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Shell, Alaska Native corporations enter agreement with option to share in drilling profits

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ANCHORAGE, Alaska - An Alaska Native regional corporation and six Native Village corporations signed an agreement with a Shell Oil subsidiary Thursday that aims to share the profits from offshore drilling off Alaska's northwest coast.

Shell and the Arctic Slope Regional Corp. announced the formation of a new company called Arctic Inupiat Offshore LLC. Its participants include six village corporations on the North Slope. The agreement with the Shell subsidiary, Shell Gulf of Mexico Inc., gives the Alaska Native company the option of acquiring an overriding royalty interest from Shell's drilling on leases in the Chukchi Sea.

Rex Rock Sr., president and CEO of the regional corporation, said the new company aims to align the oil industry and North Slope communities by investing in offshore production through the purchase of the overriding interest. Rock, who also is president of the new company, said the agreement allows the corporations to balance the risks and benefits of offshore drilling.

"This is a historic event," he said. "This commitment represents our collective vision and commitment to a sustainable economy in our villages."

Shell would get the benefit of local knowledge for its drilling operations, said Shell Alaska Vice-President Pete Slaiby. He said the agreement also underscores Shell's commitment to provide opportunities for the communities.

"It's my belief that a strong alliance with so many respected Alaska Native corporations provides Shell the opportunity to collaborate with savvy and experienced North Slope partners," Slaiby said.

Details about the arrangement were sketchy and officials allowed little time for questions from reporters.

Rock declined to discuss the cost of investment by the corporations, saying it was proprietary information. Asked how the agreement would directly affect the communities themselves, he said it would be "huge for the future."

Shell spokesman Curtis Smith said the agreement allows for an option to purchase an equity position in Shell's Chukchi acreage at a later date. The agreement has been four years in the making, according to officials.

Slaiby said the agreement is no indication that Shell is pulling away from the Arctic. The company, however, cannot definitively outline its plans until a legal matter is resolved, he said.

Earlier this year, Royal Dutch Shell PLC announced it was suspending operations in the Alaska Arctic for 2014, at least. The company said the decision was based in part on a federal appeals court ruling that found the federal government conducted a flawed environmental review before selling $2.7 billion in oil and gas leases in the Chukchi Sea in 2008. Shell was the leading bidder in the sale, spending $2.1 billion.

Since the appeals court ruling, the U.S. Interior Department has laid out a timeline for completion of a new environmental review, targeting early next year for the final decision.

In 2012, Shell drilled pilot holes and dug mudline cellars in both the Chukchi and Beaufort seas. It was not allowed to drill into oil-bearing deposits because required response equipment was not on hand.

The company experienced problems in the challenging conditions in the Arctic, culminating with the drill vessel Kulluk running aground off an island near Kodiak as it was being towed across the Gulf of Alaska.

After Thursday's announcement, U.S. Sens. Lisa Murkowski, R-Alaska, and Mark Begich, D-Alaska, hailed the joint venture. Murkowski called it a wise decision on Shell's part.

"Shell's decision to invest in the future of the region and its people should be applauded," Murkowski said in a statement. "This announcement ensures that the people of the North Slope Borough share directly in the oil and gas bounty off their coast. It also gives locals a say in what happens near their communities."


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