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Shell readies to roll dice on multibillion-dollar bet in Arctic Alaska

Alex DeMarban

Editor’s note: This is the first of a three-part series looking at Shell’s plans to drill for offshore oil in Alaska’s Arctic. Part 2 will look at the small revenue the state can expect from federal offshore development and congressional efforts to change that. Part 3 will focus on the pipelines Shell must build to ship its oil to market -- if it finds enough to justify the massive cost.


Talk to folks with Royal Dutch Shell for any length of time and you walk away thinking they're holding a handful of aces.

The company is on the eve of exploratory drilling off Alaska’s coast, the first such efforts in some two decades. Already, two drill rigs are plowing north, bound for the Arctic Ocean to start drilling this summer.

What are the company's prospects of striking it big? Shell normally gives itself 1-in-20 odds of discovering commercial quantities of oil when it sinks a drill bit.

But in the little-explored region of the Chukchi and Beaufort seas -- which are part of the Arctic Ocean and include the very spots where Shell pierced the seafloor in the 1980s and 1990s -- the company pegs its odds at better than 1 in 2, says Curtis Smith, Shell’s Alaska spokesman.

"In some circles, that's unheard-of optimism," he says.

More oil than the North Slope?

Shell has backed that view with a massive investment and the stubbornness to overcome years of legal and regulatory hurdles. Now, the oil giant stands on the edge of a frontier thought to contain 25 billion barrels of oil, an amount putting it on par with Alaska’s North Slope fields that have produced 17 billion barrels of oil since Jimmy Carter was president.  

Shell might be sitting atop of the mother lode. If not, the company will lose one of the costliest bets in oil exploration history.

Shell has invested nearly $5 billion in its quest to begin exploratory drilling in what is known as the Hamburger prospect in the Chukchi Sea and the Sivulliq prospect in the Beaufort. But that could be just the beginning -- "the tip of the iceberg," as Oppenheimer energy analyst Fadel Gheit puts it.

"To get their oil to market, Shell might have to spend 10 times that amount or more," Gheit says.

In comparison, $40 billion to $50 billion would equal the estimated cost of building Alaska’s long-sought natural gas pipeline -- a proposed project that’s been around for nearly four decades and is currently stalled, despite up to $500 million in state subsidies to jumpstart construction.

But Shell appears more confident in its offshore oil program in Alaska’s Arctic than state leaders are about a gas pipeline project.

Even though Shell hasn’t drilled its exploratory wells yet, the company is already thinking about how it will get the oil to market. And it’s dropped tens of millions of dollars in prep work for this second phase.

What does that cover?

• The construction of permanent drilling platforms rising 100 to 150 feet above the sea floor, manned stations where the crude is processed year-round into pipeline-ready oil.

• Hundreds of miles of pipelines snaking beneath the subsea floor and over tundra -- a project that would rival the 800-mile-long wonder known as the trans-Alaska oil pipeline.

• What the company predicts will be the nation's largest-ever environmental impact statement.

All told, Shell’s work could easily consume another decade, what with massive engineering obstacles, continued legal battles and who knows what else.       

"We're spending billions of dollars now for the right to spend tens of billions of dollars more," Smith says.

Arctic game-changer?

For Alaska, the state treasury has little to gain, at least for now, because Shell’s oil prospects sit in federal offshore waters -- some 70 miles off Northwest Alaska and about 20 miles above Northeast Alaska.

But the potential riches have already sparked a fight in the halls of Congress to wrest more than one-third of the federal oil royalties for Alaska -- a deal which could be worth hundreds of millions annually for the state, depending how much oil is found and what refineries pay for it.

Watching close are other industry giants, poised to jump in big if Shell hits a bonanza. Norwegian-owned Statoil, for example, is readying for exploratory drilling in 2014 in Alaska's Chukchi region.

If Shell doesn't strike it big, Statoil will think even harder about its plans, says Jim Schwartz, a Statoil spokesman.

What's a big find? Statoil has never announced the size of the reservoir it needs to make a discovery economical. But generally, oil companies eyeing Alaska’s Arctic waters want a field of at least 1 billion barrels with high recovery rates, a cache that would rival all but a few fields in the Gulf of Mexico, Schwartz says.

