Shell against the Arctic: the first round loss

By Rimvydas Ragauskas

On the eve of the New Year  the mobile Kulluk drill ship owned by the energy company Shell ran aground in the Gulf of Alaska, near Kodiak Island. This made reconsider the readiness of oil companies to pursue drilling operations under extreme harsh weather conditions. Due to Shell‘s failures Norwegian Statoil is going to postpone the beginning of drilling in the Chukchi Sea, whereas the French Total announced that the risk of an oil spill in such an environmentally sensitive area was too high to start drilling in the Arctic.  


On 8 January the U.S. Interior Secretary Ken Salazar informed on the review of Shell‘s actions in the Arctic in order to define the company‘s compliance with strict standards imposed for operations in the Arctic. He highlighted that Shell was not even ready to move forward with drilling in 2013. Carol Browner and John Podesta, influential representatives of the Centre for American Progress, said they now believed there was no safe way to drill for oil and gas in the Arctic; in view of this, American authorities shouldn’t issue any new permits to Shell and should suspend all action on other companies’ application to drill in this region.


> Artic Territory map


For Shell, which has already invested about USD 4,5 billion in the Beafourt and Chukchi Seas, this was a bad news. Validity of some of ten-year Shell‘slicences obtained in 2005 will soon expire. In view of this, the company has already applied to the U.S. Government for the extension of licenses; but the decision would hardly be made in the near future. The company was ready to start drilling in the Beaufort Sea in 2007, but had to delay works because of the claims of Alaska natives  against the U.S. Minerals Management Service which approved Shell’s plan. Besides, it was decided to postpone granting new drilling permits in the aftermath of the Gulf of Mexico disaster.


In 2012 drilling season should have become a breakthrough but this didn’t happen. Shell’s oil spill response vessel failed to obtain certification from the U.S. Coast Guard; the company announced that it postpones Arctic drilling until 2013; in 2012 it will carry out preliminary work and would drill 1,400 feet (about 425 meters) below the seafloor. In September spill containment dome sustained damage during the course of a testing session.


But that was not the last problem. In July the drill ship Noble Discoverer started drifting and nearly ran aground close to the Aleutian Islands. On 10 September, just one day after beginning of preparatory drilling operations, Shell had to suspend drilling as a massive ice pack covering approximately 360 square miles drifted toward the site. Finally, in December, Shell‘sefforts to tow the Kulluk rig from Alaska to Seattle ended with Kulluk‘srunning aground. Moreover, on 10 January the U.S. Environmental Protection Agency has issued notices of violation for the air quality permits for the Kulluk and the Noble Discoverer. The Kullukrig, which during the incident carried about 550 tons of diesel fuel and oils, withstood the blow and information about the oil slip was not released.


This happened in Gulf of Alaska, near the Coast Guard Station. Strong network of resources including 500 people, coast guard vessels and other resources took all the efforts to improve the situation. If this happened in the Arctic Ocean where there is no infrastructure, in the distance of 1000 miles Shell would have been absolutely alone.  


Regarding exploitation of the Arctic’s vast oil reserves it is worth recalling the 2010 environmental disaster in the Gulf of Mexico: it could serve as the basis for comparing elimination of consequences of the spill of oil. The first serious problem in case of the Arctic disaster is lack of relevant infrastructure. Within 500 miles from the oil spill site the Gulf of Mexico had dozens of sea and air ports, about 30 coast guard stations and good communication facilities; moreover, people of other oil companies contributed to the elimination of consequences of the disaster. Whereas in Alaska, North of the Arctic Circle, there are no coast guard stations and no major sea/air ports, road infrastructure is underdeveloped and the U.S. has only one active ice-breaking vessel capable of operating under all Arctic conditions.


The second important aspect with respect to oil spill management is seasonality. The Beaufort and Chukchi Seas of Alaska are characterised by prevalent fog and storms, and, most importantly, the seas are ice-free only several months per year. In case of oil spills the time for the elimination of consequences is usually very short. Besides, today it is not clear what technologies are most effective to remove oil in cold and icy waters.  


The third aspect is damage to sensitive arctic marine ecosystem and Alaska’s Arctic community – its welfare highly depends on the income generated from hunting and fishing. Oil spills would not be the only environmental disaster; successful exploitation of oil reserves might change the behaviour of wildlife (whale migration routes, etc.). On the other hand, industry could facilitate establishment of new jobs (it is a big problem in the region).


Another important thing is very high operational costs of the Arctic reserves. Could this activity be profitable today? Exploitation of financially feasible Arctic reserves determines high oil prices, subsidies or tax discounts. Take for instance, the U.S. shale gas and oil revolution: by 2020 the U.S. might become the largest oil producer in the world. In this context the attempts of Shell to exploit oil reserves under harsh Arctic conditions might not seem attractive for the U.S. Government. In the case of fall in the oil price, exploitation of the Arctic reserves might become economically unfeasible, moreover that today the volumes of oil in the Beaufort and Chukchi Seas are still under question.


The Arctic is a priority region for Shell, yet the year 2012 didn‘t bring the expected results in Alaska. Bad precedents are least needed for the company which has obtained oil exploitation licences in the Arctic regions of the U.S., Canada, Russia and Greenland, since this might also affect other countries.  


However, failures are part of the oil business. Shellis one of the most powerful companies in the world for which the Arctic is only part of a puzzle; the company disposes large resources (in 2012 Shell’s profit amounted to USD 27 billion) and has a good reputation. In any case, failures provide valuable lessons for all companies interested in the exploitation of the Arctic resources.


It is obvious that the first round against the Arctic has been lost, but there are still many rounds ahead.