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FIRE AND ICE: Shell and BP's hunt for offshore oil in Alaska

Jill Burke,Craig Medred

Since the Arctic whaling days of the 1850s, profits on oil from Alaska's north have fattened the wallets of the global merchant class. The source of the oil changed with the times, but it has continued to flow to the benefit of both commerce and government.

The crude that replaced whale oil set the stage for a boom that ran, with some ups and downs, from the mid-1970s into the 21st century. Oil production on the North Slope peaked in 1988, with about 2 million barrels a day. That boom is fading now, the volume of oil running through the trans-Alaska oil pipeline falling to about 675,000 per day. And yet many believe there are vast new oil riches waiting just offshore beneath the waters once roamed by the Nantucket whalers -- if companies are allowed access, and if they can find a way to get the oil out without harming the environment.

An ugly and growing oil leak associated with the explosion and sinking of the Deepwater Horizon oil drilling rig in the Gulf of Mexico last week has raised questions about the latter while providing new leverage to environmentalists and North Slope residents who've long tried to block the former.

Opponents of offshore drilling in the Arctic say it is not worth the risk. But the Minerals Management Service, which regulates offshore oil development in federal waters, believes the potential rewards cannot be ignored. MMS estimates oil fields buried beneath the seabed off Alaska's northern and northwest coasts could hold 27 billion barrels of crude -- more than Prudhoe Bay when it was discovered. About 12 to 15 billion barrels is believed to be in the Chukchi Sea, 350 miles west of oil development now clustered around the Sagavanirktok River delta near Prudhoe Bay.

Alaska political leaders say the oil needs to be developed if Alaska is to survive. Crude does more than just grease the gears of the Alaska economy; it is the gears, funding up to 90 percent of the state's budget through taxes, royalties and fees.

Before the Deepwater Horizon accident, there was growing optimism about new oil development in Alaska. Both the Chukchi and the waters off the mouth of the Sag are expected to see significant new oil activity in the coming months. But by Wednesday afternoon, five days after the Deepwater Horizon erupted in flames, the incident was among the topics of discussion at an afternoon meeting with the State of Alaska about Shell's 2010 exploration plans for the Chukchi Sea, said Joe Balash, a special assistant to Gov. Sean Parnell.

"There is nothing like what happened last week to cause you to want to double check on things," Balash said on his way to the meeting.

Specifically, he said, the state wanted more information about the individual drilling locations, how the Alaska operations are similar or dissimilar to those in the Gulf of Mexico, and what cleanup vessels and equipment will be standing by, ready to go on a moment's notice in the event of a problem as oil development heats up in the Arctic.

BP -- the world's third-largest privately held oil company and the operator of the Deepwater Horizon -- plans this summer to snake a drill bit from an island off the coast of Prudhoe and under the seabed to tap an offshore prospect known as Liberty. Royal Dutch Shell Oil -- the world's largest privately held oil company -- holds permits to probe offshore in the Chukchi this summer.

Like the whalers who came before them, today's oil merchants face challenges and, at times, danger in their quest for energy riches. Their predecessors were saddled with extreme weather, potential malnutrition, rough seas and thrashing leviathans. BP and Shell must stare down federal regulations, logistical difficulties, opposition from environmental and cultural advocates, massive expenses, political hurdles -- and the very real possibility their efforts could end in disaster.

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Record-breaking distance, billion-dollar overhead

BP officials say Liberty will boost oil production in Alaska's oil patch and help offset the declining flow in the 800-mile trans-Alaska oil pipeline. The company estimates it will spend more than $1 billion to tap a 100-million barrel reservoir beneath federal waters in the Beaufort Sea. BP's newest offshore venture is expected to break long-distance drilling records and yield up to 40,000 barrels of oil a day by 2013.

Company executives are vocal in their belief that projects like Liberty have a role in liberating America from foreign influences. Energy security is national security, the argument goes, and it is beneath the waters of the nation's outer continental shelf that BP and other oil companies see the greatest potential for new domestic oil and gas resources.

Liberty is a hybrid operation, a high-tech endeavor spanning land and sea, state and federal terrain. Unlike the Deepwater Horizon operation, Liberty's drill tower will sit atop a gravel island, not a semi-submersible floating platform. From an existing manmade island inside state borders it will employ extended-reach drilling to bore two miles beneath the Beaufort Sea, then stretch outward another six to eight miles to reach a rock-trapped field buried deep in the seabed under federal waters.

The first drilling will begin in fall. Over the course of several months, wells will be carved in sections. For each, steel casings are installed and cemented in place. Tubing will then be used to feed the oil and gas from the buried reservoir to processing facilities. "Using this design, oil and gas are fully contained and controlled inside the well," according to a BP brochure on Liberty. Production is expected to begin in 2011.


BP views Liberty as a project for the future, one that minimizes onshore and offshore impacts, largely relying on existing infrastructure from which to launch the operation and move the oil to market. Still, it has constructed a massive drill rig, one it forecasted may become the largest landing operation in the world.

frontier-discoverer-shell-drill-ship
Courtesy Shell
The Royal Dutch Shell drill rig Frontier Discoverer.

