Shell's flawed plan to drill for oil in the Arctic

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Shell's dubious plan to drill for oil in the Arctic

The single well in the Chukchi that Shell aims to excavate this summer could be the most expensive on earth, and it hasn’t yielded its first barrel of crude.

So why is Shell doubling down on the Arctic amid a worldwide supply glut, and at the same time that many politicians are vowing to address global warming?

Even against the OBSTACLES (see below), Shell won’t postpone or downsize its Arctic dreams. 
CEO Van Beurden said, “it has the potential to be multiple times larger than the largest prospects in the U.S. Gulf of Mexico, so it’s huge.”

 Its top executives have even professed a desire to rethink fossil fuels and move toward renewable energy sources. And yet it’s assuming immense operational risks to drill in the Arctic.

Even sympathetic observers find it curious, though, that Shell and Shell alone sees future profit in the Chukchi, especially after its misadventures there in 2012.

Chevron, ConocoPhillips, ExxonMobil, Statoil, and Total have all put Arctic plans on hold. “Given the environmental and regulatory risks in the Arctic and the cost of producing in that difficult setting, assuming they ever get to producing, Shell must anticipate an enormous find—and future oil prices much higher than they are today,” says Nick Butler, a former senior strategy executive at BP who does energy research at King’s College London. “It’s a dangerous wager.” If Shell makes progress, other companies and nations will be emboldened to try the Arctic. “
 
Shell's Pickard says "Most of the world’s 'easy oil' has already been pumped or nationalized by resource-rich governments, leaving independent producers such as Shell no choice but to pursue 'extreme oil' in dicey places".

" 2012 really wasn’t all that bad: A lot of things went right". They had a successful exploration season in terms of getting rigs up here, operating to top holes, and then getting back down to Alaska quite successfully.” (From Alaska south, of course, not so much.)

What of the spill containment system crushed like an empty beer can? “That didn’t go well,” she admits. Also, “the Kulluk ended up on the beach. That’s not anything anyone wants to see in pictures.”

But past failure doesn’t guarantee future failure, Pickard points out. “The perception was that the weather is far worse [in the Arctic] than anywhere else we operate,” she continues. Not so. Off the U.K., she says, “North Sea conditions are actually worse.” Before taking over in Anchorage, she oversaw the construction of Prelude, a mammoth floating liquefied natural gas plant off northwestern Australia. It’s designed to withstand Category 5 cyclones, she explains, and those don’t happen in the Arctic. “We know how to operate in places where there’s challenging weather,” she says. “Alaska is no worse, and in many ways better than some other places.”

Continuing to accentuate the positive, Pickard says the Burger J prospect lies beneath only 140 feet of water, and its crude oil reservoir is under relatively low pressure as these things go. In contrast, BP’s ill-fated Macondo well lay beneath a mile of ocean and was under extremely high pressure. “The blowout scenario is quite different than the case of BP’s Macondo,” Pickard says. Burger J “is the kind of thing we’ve done all over the world for decades.”

Not to say there will be a blowout. “It’s not going to happen on my watch,” Pickard maintains. She has hired new talent, including a retired Navy admiral and several ex-Coast Guard officers. She’s “flattened the organization a lot.” Her predecessor and his inner circle in Anchorage perched several floors above the operations people; Pickard and her aides-de-camp mingle with the rank and file.

Ninety percent of the hands-on crew on an offshore project work for contractors. Pickard acknowledges that in 2012, Shell didn’t supervise the hired help adequately. “The contract management side has entirely changed,” she says. She has designated senior Shell employees as “contract holders” who each supervise one or two outside companies to the exclusion of other duties. “I expect our contract holder to know what the captain of the Aiviq had for breakfast yesterday.”

Yes, she confirms, that’s the same Aiviq that was part of the misadventure three years ago. It’s been repaired and returned to action; same with the rehabilitated Noble Discoverer and containment dome. The wrecked Kulluk has been replaced by the Polar Pioneer, a rectangular eight-leg drilling unit 279 feet long and 233 feet wide. Built in 1985, the Pioneer is owned and operated by Transocean, the same Switzerland-based drilling contractor responsible for the Deepwater Horizon rig that exploded while working for BP in the Gulf of Mexico in April 2010, killing 11 men. Thirty vessels are expected to be in the vicinity of the Burger J prospect, about the same as in 2012, with the Discoverer backing up the Pioneer and available to drill a relief well in the event of the blowout Pickard guarantees won’t occur.

The National Research Council, the working arm of the National Academies of Sciences, Engineering, and Medicine, has a more pessimistic view. “Coast Guard personnel, equipment, transportation, communication, navigation, and safety resources needed for oil spill response are not adequate for overseeing oil spill response in the Arctic,” the council concluded in a report last year.

 “We do believe in climate change,” says Pickard. Shell’s Scenarios group, an in-house think tank that management points to as an emblem of its open-mindedness, has done extensive work undergirding the company’s support for government policies encouraging development of renewable energy sources, she says. But the Scenarios research also justifies aggressive exploration for more crude.

