Last updated: June 29, 2012 11:08 pm

Shell poised to crack Arctic after test

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This week, Royal Dutch Shell has been practising for an oil spill.

Watched by inspectors from the Bureau of Safety and Environmental Enforcement, the US offshore regulator, Shell staff lowered a capping stack, a bright yellow 25ft high set of valves, off the icebreaker Fennica 200 feet down into the Puget Sound off the port of Everett, Washington state.



With the stack back on board, Shell demonstrated the 1.5m pounds of pressure that it would clamp on to a leaking well to prevent oil escaping.

It was not quite a full test of the way that the stack might be used in reality to control a blowout in the Arctic waters north of Alaska, but the inspectors were impressed enough to pronounce the demonstration a success.

“The tests this week were crucial for ensuring that this piece of Shell’s safety equipment is fully operational,” said Mark Fesmire, the BSEE’s regional director.

That vital step forward, a culmination of years of discussions between the company and the regulators, has left Shell on the brink of being able to launch one of the world’s most important drilling campaigns, both for the oil industry and, campaigners say, for the environment.

As Pete Slaiby, Shell’s vice-president for Alaska, says: “These wells will be the most watched inside Shell, and probably in the whole world, in 2012.”

Shell is planning to drill five wells this summer in the Chukchi and Beaufort seas, to the north-west and north-east of Alaska, respectively, in the three-month window when the waters are open.

It is in the vanguard of a wave of oil exploration moving into one of the industry’s last remaining frontiers. ExxonMobil, Chevron and ConocoPhillips of the US, Rosneft of Russia, Statoil of Norway and Eni of Italy are among the companies drawing up plans for Arctic exploration, often in collaboration with each other.

In a world where many established oil regions such as the North Sea and the older fields of Alaska are in steep decline, and the geologically most accessible reserves are in countries that are politically challenging, such as Iraq, the Arctic is an alluring prospect for international companies.

The Chukchi and Beaufort seas alone are believed to hold 25bn-27bn barrels of oil, more than four-fifths as much as the entire proved reserves of the US.

With economic development and rising living standards in emerging economies expected to drive long-term growth in demand for energy, the industry is betting that there will be a market for Arctic oil in the decades to come.

Shell already knows the region, having drilled wells in the late 1980s and early 1990s, finding oil reserves that were not commercially viable with crude at $10 a barrel.

It also has extensive experience of long-term production in Arctic waters at its Sakhalin-2 liquefied natural gas project off the far east coast of Russia.

The challenging conditions of the Arctic suit its strategy of making big bets on technology, according to Robin West of PFC Energy, the consultancy.

“Shell is trying to differentiate itself by its aggressive deployment of technology to give it access to large reserves: in the Arctic, in floating LNG, in ultra-deep water drilling, in gas to liquids processes, and others,” he says.

The company has already spent $4.5bn on leases and preparations for drilling in the Arctic, but its plans have been much delayed. It began buying leases in 2005 and had hoped to start drilling in 2007, but it was held up by legal actions from environmental groups, problems with official permits and the objections raised by the US government after BP’s Deepwater Horizon disaster in 2010.

All it needs to get under way are the permits for the specific wells that it plans to drill, which in turn are waiting only for a demonstration of one last piece of spill response equipment: a containment system for capturing leaking oil underwater and separating it on a barge on the surface. That test is expected within the next two weeks.

The Arctic’s unique and fragile ecosystems, and local populations who depend on fishing and whaling for their livelihoods, make it particularly important to prevent a spill.

The Deepwater Horizon disaster revealed a lack of preparedness for managing a large spill, and the public shock that this provoked further increased the pressure on Shell to make absolutely certain that it did not suffer an accident.

The new capping stack and containment system have been designed to respond to that pressure, and to implement the lessons of the BP spill.

The capping stack is based on the device that BP eventually managed to use to seal the leaking well, 87 days after the accident.

Mr Slaiby argues that the spill preparations that Shell had in place for its planned drilling in 2007, including traditional methods such as chemical dispersants, would have been appropriate. However, he accepts that the capping stack, in particular, is a useful addition to the toolkit, allowing faster action to seal the well than would have been possible before.

The new containment system, he says, is “nice to have but not essential. It’s belt and braces”.

Precautions that err on the side of safety probably make sense, though. Shell has recently suffered a painful reminder of how even the largest and highest-profile projects can go wrong.

The Port Arthur refinery in Texas owned by Motiva, Shell’s joint venture with Saudi Aramco, opened a $10bn expansion to great fanfare at the end of last month but was forced to shut down one of its main units soon afterwards because of a corrosive chemical leak.

No one was hurt, but the unit could be closed for many months.

A similar slip-up in Arctic drilling would, in the words of Ken Salazar, the US interior secretary, present a “high risk” not only to Shell but to the whole industry.

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