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Rig Grounding Revives Debate Over Shell’s Arctic Drilling

January 03, 2013

Rig Grounding Revives Debate Over Shell's Alaska Oil Venture

The Royal Dutch Shell conical drilling unit Kulluk sits aground on the southeast shore of Sitkalidak Island, Alaska. The Kulluk has approximately 139,000 gallons of ultra-low-sulfur diesel and 12,000 gallons of combined lube oil and hydraulic fluid on board. Source: U.S. Coast Guard via Bloomberg

This week’s grounding of a rig off the coast of Alaska adds to a series of mishaps in Royal Dutch Shell Plc (RDSA)’s seven-year quest to tap the vast oil reserves of the Arctic and emboldened critics who say it can’t be done safely.

The drill ship Kulluk broke free of a tow boat in a storm Dec. 31 and remained upright though stranded last night on the coast of Sitkalidak Island, about 60 miles (97 kilometers) southwest of the town of Kodiak. The crew was evacuated and there were no signs the vessel was leaking diesel or drilling chemicals it carried, according to the U.S. Coast Guard.

The Kulluk’s grounding caps a series of episodes that have dogged Shell’s effort to tap Arctic oil. Environmental groups today said they would ask President Barack Obama to suspend all current and pending Arctic drilling permits until operators prove they can work safely in the region’s harsh conditions.

“This string of mishaps by Shell makes it crystal clear that we are not ready to drill in the Arctic,” Charles Clusen, director of National Parks and Alaska Projects for the Natural Resources Defense Council, said on a conference call. “Shell is not Arctic-ready. We are asking the Obama administration to immediately put a hold on all permitting activities.”

The U.S. Coast Guard is sending investigators to start a probe of the incident, Coast Guard Capitan Paul Mehler said at a press conference today in Anchorage, Alaska. Mehler is the federal on-scene coordinator for the Unified Command, a response group that includes federal agencies and industry representatives.

Dome Damage

Shell’s drilling setbacks include a containment dome designed to cap oil spills that was damaged during tests in September, and another drill ship, the Noble Discoverer, that slipped its mooring in July and drifted toward shore in the Aleutian Islands. The troubles forced The Hague-based company to abandon plans to begin drilling wells last year and perform only preliminary work.

“It’s just another of the long line of incidents that have bedeviled Shell throughout the year that prove that operating in the Arctic safely is a misnomer,” Ben Ayliffe, head of the Arctic campaign for the environmental group Greenpeace, said in an interview. “You wonder how much more the U.S. authorities have to see before it’s clear to everyone that Shell shouldn’t be operating there.”

Experts Onboard

A team of experts was on board the rig today to conduct structural assessments, Shell Alaska Operations Manager Sean Churchfield said at the press conference today. Water breached some hatches, damaging emergency generators. Additional power sources may need to be brought on board the rig, he said.

The company cannot yet provide a timeline for removing the rig from the shoreline, Churchfield said.

Shell said it’s reviewing the accident with an eye toward improving the safety of the venture.

“We have already begun a review -- working with our marine experts, partners and suppliers -- of how this sequence of events, including the failure of multiple engines on the MV Aiviq towing vessel led to this incident,” Shell said in a statement. “We intend to use lessons from that review to strengthen our maritime fleet operations, globally.”

A spill on Sitkalidak Island, which has no docks, air strips, permanent residents or paved roads, would be difficult to clean, Andy Schroeder, executive director of the Island Trails Network in Kodiak, Alaska, and a former Coast Guard officer, said on today’s call. The island has 20 salmon streams and is home to the Kodiak Bear.

‘Futile’ Attempts

“Attempts at oil containment are futile in typical winter conditions,” said Schroeder as he pointed out the rig is being lashed by 14-foot seas and 25-knot winds. “A break up of the rig or a spill in this area would dramatically impact the island and surrounding environment.”

Shell has spent about $4.5 billion preparing to drill in the Chukchi and Beaufort Seas on Alaska’s Arctic coast, including procuring leases and $250 million a year just to maintain the ability to operate there, according to Tad Patzek, a former Shell researcher who chairs the Petroleum and Geosystems Engineering Department at The University of Texas at Austin.