With the global population rising from 7 billion to more than 9 billion by 2050 and total energy demand nearly doubling, “hydrocarbons are going to be needed for an awfully long time,” Pickard says. “That’s where Alaska fits into the picture.”

Shell in 1998 was one of the first major oil producers to acknowledge man-made climate change. For several years the company has even endorsed imposition of taxes on burning oil and other CO₂-emitting fuels, such as those enacted by some European countries. Bentham blames the U.S., China, and other major economies for failing to put their muscle behind this trend and impose levies that would create incentives to develop noncarbon alternatives. “We’ve lost 20 years collectively for the potential to moderate greenhouse gas emissions,” he says.

 In Shell’s view, it has no real choice. It’s “the responsibility of oil and gas companies to meet that demand in as reasonable a way that they can.” As for Alaska, he says, the company thinks “it’s not about Shell exploring for hydrocarbons in the Arctic. It’s society that is demanding this energy.” At the end of his personal journey, Van Beurden gave the Arctic project a green light.

Spent $7 billion

Shell is spending more than $1 billion a year—more than $7 billion so far and counting.

 2005-2008, Shell moved aggressively to snap up new drilling leases in the Arctic Ocean and spent $2.1 billion at auction for rights to more than 2 million acres.

SHELL'S CURRRENT PLANS

If all goes well, Shell will drill through in late September 2015, at which point Pickard says she’ll order the fleet to move south for the cold months.
Shell will have to come back for 15 summers before “first oil” flows through an as-yet-unconstructed 70-mile seafloor pipeline to the Alaska coast and then a 350-mile overland connector (also yet to be built) to the Trans-Alaska Pipeline.

OBSTACLES & ROCKY HISTORY

 Logistical and legal obstacles have repeatedly delayed the Arctic initiative, on which;

• Activists have sued;
• judges have intervened.
• In 2010, work stopped when the Obama administration temporarily suspended offshore drilling throughout the U.S. after the BP disaster in the Gulf of Mexico.
• Back in action in 2012, Shell suffered a maritime fiasco with Keystone Kops undertones: the Kulluk ship engines conked out, tow lines snapped, and a massive drill barge ran aground, requiring the U.S. Coast Guard to rescue storm-stranded workers.
  • for more detail (below)
• This July 16, former Vice President Al Gore called the Obama administration’s decision to approve Shell’s drilling “insane.”
• Two weeks later, on July 30, Shell’s chief executive officer, Ben Van Beurden, announced that as a result of $50-a-barrel oil, a 55 percent decline since last year, the company’s profit fell by a third in the second quarter. Expecting prices to “remain low for some time,” Van Beurden announced plans to eliminate 6,500 jobs, part of a broader contraction in a reeling industry.
•  In 2004,  Shell admitted it had overstated its global proven oil reserves by 4.5 billion barrels, or 22 percent. The ensuing scandal led to government fines in the U.S. and U.K., settlement of investor lawsuits, the ouster of the company’s chairman, and consolidation of the Dutch and British branches of the corporation.
• In 2007 nongovernmental organizations and native Alaskan groups went to court to stop Shell. They argued that regulators didn’t know enough about the effects of drilling in the Arctic, that the company lacked adequate spill response plans, and that Eskimo tribal representatives hadn’t been adequately consulted. Years of Whac-a-Mole litigation unfolded in federal courts in Alaska, San Francisco, and Washington: Environmentalists identified planning flaws, judges halted drilling preparation, the government and Shell proposed fixes, drilling prep resumed, and the lawyers went back to court. The six-month post-BP-spill moratorium came and went in 2010. Shell’s cutting-edge three- and four-dimensional seismic technology, not available in the 1980s and 1990s, bolstered the company’s confidence. In the summer of 2012, with the courts and regulatory agencies temporarily in favorable alignment, Shell returned to the Arctic.
• With 35 miles-per-hour wind during a stopover in Dutch Harbor,  the Discoverer nearly ran aground. The Coast Guard said the vessel came within 100 yards of shore, but photos posted by local radio station KUCB seemed to indicate it came a lot closer than that. A tugboat pulled the Discoverer back into deeper water.
• That September, the test of a $400 million “containment dome” went seriously awry. A faulty electrical connection caused the gigantic dome, designed to limit the spread of oil in case of a blowout, to rise to the surface without warning—and not in the storm-tossed Arctic but in the relatively tame Puget Sound, off Seattle. The head of the Alaska office of the U.S. Bureau of Safety and Environmental Enforcement reported that the dome “breached like a whale,” sank again, and reemerged, its top “crushed like a beer can.”
• Despite these forbidding omens, in September and October 2012, Shell went ahead and drilled two shallow “top holes,” one in the Chukchi and one in the adjacent Beaufort Sea. The U.S. Department of the Interior banned penetration of hydrocarbon-bearing zones because of the containment dome snafu.
  Operating in the Chukchi, the Discoverer, a converted log carrier built in 1966, had to detach prematurely from the ocean floor when wind pushed a 10-mile-wide ice floe directly at the vessel. The Discoverer then suffered an onboard fire and propeller shaft malfunction that required the crew to shut down its engines and accept a tow to Seward, Alaska, where the Coast Guard impounded the vessel.
  Ultimately, Noble Drilling, Shell’s contractor, pleaded guilty to eight federal felony counts related to pollution and safety infractions and paid penalties totaling $12.2 million.

