Shell's Arctic Drilling Plans Draw Increased Scrutiny After BP's Oil Spill

The U.S. will review Royal Dutch Shell Plc’s plans to explore for oil and natural gas off Alaska’s coast and take steps to increase safety on all offshore rigs, Interior Secretary Ken Salazar said today.

Shell’s application to drill exploratory wells in the Arctic Ocean faces new scrutiny because of the spill from BP Plc’s well in the Gulf of Mexico, Salazar told a House panel probing the spill. Shell’s plans were conditionally approved last year by Salazar, and drilling could begin within months in Alaska’s Beaufort and Chukchi seas.

The U.S. gets about 30 percent of domestic oil and gas from the Gulf of Mexico, where 36,000 wells have been drilled without a major spill before BP’s well blew out on April 20, Salazar said. With oil fouling beaches in Louisiana, new legislation to regulate offshore drilling is needed, he said.

“We will deliver an interim safety report to the president tomorrow that will address some of the measures that can be taken to increase safety,” Salazar said at the House Natural Resources Committee. “We need to move forward with oil and gas development in the outer continental shelf.”

On April 20, the Deepwater Horizon drilling rig leased by BP from Transocean Ltd. exploded, killing 11 workers and unleashing a spill. The disaster was followed by a temporary suspension of some new drilling and the appointment of a presidential commission to review offshore energy development.

‘Root Causes’

What’s needed is an approach that will get “the answers to the root causes of what happened here and also gets us developing with Congress the kind of safety regime so that this type of event does not happen again,” Salazar said today.

President Barack Obama will announce added safety measures for offshore drilling tomorrow, after receiving Salazar’s initial report, according to an administration official who asked not to be identified before the announcement. Obama will impose new permitting procedures for oil exploration and tougher inspections to ensure safety and environmental rules are being followed, the official said.

“Nothing in life and nothing that we do is risk-free,” Salazar said today. “How do you create a program that does in fact minimize those risks?”

Shell, Alaska’s biggest offshore-oil explorer, spent $2.1 billion for rights to explore in the Chukchi Sea, which is estimated to hold 15 billion barrels of recoverable oil and 77 trillion cubic feet of recoverable natural-gas reserves. The areas Shell plans to test-drill are at least 60 miles offshore.

Beaufort Reserves

The Beaufort Sea may hold 8.22 billion barrels of oil and 27.64 trillion cubic feet of gas, according to the Interior Department.

“Those are being examined,” Salazar told the House committee, referring to the Alaska drilling plans. “Adjustments will be made in the days and weeks ahead.”

Salazar wouldn’t say whether the administration intends to cancel the Arctic leases.

U.S. Coast Guard Rear Admiral Mary Landry today approved a BP maneuver, known as a “top kill,” to plug the leaking Gulf oil well.

Lawmakers including Edward Markey, a Democrat from Massachusetts, have criticized BP for failing to accurately measure the volume of the spill. Initial estimates of 1,000 barrels a day were raised to 5,000 barrels (210,000 gallons) a day. Scientists say the well could be spilling as much as 25,000 barrels to 100,000 barrels a day.

‘Financial Interest’

“Was there any reason why BP would have a financial interest in underestimating how much oil was leaking?” Markey said at today’s hearing.

“The answer is yes,” Salazar said. “Liability does apply with respect to the amount of the oil spill.”

Deputy Interior Secretary David Hayes said reports were erroneous that new drilling permits have been issued by the Minerals Management Service since Obama imposed a 30-day moratorium. Permits have been approved for operators needing to change existing drilling plans, he said.

“We have not approved any new applications for drilling in the deep water since April 20,” Hayes said. “We put a full stop after May 6 on all new applications to drill period, shallow water and deep water. The confusion, congressman, has been there are revisions to permits. Those appear on the MMS website as new permits. They are not new permits.”

Salazar said ethics improprieties by some MMS employees are “reprehensible,” while defending the majority of MMS employees as responsible workers.

“There are 1,700 employees within the Minerals Management Service” Salazar said. “Most of the employees at MMS are good public servants. There are bad apples within the organization. People have been reprimanded. People have been turned over for prosecution. We will have zero tolerance with respect to ethical lapses.”

To contact the reporter on this story: Jim Efstathiou Jr. in Washington at jefstathiou@bloomberg.net

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