Shell rose 15.50 pence to 2,139.00 pence at the end of trading today in London. The shares fell 11 percent last year.

Inhospitable Environment

Patzek said the Arctic is “the most difficult and inhospitable environment on the planet,” where the ocean can freeze all the way to the sea floor in places, requiring that pipes and wellheads be buried. Most drilling equipment must be delivered by ship from the lower 48 states, increasing the risk of an accident that can foul the fragile ecosystem.

It’s home to about 240 fish species, 12 species of marine mammals, 4 species of whales, the polar bear, the walrus, and 6 species of seals. There are 64 species of seabirds that breed in the Arctic while about 50 million seabirds nest on Alaska’s coast each summer, Patzek said.

Shell and other operators are willing to take on those risks to develop what Patzek called the world’s largest untapped oil reserve. Still, it may take 10 to 15 years before oil begins flowing from the region, he said in an interview.

“Shell doesn’t do it because it’s neat to do it but because there’s an expectation of a very large find of oil,” Patzek said. “What’s in order in my mind is the go slow approach. We take our sweet time and develop suitable technology to produce the resource.”

End Drilling

That is still too fast for Greenpeace and other environmental groups that renewed calls to end oil drilling in the Arctic in the wake of the Kulluk mishap. If Shell, Europe’s largest energy producer, can’t get it right, it’s unlikely that other companies can, Ayliffe said.

A spokesman for the U.S. Bureau of Safety and Environmental Enforcement, which regulates offshore drilling, declined to comment on whether it was reconsidering its approval of drilling in the region.

“All equipment Shell proposes to use in drilling operations must first satisfy rigorous inspection and testing standards,” said the spokesman, Nicholas Pardi, in an e-mail. “Any approved drilling activities will be held to the highest safety and environmental standards.”

‘Serious Questions’

U.S. Representative Edward Markey, a Democrat from Massachusetts, wrote that the accident raises “serious questions” about Shell’s “ability to conduct these operations safely and in a way that protects the environment” in a letter to Marvin Odum, president of Shell Oil’s U.S. unit.

In August, Shell received a permit to begin preparatory work in the Chukchi Sea. It announced Sept. 8 that drilling had started -- the first time in two decades that the U.S. Arctic sea floor had been touched by a drill bit -- though was forced the next day to disconnect its rig from the well to avoid encroaching sea ice.

Days later, the company said it would abandon oil drilling in Alaska’s Arctic waters for the year.

“This latest accident put lives at risk and created the risk of significant environmental harm,” Michael LeVine, senior Pacific counsel for the environmental group Oceana, said in an interview. “It must be a wake-up call to the government to reconsider the approvals it’s granted Shell.”

Rig Adrift

The Kulluk has approximately 139,000 gallons of ultra-low- sulfur diesel and 12,000 gallons of combined lube oil and hydraulic fluid on board. Shell owns the vessel while Noble Corp. (NE:US), a rig contractor, provides crew members and manages its drilling operations, John Breed, a spokesman for Geneva-based Noble, said in an interview.

The Kulluk was en route to Seattle for maintenance after preliminary drilling in the Beaufort Sea off the Alaska coast. The rig had been adrift and then was temporarily brought back under control before it went aground. The crew was evacuated Dec. 29 as a precaution.

The team of salvage experts was lowered onto the rig yesterday morning by helicopter after severe weather held up efforts to conduct an assessment earlier this week. The Coast Guard helicopter and crew also delivered a state-owned emergency towing system, according to the Unified Command.

Smit Salvage, a unit of Koninklijke Boskalis Westminster NV (BOKA), is heading the salvage operation. The rescue company was involved in the recovery of the Costa Concordia, which struck a reef off Italy last January.

“In 10, 15 years we should be able to develop much better and safer technology that will actually allow us to produce some of the Arctic,” Patzek said. “The key in my mind is not to make a large mistake on the way there.”

To contact the reporter on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; Jon Morgan at jmorgan97@bloomberg.net


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