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Shell Gambles Billions in Arctic Alaska Oil Push

14 December 2011

Standing in front of a brightly colored, 3-D image of the geology far below the floor of the Chukchi Sea, Steve Phelps pointed to the "giant opportunity" that has prompted Shell Oil to pour billions of dollars into the Alaska Arctic.

"Burger that's the name you are going to get to know," Phelps recently told reporters gathered here to learn about the huge oil company's plans and promises for Alaska.

Phelps is Shell's Alaska exploration manager, a geologist whose job it is to find big oil. The Burger field, part of a Shell naming theme that revolved around junk food, has been eyed by various oil companies for years. But it's more than 70 miles offshore in the Chukchi Sea between Siberia and the northwest coast of Alaska and until recently was thought to be too expensive to develop. Now Shell for the second time holds the leases.

Armed with promising new seismic science, a sort of undersea sonogram of the earth's belly, the Dutch company says Burger is a signature find. It's the spark for ramping up controversial efforts to drill off the northernmost coast of the U.S. in some of the most extreme conditions on Earth.

"This is the stuff that most of the world was finding in the 1930s, the 1950s, the 1960s, in places like Saudi Arabia and the Middle East, Nigeria," Phelps said. "This one potential resource far outweighs any single field we've got in the Americas portfolio."

More than in the Gulf of Mexico, where drilling rigs checker the ocean and Shell led the way into deep-water zones that produce more oil than anyone predicted.

More than in Brazil, where Shell is the second-biggest oil producer after the state energy company.

More than in Canada, where Shell is investing billions to extract thick, sticky crude from tar sands.

As a result, Shell is gearing up to explore for oil as it confronts ever-higher regulatory hurdles and court challenges by environmentalists who say a big Arctic oil spill would be a disaster.

So far, Shell has spent nearly $4 billion on leases, groundwork and specialized equipment, including a new icebreaker being built in Louisiana.

In a sense, Shell is an old Alaska hand. Back in the 1960s, the company was the first to produce oil in Cook Inlet waters, where it had to engineer platforms able to withstand harsh winters and severe tides. Some of those platforms still produce today. But Shell sold those interests in the late 1990s, after their heyday.

Alaska misses

Shell was an early explorer off Alaska's northern coast in the Arctic, but walked away from those leases in the 1990s. The company missed out on Prudhoe Bay, the most productive oil field in the U.S.

Shell executives and scientists talk about its technological know-how and commitment to prudent operations above all. The company's installations withstand 100-foot waves in the North Sea. Shell facilities produce in freezing temperatures offshore from Russia's Sakhalin Island. One of its Gulf of Mexico platforms sits in water eight times deeper than the Eiffel Tower is tall a deep-water record.

Shell's Alaska leases are all in relatively shallow water, no deeper than 150 feet. If its prospects hold the vast amounts of oil that Shell hopes, it plans to build miles of subsea pipelines to transport the crude to shore, then more pipeline on land to get it into the trans-Alaska pipeline.

"Our goal is zero harm to the environment. Zero harm to people. Safety is ingrained in every ounce of the business that we do," said David Lawrence, Shell's executive vice president of exploration and commercial development.

The company has a long history of competent work in the Gulf of Mexico, and will tap into the same expertise for Alaska, executives said.

But Shell's record is not unblemished. There have been spills and environmental violations, according to critics, government records and news accounts.

In the Third World oil regime of Nigeria, the company has been accused of serious spills, human-rights abuses and missteps that contributed to violence and the deaths of agitators there.

To industry watchers, Shell's performance in challenging offshore operations is good, but not perfect.

"They are one of the industry's most credible offshore operators, bar none, with a very long track record," said Mark Gilman, a New York oil analyst with The Benchmark Co. "It's not an unblemished track record. But then again, in the industry, virtually no one's track record is unblemished, either financially or environmentally."

A close eye

One former top engineer for Shell who went on to become a famous academic and expert on risk says it's up to government regulators to keep a close eye on oil company operations.

Even after BP's Deepwater Horizon blowout last year in the Gulf of Mexico, U.S. regulation still trails countries like Norway and the United Kingdom, said Robert Bea, the former Shell engineer and retired University of California-Berkeley engineering professor.

Everyone with oil and gas interests in the high Arctic will be watching.

"If we do this one right ... resource development can continue," and Shell will be justly proud, Bea said. "But if we do it wrong, we're going to be I'll call it sorry for a long time."

The 2010 blowout on BP's Macondo prospect, involving the Deepwater Horizon rig, killed 11 workers and spewed millions of gallons of oil into the Gulf of Mexico.

Shell's chief well scientist, Charlie Williams, was a top adviser to the Deepwater Horizon incident commander. Williams is now board chairman of the new Center for Offshore Safety, an industry-led group that will help oil companies comply with tougher requirements, some of them mirroring what Shell already does.

Shell had a disastrous Gulf of Mexico well blowout and fire, too, back in 1970 in the Bay Marchand field, which was offshore though not in deep water.

Four men were killed; 2.2 million gallons of oil leaked into the Gulf over a number of months; 10 relief wells were drilled. The spill was Shell's worst ever.

Shell executives stress that the company has a history of operating safely in Alaska.

The company drilled four exploration wells in the Chukchi Sea and 15 in the Beaufort Sea; it was the biggest player in the frigid north in the 1980s and early '90s.

While there were some small spills of fuels and crude, almost all of it was cleaned up, according to a federal environmental assessment of Shell's current plans. There was no big spill, no blown-out well, no environmental disaster.

In the late 1990s, with the price of oil less than $10 a barrel and high costs to build platforms and pipelines in the remote Arctic, Shell walked away from its leases.

Past Gulf spills

In federal waters offshore in the Gulf of Mexico, Shell has had 22 spills of at least 2,100 gallons of oil, drilling mud, fuels or chemicals between 2000 and 2010, according to an analysis of statistics kept by the Bureau of Ocean Energy Management, Regulation and Enforcement. That's two fewer than BP and three more than Chevron, the other big operator there.

Shell's work in Cook Inlet in the 1990s generated sharp complaints from environmentalists over its handling of wastewater generated on its platforms.

The company was able to settle the complaints in part by paying into a fund for the creation of Cook Inletkeeper, an environmental watchdog group. Shell's share of the blame, as measured by the settlement, was a relatively small $48,000.

Marathon and Unocal, two other big operators of oil and gas platforms in Cook Inlet at the time, split the bulk of the $895,000 for Cook Inletkeeper's creation, according to an agreement filed in court. The three companies also paid a combined $194,000 in federal civil penalties under the deal.

In the U.K., Shell is drawing fresh scrutiny after an August pipeline leak that ranks as the biggest North Sea spill in a decade. A pipeline from a Shell platform 110 miles off the coast of Aberdeen, Scotland, leaked about 55,000 gallons of oil.

"They cannot come into Alaska and pretend they have an impeccable record," said Rick Steiner, a marine conservation biologist and former University of Alaska professor who has watched Shell for years, especially in Nigeria.

Although it did inform regulators, Shell did not tell the public about the North Sea spill for two days. Environmentalists accused Shell of trying to keep it hush-hush.

Shell says it wanted to understand the problem first, but some executives agree that holding back was a mistake.

"If it were my operation, we would have done it immediately," said Pete Slaiby, Shell's vice president for Alaska. Like many of the company's executives, Slaiby has spent his whole career with Shell in spots all around the world.