"If 2030 oil prices are no higher than today’s, all the effort will
have been for naught. Only if prices are 40 percent higher, or $70 a
barrel, Chukchi oil would be competitive."
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
reasoning and conclusions offer a window on how a big oil company
evaluates risk and benefit.
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.
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
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.
SHELL believes in
GLOBAL WARMING "but there's still a need for more oil"
“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.
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
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
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
Ultimately, Noble Drilling, Shell’s
contractor, pleaded guilty to eight federal felony counts related to
pollution and safety infractions and paid penalties totaling
The GREENPEACE PROTEST
Despite the July 21 meeting’s military-like
precision, peculiarities become evident. Radar shows an icebreaker called
MSV Fennica heading in the wrong
direction—south toward Portland. Three weeks earlier, the 380-foot vessel
ripped open a 39-inch-by-2-inch gash in its hull, the result of scraping
against a shallow-water hazard in Dutch Harbor, Alaska. Because the
multipurpose ship also carries spill response gear, the accident caused
federal regulators to restrict drilling to the topmost 3,000-foot section of
Burger J—and not farther down into the oil-bearing zone—until the
Fennica gets patched up in a Portland
repair facility and travels 2,300 miles back north. The detour gave
Greenpeace the chance to stage a social
media-friendly “#ShellNo” photo op on July 30,
with protesters in climbers’ slings hanging from a Portland bridge and
temporarily inhibiting the Fennica’s
movements, while “kayaktivists” heckled from the harbor. In another setback,
U.S. wildlife officials concerned about noise-sensitive Arctic walruses have
vetoed Shell’s original plan to drill two wells simultaneously. “That caught
us by surprise,” Pickard concedes.
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
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
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 Kullukbeached 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
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.”