It's the billion-dollar question in Alaska for 2012: Will this be the year Shell Oil begins large-scale offshore exploratory drilling in Arctic waters?
Two months into 2012, the oil giant is beyond the lead time it said it needed to assemble the flotilla of support vessels that must accompany drill ships to leases in the remote Chukchi and Beaufort seas. But Shell Alaska Vice President Pete Slaiby remains hopeful drilling can begin when Arctic Ocean ice melts this summer, even as he awaits a green light from regulators.
"There is clearly more certainty with the regulatory process than we've had in previous years," Slaiby said in an interview.
President Obama in July created an interagency working group to coordinate energy development in Alaska. Discussions with Shell have been fruitful, Slaiby said.
"There's a lot of questions coming back from the regulators: How does this work, when will you have this in place? What are your competencies? How do you ensure it will work? This is stuff we had all thought out," Slaiby said. "It was not like it is new stuff, or somebody was coming back with something we hadn't thought about. But they are clearly now front and center in asking questions and in really doing the things that the public demands."
Alaska's elected officials are banking on offshore development to maintain Alaska's petroleum-based economy. Environmentalists fighting to protect marine mammals have contested every permit application, claiming oil companies can't clean up spills in ice-choked oceans. Interior Secretary Ken Salazar, in the wake of the BP Gulf oil disaster, pledged "utmost caution" in Arctic offshore drilling, to the frustration of Shell, which has spent upward of $4 billion on Arctic offshore development
The federal government estimates Arctic Ocean outer continental shelf reserves at 26.6 billion barrels of recoverable oil and 130 trillion cubic feet of natural gas. Diminished production on Alaska's North Slope has lowered flow in the trans-Alaska pipeline to less than a third of its capacity.
Shell hopes to provide a source to fill it, and has made progress.
The company cleared a hurdle last month when the Appeals Board of the Environmental Protection Agency confirmed an air permit for one of Shell's drill ships, the Noble Discoverer, which had blocked 2011 drilling. Shell hopes to use the drill ship in the Chukchi Sea.
The federal Bureau of Ocean Energy Management in December approved Shell's exploration plan for the Chukchi -- with a major caveat. Shell must stop drilling into hydrocarbon zones 38 days before ice is likely to move in, roughly Sept. 24, to have time to fix a wellhead blowout.
Shell contends the chance of a blowout is minimal and that its cleanup preparations can address any spill. It is trying to reverse the 38-day restriction but will move ahead with drilling if it can't.
"Look, you have 105 days," Slaiby said. "Thirty-eight days is a large factor in 105 days. But it looks like we'll have to take a bit of measure of inefficiency unless we're successful in challenging it."
Shell has other hurdles to clear. The company could hear this month whether the Bureau of Safety and Environment Enforcement will sign off on its spill response plan, the focus of environmental groups that contend oil companies have not demonstrated they can clean up a spill 1,000 miles from the nearest Coast Guard base and from infrastructure -- ports, major runways, even warehouses and hotels -- that is available elsewhere.
Shell continues to make its case that it has an effective cleanup plan in place with response vessels standing by and additional support from resources staged at Prudhoe Bay and elsewhere.
"It's been a process where we've not had to significantly change what we've done, but we've had to put in a lot more explanation of how it's doing," Slaiby said.
Well control will include a "capping stack" that can be lowered onto a well as BP did to stem the Macondo blowout. It's being fabricated in Louisiana and will be tested in Washington or Alaska waters before drilling begins, Slaiby said.
"We're going to have that ready to go," Slaiby said. "It will be tested. It will meet with all of the BOEM, BSEE, requirements. We're going to have it offshore with us. It will actually be resident on one of our anchor handlers, with a lifting frame and ready to be deployed."
Shell is awaiting a decision on an appeal of the EPA's air permits for its other drill ship, the Kulluk, which it hopes to use for exploratory wells in the Beaufort Sea.
Environmental and Alaska Native groups have challenged Shell's exploration plan in the Beaufort. Arguments in the case are scheduled for March.
Shell is constructing an ice-hardy spill containment barge in Seattle. The Kulluk has been undergoing upgrades in dry dock since last summer, including replacement of engines to make them compliant with air standards. The Noble Discover is finishing up a well in New Zealand before it will make the trip to the West Coast for modifications.
Environmental groups have challenged the lease sale that allowed the 2008 sale of leases in the Chukchi. A federal judge in Anchorage ruled that the former Minerals Management Service had not followed environmental requirements before the sale. He's now considering corrections made by the Interior Department. A negative outcome, Slaiby conceded, could block Chukchi drilling.
Slaiby remains optimistic about progress in the regulatory process. Interior Department Deputy Secretary David Hayes, the chairman of the interagency group on Alaska energy, has done a good job assembling various agencies to "kick the tires" on the project to make sure it was put together properly.
"I think the end result is pretty good," Slaiby said.
By DAN JOLING