For all the talk of economic opportunities opening up as the Arctic Ocean thaws, new development and investment will remain constrained by tough environmental rules, high costs and harsh weather. That was the take-away message Sunday from the Arctic Imperative Summit at a swank hotel overlooking Alaska's only ski resort, where scores of visionaries gathered to discuss the Arctic's promising but star-crossed future.
Attendees needed to look no further than the stuttering, start-stop-start experience of Royal Dutch Shell in the Chukchi Sea off Barrow at the top of the world. Shell executive Pete Slaiby recounted what has gone on in the six years since he arrived in Alaska to lead Shell back into the Arctic to drill in the Chukchi and the Beaufort sea to the east. Experts estimate more than 25 billion barrels of oil await beneath the seabed there.
Shell has spent years trying to launch an exploratory drilling program. The company is optimistic it will be drilling soon, Slaiby said. But the summer is almost over, and it has only been in recent days that its two drilling rigs departed Dutch Harbor in Alaska’s Aleutian Islands for Shell’s Burger prospect in the Arctic 1,200 miles to the north and its Beaufort prospect even farther away.
After spending $4.5 billion and fending off dozens of lawsuits, the company had hoped to begin drilling up to five wells in July. But regulatory hurdles and lingering sea ice delayed the effort, and the company will now be lucky to drill two wells.
In an interview with reporters Sunday, Slaiby said Shell has submitted a proposal to the U.S. Interior Department that might provide the company with more drilling time. The problems are a setback not just for Shell, but for the oil-dependent state of Alaska that has pinned its economic hopes on Shell for years.
Oil production has been declining for years at the oil fields on Alaska’s North Slope. The state depends on oil tax to fund about 90 percent of its budget. It needs to keep oil flowing through the 800-mile trans-Alaska oil pipeline, and Shell is the great crude hope.
Shell safely conducted exploratory drilling in the Chukchi and Beaufort seas more than two decades ago, but left as oil prices sank and the costs of extracting oil rose. They've returned to resume exploration efforts with improved drilling technology and an unprecedented quantity of equipment to stop a spill.
Despite the technological advances and Shell’s experience, drilling has proven no easier this time around than in the past. And if Shell finds the elephant field for which it is looking, getting that oil into production could prove even more daunting.
The Interior Department recently announced it's proposing to set aside much of the nation's 23-million-acre National Petroleum Reserve-Alaska to protect it from development. Shell has been thinking about threading a pipeline or pipelines across the reserve to connect to the existing oil line.
David Hayes, an Interior deputy secretary, told an audience of about 200 at that Arctic Imperative Summit that the NPR-A proposal balances ecology and development. In addition to closing off environmentally important areas, the plan would lead to increased leasing opportunities for oil companies in the reserve, and allow access for a Shell pipeline.
Some in the audience were skeptical. Former Alaska Gov. Frank Murkowsk said the Interior's plan, which could be finalized late this year, will prevent drilling in the most oil-rich areas of NPR-A, including near Teshukpuk Lake. It is an ecologically sensitive area considered a vital nesting site for migratory birds.
With the federal government owning two-thirds of Alaska, and preventing industrial activity on most of it, development in Alaska often means "a lot of talk and very little actual production," Murkowski complained.
What will the latest government land-protection plan do to any of Shell's hopes for pipelines spanning more than 200 miles across western Alaska to the trans-Alaska oil pipeline?
Slaiby said Shell is evaluating. On the positive side, he said, the Interior Department is no longer considering an earlier proposal that would have limited development even more. But the new plan remains a concern.
"When you hear the (Interior) secretary say, well it doesn't -- and I can't quote him exactly -- ‘doesn't foreclose the possibility of a pipeline across NPRA,’ that's not exactly a ringing endorsement,” Slaiby said.
But that is the least of the problems facing Shell at the moment.
Few Arctic facilities
Other, more-immediate challenges were on the minds of investors, political leaders and others at the summit. Infrastructure in Alaska’s Arctic is woefully lacking. There are few roads and none that go anywhere; no railroads; and no deepwater port. Aircraft facilities and communications are limited.
Cmdr. Thomas Ostebo, head of the U.S. Coast Guard's Alaska district, clearly laid that out. There were 95 ships with a total of 1,500 people aboard sailing above Alaska last week. He knew where about 45 of them were and the countries to which they were registered. One of the known entities was the Coast Guard's Healy icebreaker, part of an unprecedented but still minimal Coast Guard presence that includes some 40 personnel bunked in hotels in Barrow, the nation's northernmost community.
