Arctic-Specific Rules Required After Shell’s 2012 Mishaps

Royal Dutch Shell Plc (RDSA) was blasted by the U.S. government for the series of mishaps that dogged its attempts to explore for oil in the Arctic, and ordered to file detailed plans before it can resume those efforts.

An Interior Department review of Shell’s exploration off the north coast of Alaska in 2012, which was released yesterday, found shortcomings in oversight of its various contractors and said the company started its work “not fully prepared” for the challenges it faced.

Interior Secretary Ken Salazar ordered the staff review of Shell’s 2012 experience in January. The company had already announced a pause in its Arctic operations due to equipment repairs that forced it to skip this year’s drilling season.

“Shell screwed up in 2012, and we are not going to let them screw up after their pause is over,” Salazar told reporters on a conference call. “Before Shell is allowed to move forward, they are going to have to demonstrate to us that they have a comprehensive management plan in place.”

Interior, which regulates offshore drilling, will require the company to provide a detailed plan of both its drilling and transport operations. The plan must include how it will manage contractors, who contributed to Shell’s woes. It will also need third-party approval of that plan, Salazar said.

“The traditional operator-specific, ‘go it alone’ model common with exploration programs in other regions is not appropriate for Arctic offshore operations,” the Interior Department report said.

Shell Statement

Shell will “apply lessons learned” from the Interior report along with a separate Coast Guard investigation and its own assessment to bolster its offshore program, Curtis Smith, a company spokesman in Alaska, said in an e-mail.

“Alaska remains a high potential area over the long-term, and we remain committed to drilling there safely, again,” Smith said.

Two ships Shell was using in the Beaufort and Chukchi seas were being towed to Asia for repairs, meaning it will miss any chance to resume drilling in 2013. The company never got a U.S. permit last year to tap an oil reservoir off Alaska’s north coast because of issues with a spill-containment system, though it was allowed to conduct preliminary drilling.

Shell also encountered weather delays and was cited for violating air-pollution standards.

At Risk

“Shell’s lack of respect and lack of attention to detail repeatedly put lives and our oceans at risk,” Susan Murray, deputy vice president of Oceana, an environmental group that works to protect the oceans, said in a statement. “The Arctic Ocean is unique and important. Americans deserve better care and stewardship than oil companies or the government have provided.”

Oil exploration and production companies have stepped up plans for drilling in the Arctic 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, the only company working off the Alaska coast, drilled two preparatory wells last year after spending about $4.9 billion over seven years preparing for Arctic exploration.

“Alaska’s offshore resources represent one of our greatest opportunities to improve America’s energy security,” Alaska Republican Senator Lisa Murkowski said in a statement. “I want to review the full report to ensure that stricter oversight is not code for prohibiting access to our resources.”

Some environmental groups say that is just what Interior should do.

Shell’s setbacks “demonstrates that the oil and gas industry is not prepared to operate safely in the Arctic Ocean,” Cindy Shogan, executive director of the Alaska Wilderness League, said in a statement. “Obama should prioritize protecting the Arctic as part of his climate legacy.”

To contact the reporter on this story: Mark Drajem in Washington at mdrajem@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net

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