Shell Makes Tentative Plans for Arctic Season in 2014

Thursday, October 31 2013

Shell's Kulluk drill rig. / KUCB

Shell Oil is still weighing its options for drilling in the Arctic next year. But any program would be scaled down compared to the company’s last trip north in 2012.

That's what Shell’s chief financial officer, Simon Henry, said when he addressed the company’s Arctic drilling plans last week, during a teleconference about quarterly earnings. Henry said the company does want to return to Alaska – and soon.

"Clearly we would like to drill as soon as possible," Henry said. "So we’re putting the building blocks in place."

The company is getting ready to file a new exploration plan in the next few weeks. But Henry says it won’t include any prospects in the Beaufort Sea –- just the Chukchi.

That’s because the company will be missing a critical piece of equipment.

"We will not take the Kulluk back next year," Henry said. "And one of the reasons we wouldn’t is because the repair costs may exceed the benefit of doing so."

Shell bought the Kulluk drill rig because its unique, rounded design was a good fit for icy conditions.

The vessel was badly damaged when it ran aground in the Gulf of Alaska on New Year’s Eve of 2012. Shell executives have said that the rig was being moved out of state to avoid paying oil and gas taxes on it.

Almost a year later, Henry says the Kulluk is still sitting in a shipyard in Singapore.

"The Beaufort is particularly shallow as you may know," Henry said. "We do not expect -- in fact, we’re not sure -- that we’ll necessarily bring the Kulluk back into operation," Henry said.

Instead of repairing the Kulluk, Shell may write off the vessel as a loss of $200 million.

They still have the Noble Discoverer drill rig, which is leased from the Noble Corporation. Henry says Shell’s now leasing the Polar Pioneer from Transocean, to serve as a backup.

"But there remains permitting and regulatory process through which we need to go before we can confirm a decision to drill, actually, in 2014," Henry said.

Shell spokesperson Megan Baldino says company’s been making plans to obtain permits in time for a 2014 season.

This year, they’d go through the Department of the Interior for air emissions permits instead of the Environmental Protection Agency.

Interior already oversees air permits for offshore drilling in the Gulf of Mexico. In the past, Alaska politicians have criticized the EPA for granting permits too slowly.

Even though they’d be trying a faster route to meet regulations this time around, Baldino says Shell isn’t rushing to get back to the Arctic.

"This is a multi-year exploration program, so every step we take is really going to be contingent on meeting all the conditions necessary to proceed safely and responsibly," Baldino says.

There’s a lot on the line: Shell has spent almost $1 billion on its Arctic oil program in the past year.

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