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Shell-Led Arctic Push Finds U.S. Shy in Icebreakers: Energy

July 18, 2012

Shell-Led Arctic Push Finds U.S. $3 Billion Shy in Icebreakers

The Coast Guard Cutter Healy breaks through ice in the Arctic Ocean in 2009. In a 2010 report, the Coast Guard said it eventually would need three heavy-duty and three medium-duty icebreakers for the Arctic. Source: U.S. Coast Guard

Royal Dutch Shell Plc (RDSA) has spent $4.5 billion since 2005 preparing to explore for oil off Alaska’s north coast in the Arctic. U.S. taxpayers may end up paying almost as much to supervise future operations in the region.

Shell, which may begin drilling next month, is one of at least six companies planning to extract oil, gas and minerals in the Arctic as global warming melts ice and opens new sea lanes to commerce. As the companies move in, so must the Coast Guard, to defend U.S. interests, perform sea rescues and coordinate the government’s response to any oil spills.

The Coast Guard is ill-equipped for the Arctic. It lacks appropriate communications and navigation systems, and will need at least $3 billion in additional vessels and equipment, assessments by the Congressional Research Service and the Coast Guard itself show. Without more icebreakers, the service will be “unable to accomplish its Arctic missions,” according to a report last year by the Homeland Security Department’s inspector general.

“The Coast Guard has zero capability in the Arctic,” Admiral Robert Papp, the Coast Guard commandant, said in a July 13 interview at a Bloomberg Government breakfast in Washington. “If we are going to have a permanent presence there, it’s going to require some investment. We don’t have the infrastructure in place right now.”

Laying Plans

Countries and companies are laying plans for the Arctic, which holds about a fourth of the word’s undiscovered oil and natural gas, according to the U.S. Geological Survey. The U.S. has more than 1,000 miles of Arctic shoreline. Much of its oil is off the Alaskan North Slope, which is bordered by the Beaufort and Chukchi seas and about 1,100 miles northwest of Juneau, the state capital.

Russia in 2007 dropped a capsule containing its flag on the seabed 14,000 feet below the North Pole, staking a claim for oil and gas reserves there. Canada plans to purchase military icebreakers to protect its interests. China, which doesn’t have an Arctic border, has signed energy agreements with Iceland.

The Hague-based Shell (A:US), Europe’s biggest oil company, will be the first to resume operations in the Arctic. It was last explored in the early 1990s, before lower oil prices reduced profit prospects. Shell is awaiting final approval from the U.S. to begin drilling.

ConocoPhillips (COP:US) and Statoil Asa (STL) of Norway also have won rights to explore fields in the Arctic. Exxon Mobil Corp. (XOM:US), the biggest energy company by market value, has reached an agreement with Russia to explore its area of Arctic. Other companies with plans for the region include BP Plc (BP/), Imperial Oil Ltd. (IMO) and Chevron Corp. (CVX:US)

Icebreakers Critical

Even as ice recedes, the Arctic remains a vast frozen area with hurricane-strength storms, below-freezing temperatures and large ice floes, making icebreakers critical.

“Even with the open sea lanes, the Arctic is immensely dangerous,” Peter Harrison, director of the school of policy studies at Queen’s University in Ontario, whose work focuses on the Arctic, said at a Brookings Institution conference on the subject last month. “If anyone thinks it’s like Lake Michigan in July and August, they are dreaming in Technicolor.”

Papp said the Coast Guard eventually would need three heavy-duty and three medium-duty icebreakers for the Arctic. It now has one medium-duty icebreaker and two heavy-duty ones dating from the 1970s, neither of which is currently operable. The service plans to repair one of them.

That means the U.S. would need to build four icebreakers -- two heavy-duty and two medium-duty -- with an estimated total cost of $3.2 billion, according to a Congressional Research Service report in April.

‘Pay Attention’

Neither Congress nor the administration of President Barack Obama has proposed spending that kind of money on icebreakers. The Obama fiscal 2013 budget has called for $8 million to study building one. The Coast Guard’s five-year plan has called for $852 million for its actual construction in subsequent years, although Congress has yet to address the funding. It can take as long as 10 years to build an icebreaker.

Russia has 25 icebreakers, which are being used “to assert sovereign control over the Arctic region and its valuable resources,” according to the Congressional Research Service report.

Finland and Sweden have seven icebreakers each and Canada has six, the report says. China has one icebreaker and another under construction.

Exercises Beginning

“This is an internationally competitive area where we must start paying attention,” Representative David Price, a North Carolina Democrat and ranking member of a House Appropriations subcommittee in charge of allocating the money, said in a telephone interview. “The Coast Guard is going to be called on to do a lot of things up there and we can’t limp along with our current icebreaker capacity.”

For the Shell drilling, the Coast Guard plans to send two helicopters and two cutters to the Arctic, including one of its three flagship National Security Cutters.

The Coast Guard opened a temporary base in Barrow, Alaska, on July 16. It will practice oil-spill responses as well as other maneuvers to test equipment and personnel readiness, said Vice Admiral Peter Neffenger, deputy commandant for operations at the service, in a telephone interview.

“Our goal is to have a presence up there that can adequately address the activity for this summer and then to think about what it means for the future,” he said.

The ships and equipment will have to be pulled from Coast Guard duties elsewhere, Commandant Papp said.

No More Resources

“The problem with that is no one is giving me any additional resources to take on this new mission,” Papp said in the interview. The cutter in the Arctic is “not going to be able to do drug interdiction in the eastern Pacific on the drug routes from South America. We’re going to have to pull other ships off fishery patrols in the western Pacific from a Naval exercise in the western Pacific.”

Placing a National Security Cutter in the Arctic will help because the ship can function as an air station and communications center, and has three boats for rescue missions and security operations, he said.

“It gives us immediate capabilities and infrastructure in the summer, and when the ice starts forming we can pull it back,” Papp said.

Shell’s Preparation

The U.S. plan to oversee the drilling is inadequate and favors Shell at the expense of taxpayers, said Michael Conathan, director of Ocean Policy at the Center for American Progress, a Washington-based research firm.

“Those are not assets that were just sitting on a shelf somewhere waiting to be deployed,” Conathan said in a telephone interview. “Instead of doing other jobs, they will be babysitting Shell’s operations and the American taxpayer will be on the hook.”

Shell is bringing its own equipment for the job and emergencies, including 33 vessels and 600 workers, said Steve Phelps, Shell’s manager of exploration for Alaska.

“We know the region is very remote and very dangerous,” Phelps said at the Brookings Institution forum. “We realize if we need it, we have to bring it.”

To contact the reporter on this story: in Washington at cwolf@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net


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