The Kulluk in happier times

Royal Dutch Shell announced to shareholders last week that they are contemplating a resumption of oil drilling in Arctic waters adjacent to Alaska this coming summer season:

“We have not yet confirmed if we drill in 2014, but we do expect to file an exploration plan shortly, maybe in the next couple of weeks. It’s likely to be focused on the Chukchi,” Shell Chief Financial Officer Simon Henry told reporters in a media teleconference detailing the company’s third-quarter results.

Shell reported third-quarter earnings that were nearly a third lower than those for the third quarter of 2012. The company cited numerous reasons for the drop, including weaker refinery-business conditions, increased upstream operations and exploration costs, challenges in Nigeria and reduced dividends from an LNG venture.

After an expensive series of mishaps in late 2012 and early 2013, Shell sat out the recently ended 2013 drilling season, as they licked their self-inflicted wounds:

The New Year’s Eve grounding of the Kulluk, the Shell-owned drill ship dedicated to Beaufort operations, was apparently the final blow to the company’s plans to operate there, at least for the foreseeable future. The Kulluk was so badly damaged in the grounding that it may never return to service. It’s been in a Singapore shipyard for months.

“We will not take the Kulluk back next year,” Henry said. “The repair costs may exceed the benefits of doing so.”

The so-called “impairment costs” for the Kulluk could be “a few hundred million dollars in the fourth quarter,” he said. Shell is replacing the Kulluk with a leased drill rig, the Polar Pioneer, Henry said. That ship, owned by Transocean, is semi-submersible unit that is nearly square — 279 feet long and 233 feet wide, according to Transocean’s website.

If Shell pursues Chukchi drilling, it will be done with the Noble Discoverer, the leased drill ship that operated in the Chukchi in 2012, said Megan Baldino, Shell’s Anchorage spokeswoman. The company intends to bring the Noble Discoverer back to Alaska, she said. The Polar Pioneer is intended to be the back-up rig available to drill a relief well, in accordance with federal regulations, Baldino said.

Shell has already spent about $5 billion on its Alaska oil-exploration program, but has managed so far to drill only the top portions of two wells, one in the Chukchi and one in the Beaufort. The company was forbidden by federal authorities to drill into oil-bearing zones because a mandatory oil-containment barge failed to pass U.S. Coast Guard tests in time for the 2012 drilling season.

Henry, in the conference call, said that vessel, the Arctic Challenger, now has regulatory clearance, but that all of the two dozen ships in the fleet that Shell would amass for future Chukchi drilling must also pass new regulatory muster.

The new regulatory muster they must pass is still indefinite, as not all investigations into Shell’s botched 2012 efforts have concluded.  They must submit an entirely new exploration plan to the Bureau of Ocean Energy Management, a new marine mammal protection plan to the National Marine Fisheries  Service and U.S. Fish and Wildlife Service, clean air permits from the Environmental Protection Agency, and even more:

Shell must comply with yet-to-be-issued Arctic-specific rules for future oil and gas activities. Those rules are expected to be released by BOEM before the end of the year, and are expected to cover travel to and from the Arctic — as well as any activities by drillers. The rules are being drafted in response to a Department of Interior investigation into the Kulluk grounding and Shell’s other 2012 woes.

And the U.S. Coast Guard Kulluk grounding investigation has not issued its final report.

My gut feeling is that Shell doesn’t really hold out great hopes for 2014 Alaskan waters drilling.  Greenpeace seems to be thinking along the same lines:

Shell’s Arctic bravado is a desperate attempt to reassure its investors, but the facts tell a different story. Brushing off the loss of hundreds of millions of dollars and casually scrapping a drilling platform are not the actions of a company in control of its operations,” Ben Ayliffe, Greenpeace International’s Arctic campaign leader, said in a statement issued hours after Shell’s teleconference.

“In 2012 Shell proved it is completely unfit to drill in the remote Arctic, a place of unrivaled beauty where any spill would be an environmental catastrophe. In April, it signed a joint deal with Russia’s state owned giant Gazprom, one of the world’s most polluting oil companies with a record of serious negligence. Shell has run out of options, and is prepared to gamble its reputation on projects and partnerships that other oil companies have dismissed as far too risky,” Ayliffe said.

Photo by the US Coast Guard