The GREENPEACE PROTEST

How much oil is there?

They believe that 70 miles offshore and 800 miles from  Anchorage there is 15 billion barrels of oil. An additional 11 billion barrels are thought to be buried due east under the Beaufort Sea. All told, Arctic waters cover about 13 percent of the world’s undiscovered petroleum, or enough to supply the U.S. for more than a decade, according to government estimates.

SHELL'S DISASTER PREPAREDNESS

Pickard  says she can get all of her gear—capping stack, containment dome, surface booms, skimmer boats, tankers—in position within 60 minutes of an accident.

As she sees it, the damaged Fennica’s detour to Portland proves her point. Yes, the icebreaker suffered a puncture wound in Alaska. But rather than attempt a quick fix, she sent it to Portland for a more thorough repair in dry dock. The Fennica also happens to carry the capping stack, a massive piece of spill response equipment that would come into play to plug an out-of-control well if another device, the blowout preventer, failed to do the job.

 Pickard left the capping stack on the Fennica, even though that decision prompted the Department of Interior to ban Shell from penetrating Burger J’s oil zone until the Fennica returned to the vicinity of the well.

Pickard calls the management of the Fennica “a perfect example of operating exceptionally well.” On July 30, the ship maneuvered past nine remaining protesters hanging from Portland’s St. Johns Bridge and headed out to the Pacific on its way to the Chukchi. Anticipating the Fennica’s return, the Polar Pioneer’s drill bit began spinning into the seafloor to carve a “mud-line cellar,” a 20-by-40-foot space that will house the blowout preventer (BOP).

 In most offshore projects, the BOP projects above the seabed.

 Shell is burying the device to minimize potential damage from any large, unseasonal underwater ice floes of the sort that forced the Discoverer to detach and retreat from its top hole in 2012.

• The most spectacular failure involved the Kulluk, a round-shaped drilling barge that floated 250 feet above the waterline and had to be pulled by another vessel because it lacked its own power. Built in 1983 in Japan and mothballed a decade later, the Kulluk was purchased by Shell in 2005 and refurbished. In October 2012, after poking a shallow top hole in the Beaufort ice cap, the barge began its journey west and south, just ahead of fast-forming autumn ice. Bad weather and rough seas delayed its progress. Roiling seas, temperatures of -16F, and deck hands continuously chopping and hurling overboard two-foot-thick ice sheets that threatened to throw off the ship’s balance.

  By December it reached Dutch Harbor, where it could have spent the winter. Shell instead decided to tow the Kulluk on to Seattle. Subsequent government investigations found that Shell wanted to make off-season repairs that would have been more expensive and difficult to execute in Dutch Harbor. The oil company, with $467 billion in 2012 revenue, also wished to avoid $6 million in state port taxes that might have come due if the Kulluk remained in Alaska.

  December is a perilous month for any vessel to cross the Gulf of Alaska. The dangers are multiplied by a complicated towing maneuver. The captain of the Aiviq, the ship pulling the Kulluk, sent an e-mail to a member of the 18-man skeleton crew on the barge. “To be blunt,” Captain Jon Skoglund wrote on Dec. 22, “I believe that this length of tow, at this time of year, in this location, with our current routing guarantees an ass kicking.”

  On Dec. 27, with gale-force winds and 25-foot swells buffeting both vessels, the 600-yard towline snapped, setting the Kulluk and its crew adrift. The Aiviq circled back and reconnected the ships with an emergency line. The next day, however, the Aiviq’s four main engines all failed, apparently a result of seawater flooding. On Dec. 29, hovering Coast Guard helicopters lowered baskets on ropes to scoop the 18 crew members from the Kulluk’s heaving deck. Just in time, as it turned out: The towline broke once again—and later, a third time. On New Year’s Eve, Shell executives gave up. Cut loose, the Kulluk beached itself near Kodiak Island. Declared a total loss, the barge was dry-hauled to Singapore and cut up for scrap.

  Multiple investigations followed. The Coast Guard faulted a series of poor decisions by Shell and its contractors. “Inadequate assessment and management of risks ... was the most significant causal factor,” the agency concluded. The Department of the Interior similarly found “shortcomings in Shell’s management and oversight of key contractors.” In March 2013, then-Secretary of the Interior Kenneth Salazar told reporters: “Shell screwed up.”

  Following the Kulluk mess, Shell executives at the highest levels describe a period of intense internal reflection on whether to persevere in the Arctic. “I had the opportunity very early on in my tenure to say, ‘That’s it, let’s pull the plug on it,’” Van Beurden, who was named CEO in 2013, told the Guardian in a May 2015 podcast. “I had to go through a personal journey on that.”