More uncertainty for Shell's big 'if'

Shell, meanwhile, has invested heavily in offshore exploration in Alaska. It wants to return to the Burger and Klondike prospects about 75 miles west of the coastal village of Barrow. The company drilled three wells there almost 20 years ago and then capped them. The world was, at the time, in the midst of an oil glut. Crude oil, which had peaked at $35 per barrel in 1980, was falling toward $10 per barrel. Prices wouldn't start to climb seriously until the start of the new millennium.

As prices went up, so did interest in finding new oil reserves. In 2008, Shell spent $2.1 billion for oil leases in the area it had previously explored and plans to go back there this summer. ConconoPhillips, the world's sixth-largest oil company, spent about $500 million for Chukchi leases two years ago.

Curtis Smith, Shell's spokesman in Alaska, said the company hopes to resume drilling this summer to determine what exactly lies beneath the seabed in the Chukchi and the Beaufort, the courts permitting. Though Shell has the government permits needed to proceed, there is still a lawsuit pending in a federal appeals court challenging the adequacy of the Interior Department's environmental studies preceding the 2008 lease sale.

"We're planning to drill up to three wells total in the Beaufort and Chukchi seas,'' Smith said.

Shell hopes to start work in the Beaufort after the departure of sea ice in July. The drill rig Frontier Discoverer would relocate to the Chukchi, Smith said, before subsistence whaling begins along the North Slope. Chukchi drilling would take place about 75 miles from the shoreline, well away from any coastal whaling in August, September and October.

"How many wells we drill in the Chukchi will be determined by any progress made in the Beaufort, as well as the time we have to complete any downhole work before we leave the Chukchi theater at the end of October,'' Smith said, adding that "if we do drill, we expect to hire hundreds of workers and several Alaskan companies.''

Some believe that "if" might have become iffier because of what is happening in the Gulf of Mexico. The seeping leak beneath where the Deepwater Horizon was drilling lends some credence to claims by environmentalists that pre-drilling studies in Alaska failed to pay adequate attention to the possibility of a spill and its effects on marine life including polar bears, a threatened species.

Until the Gulf accident, the possibilities of a spill had appeared low. There hadn't been a major spill associated with an offshore rig in North America since Santa Barbara in 1969. Shell has been trying to stress that environmental protection measures instituted after that spill have proven themselves and that the problem with the Gulf spill came from totally new technology designed for drilling a mile beneath the surface of the ocean.

Smith said there is a huge difference -- about 4,850 feet worth to be exact -- between the deep-water drilling off the coast of Louisiana and the 150-foot-deep water where drilling is planned on Alaska's continental shelf. The deep-water drilling was being conducted from a floating platform that required state-of-the-art technology to keep it positioned over its target. The Chukchi and Beaufort drilling would be conducted from an old-fashioned rig anchored to the sea bed. The technology has been used successfully and without a major spill in Alaska's Cook Inlet since the 1960s, despite extreme tides, rip-roaring currents and moving ice flows.

'Very disturbing'

The White House, too, is holding to the opinion the new drilling proposed for Alaska is safe. When asked Wednesday how the Gulf incident might affect future offshore activity in the Arctic, if at all, the Interior Department responded that the Obama administration's offshore oil and gas plan proposes a "thoughtful, scientifically grounded process" for proceeding with oil development. It also appears the administration feels there isn't much choice.

"Ultimately, the goal is to achieve energy independence because there is a risk inherent in leaving our energy supply in the hands of other nations,'' Kendra Barkoff, the Interior Department's press secretary, said in a prepared statement.

On a national level, though, some political leaders already appear to be backing away from offshore drilling. Florida Gov. Charlie Crist, a one-time backer of drilling off the coast of his state, flew over the Gulf of Mexico spill on Wednesday. When he spoke to reporters after the flight, he sounded anything but supportive.

"It was very disturbing. I mean, it was horrific," he was quoted as saying. "Enormous. Remarkable with its size, and I think the impact that it could potentially have on Florida has to give all of us pause. I think only being prudent and wanting to protect our beautiful state is appropriate."

Faced with the decline of North Slope production, however, Alaska politicians have so far been vocally supportive of drilling. "I am still confident that Alaska's Outer Continental Shelf can be responsibly developed and routinely encourage stringent standards of safety in all matters of resources development,'' said Sen. Mark Begich, D-Alaska, the greenest of Alaska's Congressional delegation, in a written response to questions about whether his position, like Crist's, had shifted.

While Alaska and the nation watch the mess in the Gulf get messier and wait for answers about what went wrong and how, lawmakers' support for developing Alaska's new frontier seems to remain largely undeterred.

"It's been a complete non-event here," state Rep. Mike Hawker, R-Anchorage, said Wednesday. The co-chairman of the state House Finance Committee said Alaska's political leaders understand the relationship between the oil industry and state government. If oil stops flowing through the trans-Alaska pipeline, Alaskans will find themselves in a world of hurt. But Hawker recognizes the Gulf of Mexico spill might be used to beat up Alaska's oil industry in the months ahead.

"They've been declared public enemy number one in some circles,'' Hawker said. "Big companies, wherever they are, are always an easy target.''

Coming Friday: Déjà vu all over again

Contact Craig Medred at craig(at)alaskadispatch.com and Jill Burke at jill(at)alaskadispatch.com.