Despite the Coast Guard's increased presence, thousands of miles of Alaska coastline remain lonely and desolate. The agency lack docks for fueling ships or taking on personnel and supplies, Ostebo said, raising questions about response capabilities in the event of a ship collision or an environmental catastrophe.
He worried that things are spinning a "bit out of control" in the Arctic. The Coast Guard was recently called in to help with a rescue in Nome in Western Alaska. Getting there from Barrow took a day, he said.
Regulatory hurdles and a lack of infrastructure aren't the only things limiting development.
David Rubenstein, co-founder of the Carlyle Group, said he doesn't believe the Arctic will be an attractive investment opportunity until the Law of the Sea Treaty is ratified by the U.S. Senate. Advocates have said ratification of the United Nations agreement will allow the U.S. to claim a California-sized area off the coast of Alaska, vastly increasing the nation's oil and mineral holdings.
Former Secretary of State James A. Baker III said at the summit that it's a toss-up as to whether Congress will approve the treaty this year. Republicans, he said, “don’t like like treaties.’’ A Republican himself and a former chief of staff for Republican icon President Ronald Reagan, Baker said he believes the Law of the Sea Treaty is vital to U.S. interests, but it will take a full-court press by the Obama administration for it to have any hope of winning approval.
Despite the hurdles to Arctic development, Shell has been creeping forward on its oil plans.
Shell extra prepared
To prevent a possible environmental disaster, Shell is required to have in place multiple layers of protection against a drilling well blowout, including a capping stack. That's now sitting near Shell's Chukchi drill site, Slaiby said. The prospect lies about 70 miles northwest of the village of Wainwright. In a worst-case scenario, the capping stack can be lowered over the well to stop a spill.
Shell also plans to soon bring a 36-year-old containment barge to the Arctic. The Arctic Challenger is still being refurbished at a shipyard in Bellingham, Wash. The containment system is designed to capture spilling oil and bring it to the surface.
Slaiby said it's Shell's belief that once the barge receives Coast Guard certification, and the company receives its final permits to drill, then Shell can begin doing preliminary well work that does not drill into hydrocarbon zones.
"We're getting more and more optimistic about getting the Challenger out of Bellingham in the near-term," he said. "When that happens, it's our belief we can start work as quick as we have an APD (permit to drill), and that in hand we can do the work that doesn't involve hydrocarbons: the mud line cellar and the 30-inch and the 20-inch casing."
Getting the Arctic Challenger from Bellingham to its position in the Arctic will take two weeks, Slaiby said.
"There's no real show-stoppers to what needs to be done," said Slaiby of the Challenger. "It's a question of finishing up some pretty basic stuff to get ready."
Ostebo of the Coast Guard said the Challenger is "real close" to being certified, but he stopped short of giving an exact date. Coast Guard reviews of the Challenger’s systems are occurring daily in Bellingham, he said.
Shell has submitted a letter to the Interior Department asking to extend its drilling window in the Chukchi, Slaiby said. Federal regulators required the company to stop drilling there by Sept. 24, to allow the company time to leave the area before sea ice sets in.
But the National Oceanic and Atmospheric Administration and Shell's ice experts -- who have been pretty accurate so far -- expect that ice will form later in the year than expected this season, Slaiby said. If Shell's request is approved, that could give the company a couple extra weeks to drill.
"We do see a later freeze-up this year, and we think it's supported by some pretty good data and analogous years," Slaiby said. "So we have gone and asked (regulators) to consider that, which (is an option) they had put together in their original permitting language."
The Interior Department has not yet responded to the request, he said.
As for the company's drilling site in the Beaufort Sea off Alaska's northeast coast, Shell's anchor handlers moved out of the area on Aug. 23 as part of the company's agreement with Inupiat whalers from the villages of Nuiqsuit and Kaktovik. The villages wanted Shell out of the way during the bowhead whale hunting season in the fall.
Shell will move its drilling rig back into position there once whaling ends, an annual event that can take several weeks. Federal regulators have given Shell until Oct. 31 to drill in the Beaufort.
Whale-hunting season is yet another of the unique hurdles confronting oil drilling in the Arctic. This is most decidedly not the Gulf of Mexico, where oil companies have been punching holes in the seabed on a regular basis for decades. Federal offshore areas in the Gulf -- those areas beyond state territorial waters -- now produce more oil than any state in the nation.
Contact Alex DeMarban at alex(at)alaskadispatch.com