Nearly all systems go

What is Shell sitting on in the frigid Arctic? There's only one way to know, and it appears the company may soon find out.

Shell had hoped to have the Kulluk and Noble Discover drilling rigs through that Arctic Ocean doorway -- the Bering Strait -- by this weekend. But unusually thick sea ice at the strait and around Shell's prospects has delayed plans.

The massive, round Kulluk must be towed, making for slow-going, no faster than a handful of knots. The rigs are still several days from reaching Dutch Harbor, a fishing town that’s still hundreds of miles from oil-hunting grounds to the north.

Meantime, regulators seem increasingly likely to approve the final permits for Shell's proposed wells -- up to three in the Chukchi and two in the Beaufort -- with the same limits set for next summer. U.S. Interior Secretary Ken Salazar recently said approval is highly likely, making it virtually a done deal.

The other major obstacle Shell has faced is litigation -- a barrage of lawsuits by those opposed to offshore oil development in the Arctic. But just like the ice will clear this summer, so too have the suits drifted away. Environmental groups that had joined forces with Alaska Native groups confess they've run out of legal options to stop this summer's drilling.

Three lawsuits remain in federal court, two challenging air permits issued to the drilling fleets and another addressing Shell's exploration plans. But no court action is scheduled to occur before Shell begins drilling in the coming weeks, according to lawyers with Earthjustice and the Center for Biological Diversity -- two of the main groups that have opposed Shell for years now.

Skeptical whaler

Growing increasingly restless are some North Slope residents, where Inupiat villages have long survived by hunting bowhead whales.

Shell and federal regulators have raised the bar on safety to prevent another 2010 Gulf of Mexico disaster, even though such a screw-up is considered less likely off Alaska’s coastline because of the shallow seas and low well pressures.

Shell is hauling up an unprecedented array of equipment to the Arctic to deploy in the event it must shut down a spewing well. The company has also agreed to suspend drilling operations in the Beaufort Sea prospect by Aug. 25 to reduce interfering with the bowhead migration -- the prelude to the fall whale hunts.  

Still, concerns remain high for those who call the Chukchi and Beaufort their garden -- an ocean full of seals, walrus and whales. Among them is former North Slope Borough Mayor Edward Itta, who remains skeptical of Shell’s plans.

Before Itta’s mayoral term ended in fall, he worked closely with Shell to find common ground after challenging federal regulators in court over the North Slope Borough’s concerns with offshore oil development. Itta is also featured in the new book by Bob Reiss, “The Eskimo and the Oil Man,” a work spawned by Shell's Arctic ambitions.

Itta believes Shell has done a good job reaching out to villages and understanding concerns on the North Slope. But he's troubled with the fact that oil-spill prevention and response equipment hasn’t been tested in Arctic waters, preferably in rough conditions, like huge storms and sea ice -- common off the shores of his home in Barrow, he says. Environmental groups have long demanded the same kind of testing.

Shell's done a lot, but it's not enough, Itta now says.

"There's a new anchor-handling, ice-class ship that's touted as state of the art, and I applaud them for that,” he says. “But until real-life conditions and drills are met and done up here, who knows?"  

Shell should have also tested its capping stack in the Arctic, he says. The capping stack is the kind of device that shut off BP's oil-well blowout in the Gulf of Mexico. Instead, Shell wrapped up testing last week in Puget Sound near Seattle.

"It's one thing to say they have a plan," Itta says. "It's another to try it out. There's never been a drill or a test done up here. It'd be interesting at the least."

Shell officials have said the company will stop drilling before sea ice moves into the area of their operations. Regulators have created short drilling seasons to make sure Shell is prepared to do so.

As for the capping-stack tests, Curtis Smith, the Shell spokesman, says the company will be working in ice-free waters similar to Puget Sound conditions. "I don't know what regulators or inspectors would gain by seeing this deployed in Arctic waters," he says.

The test occurred in Puget Sound because it was accessible for federal observers, who called the capping-stack test a success, Smith adds.

Alaska Dispatch’s requests to speak with Pete Slaiby, Shell's vice president of Alaska and a man whom Itta calls a friend, were unsuccessful. But Smith says Shell is open to testing its capping stack and containment system in the Arctic, if regulators ask the company.

Contact Alex DeMarban at alex(at)alaskadispatch.com