Shell says it will 'pause' drilling in Arctic Ocean for 2013

ANCHORAGE, Alaska - An effort to give the United States a new source of domestic oil and refill the trans-Alaska pipeline took a hit Wednesday when Royal Dutch Shell PLC announced it will suspend offshore petroleum drilling in the Arctic Ocean for 2013.

Shell drilled last year in both the Chukchi Sea off Alaska's northwest coast and in the Beaufort Sea off the state's north coast.

But problems before and after drilling, culminating with the grounding of one of Shell's two drill ships, left in doubt whether the company could make repairs in time to drill in 2013. Shell Oil President Marvin Odum answered that question with the announcement that the company would "pause" exploration to prepare equipment and vessels for drilling in the future.

"We've made progress in Alaska, but this is a long-term program that we are pursuing in a safe and measured way," Odum said. "Our decision to pause in 2013 will give us time to ensure the readiness of all our equipment and people following the drilling season in 2012."

Environmental groups bitterly oppose Arctic drilling in the rich ecosystem that supports endangered whales, polar bears, walrus and ice seals. They claim not enough is known about drilling's effects on an ecosystem already being hammered by climate change, with summer sea ice continuing to be lost on a record pace. They also say oil companies have not demonstrated the ability to clean up a petroleum spill in ice-choked waters.

"This is the first good decision we've seen from Shell," said Mike LeVine, an Alaska spokesman for Oceana, a conservation group. "Given the disastrous 2012 season, our government agencies must take advantage of this opportunity to reassess the way decisions are made about our ocean resources and to reconsider the commitment to explore for oil in the Arctic Ocean."

In December, Calgary-based Imperial Oil (TSX:IMO) laid out its early-stage plans for drilling in the Beaufort Sea with its joint-venture partner, BP.

The plans involve one or more exploration wells in two leases about 125 kilometres northwest of Tuktoyaktuk, N.W.T., in waters that range from 60 to 1,500 metres.

The document indicated that Imperial would continue to propose the use of a blow-out preventer, which would function like a cap to prevent oil spills in the case of an accident.

But in its review of Arctic offshore drilling regulations released in December 2011, the National Energy Board clearly indicated its preference for same-season relief wells, which would involve the immediate drilling of a second well in the case of a blowout to redirect the leaking oil.

Canada's energy regulator will continue to require that oil and gas companies wanting to operate in sensitive Arctic waters be able to drill immediate relief wells to help contain blowouts.

The document suggested the proposals could be through the regulatory process by the end of 2015. The partners would then have to make a decision as to whether to fund the wells or not.

The U.S. Geological Survey estimates that 26.6 billion barrels of recoverable oil and 130 trillion cubic feet of natural gas exist below Arctic waters. The vast underwater reservoirs could be linked to shore by underwater pipelines and then overland to the trans-Alaska pipeline.

Shell in 2008 spent $2.1 billion on petroleum leases in the Chukchi Sea and estimates that it has spent $5 billion on Arctic drilling. Shell contends that it can drill safely, its two drill ships completed top-hole drilling on two wells last year, but the company was bedeviled by problems in 2012.

The company's spill response plan required that a response barge be on site before drill bits dug into petroleum-bearing zones. That never happened. A key piece of equipment, a containment dome, was damaged in testing off the Washington coast.

Seasonal ice in the Chukchi Sea delayed Shell vessels from moving north. When Chukchi drilling began Sept. 9, a major ice floe forced Shell's drill ship off a prospect less than 24 hours later.

When the drilling season ended, the Coast Guard announced that it had found 16 safety violations on the Noble Discoverer, which drilled in the Chukchi, when it docked in Seward, Alaska. The Coast Guard said last week that it has turned its investigation of the vessel over to the U.S. Department of Justice.

The problems crested in late December when the Kulluk, a circular barge with a diameter as long as nearly three basketball courts, broke away from its towing vessel on its way to a shipyard in Washington state.

The Kulluk on New Year's Eve ran aground off a remote Alaska Island near Kodiak Island. It was pulled off six days later but requires repairs. The Kulluk left under tow Tuesday for the Aleutians Island port of Dutch Harbor, where it will be loaded onto another vessel for transport to a shipyard in Asia. The Noble Discoverer also will undergo maintenance and repairs in Asia.

Shell's spill response plan calls for two drill ships to be in the Arctic so that if one is damaged in a blowout, the other could drill a relief well.

After the Kulluk was refloated, Interior Secretary Ken Salazar announced that his department would perform an "expedited, high-level assessment" of the summer drilling season. Salazar said the review would pay special attention to challenges that Shell encountered with the Kulluk, with the Noble Discoverer and with the company's oil spill response barge. The Interior Department oversees offshore drilling permits, and Salazar said drilling in frontier areas such as the Arctic demand a higher level of scrutiny.

The Coast Guard also is reviewing the Kulluk grounding. Rear Adm. Thomas Ostebo said the investigation will look at every aspect of the incident, from possible failure of materials to evidence of misconduct, inattention or negligence.

Shell has said the grounding was a maritime transport problem. Drilling in 2012, Odum said Wednesday, was completed safely.

"Shell remains committed to building an Arctic exploration program that provides confidence to stakeholders and regulators, and meets the high standards the company applies to its operations around the world," Odum said. "We continue to believe that a measured and responsible pace, especially in the exploration phase, fits best in this remote area."

Shell Alaska spokesman Curtis Smith said drilling could resume in 2014.

"It's possible, depending on the result of ongoing reviews and the readiness or our rigs, and frankly the confidence that lessons learned from our 2012 drilling program have been fully incorporated.

Alaska U.S. Sen. Lisa Murkowski, who is gearing up for confirmation hearings next month on Salazar's announced replacement, Sally Jewell, said Shell's decision to postpone exploratory drilling program shows that the company is committed to safety.

"This pause — and it is only a pause in a multi-year drilling program that will ultimately provide great benefits both to the state of Alaska and the nation as a whole — is necessary for Shell to repair its ships and make the necessary updates to its exploration plans that will ensure a safe return to exploration soon," Murkowski said.