from around the world have joined the Greenpeace campaign to Save the Arctic and keep it off limits to oil companies," said Ben Ayliffe, senior Arctic campaigner, in a statement.

"Today's news is vindication for the effort they have put in confronting the oil giant in places as far apart as New Zealand and Edinburgh, but these millions will not stop until the whole of the pristine and unique Arctic is protected."

The New York-based environmental group Natural Resources Defense Council said the problems Shell has had highlight the dangers of working in Arctic conditions.

"It's not safe to drill for oil in the Arctic -- not now, not next month, not next year," the NRDC said in a statement.

Frederic Hauge, founder of environmental campaign group the Bellona Foundation, told Reuters at a recent industry conference in Norway that there was no way a response on the scale mounted after BP's 2010 Macondo Deepwater Horizon spill in the U.S. Gulf could be mounted in the Arctic.

"We don't have the equipment for cleaning up oil on the ice. The Deepwater Horizon cleanup had 45,000 workers and 4,500 ships working out of some of the biggest ports in the world. Where are the harbors for that? We don't have that at all. The oil industry is too self-confident."

(Additional reporting by Sarah Young; and Kate Holton in London and Balazs Koranyi in Oslo; editing by Anna Willard and Marguerita Choy)

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