Shell Pause in Arctic Drilling Spurs Call for U.S. Review

Royal Dutch Shell Plc (RDSA)’s pause in Arctic oil drilling after last year’s equipment mishaps should prompt a U.S. review of drilling procedures or a total ban, environmental groups said.

Two ships Shell was using in the Beaufort and Chukchi seas will be towed to Asia for repairs, the company said yesterday in a statement. In 2012, the company never got a U.S. permit to tap an oil reservoir off Alaska’s north coast because of issues with a spill containment system. It also encountered weather delays and was cited for violating air-pollution permits.

“It appears Shell is realizing they need to take a more careful approach to ensure they don’t put the Arctic’s people and marine life at risk,” Marilyn Heiman, director of the U.S. Arctic program at the Pew Charitable Trusts, said in an e-mail. Before drilling resumes, Shell, regulators and outside groups must “develop world-class industry standards and ecological and cultural protections to safeguard the Arctic.”

Oil exploration and production companies have expanded Arctic drilling plans in the past five years, using technology that may let them reach oil reserves trapped in the sea floor beneath ice. The Chukchi and Beaufort seas may contain 25 billion barrels of oil, according to the U.S. Geological Survey.

Shell drilled two preparatory wells last year after spending about $4.9 billion over seven years preparing for Arctic exploration. The company had planned to spend $800 million in Alaska this year, and costs are “likely to remain substantial” given rental and repair costs, said Curtis Smith, a Shell spokesman.

‘Safe, Measured’

“We’ve made progress in Alaska, but this is a long-term program that we are pursuing in a safe and measured way,” Marvin Odum, head of Shell’s U.S. subsidiary, said in a statement. “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.”

Shell’s conical drilling barge Kulluk was damaged after running aground in southern Alaska Dec. 31 while being towed during a storm. The Noble Discoverer drill ship was temporarily detained by the U.S. Coast Guard in November after it lost propulsion while docking at Seward, Alaska. Owner and operator Noble Corp. agreed to fix the ship, which in July had slipped a mooring and drifted toward shore.

In January, the Environmental Protection Agency said that Shell’s operation of the Kulluk violated “numerous conditions in the permit” under the Clean Air Act. At the same time, the Interior Department started a 60-day review of Shell’s drilling, following what Secretary Ken Salazar called a “series of mishaps” that was “troubling.”

Murkowski, Environmentalists

Alaska holds high potential for Shell in the long term, and the company is committed to drilling there, Odum said. Production will take years if oil is found, Shell said.

The top Republican on the Senate Energy and Natural Resources Committee, Lisa Murkowski of Alaska, praised the company’s decision on its 2013 drilling.

“I have been a strong supporter of Shell’s activities in the waters off Alaska’s northern coastline and in energy exploration in general, but I have always said that it must be done to the highest safety standards,” Murkowski said in a statement. “Shell’s decision to postpone this summer’s exploratory drilling program shows that it shares that commitment to safety.”

Environmentalists’ Criticism

Environmental groups were more critical of Shell’s activities in the Arctic last year and what they called the unsatisfactory oversight by the U.S. Interior Department.

“This is the first thing Shell’s done right in Alaska -- calling it quits,” said Phil Radford, executive director of the environmental group Greenpeace USA. “Now the responsible decision is to make Arctic drilling off limits, forever.”

The announcement by Shell wasn’t a surprise, said Michael LeVine, the Juneau, Alaska-based Pacific senior council for Oceana, an environmental group. “It reflects a crisis of confidence both for the company and for the agency charged with regulating it,” he said.

Cindy Shogan, executive director of Alaska Wilderness League, said Shell’s failed Arctic efforts last year underscored the risks to hydrocarbon development there.

“If the top oil company in the world has failed in its quest to drill in the harsh and unpredictable conditions in the Arctic, it is time to assess whether any oil company can safely drill in the Arctic Ocean,” she said in a statement.

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Mark Drajem in Washington at mdrajem@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net; Susan Warren at susanwarren@bloomberg.net

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