Arctic offshore drilling could resume next year before new federal rules are in place

WASHINGTON -- Although federal regulators are closer than ever to imposing the first minimum standards for oil and gas activity in U.S. Arctic waters, those new mandates are not likely to be in place before next summer, when Shell might resume drilling in the region after a three-year hiatus.

The Interior Department sent a draft of those Arctic regulations to the Office of Management and Budget on Friday, marking the launch of an interagency review process that typically spans months.

Conservationists say the standards are necessary to ensure oil and gas companies working in the remote and unforgiving Arctic use ice-worthy vessels and have enough emergency equipment stashed nearby. A government advisory panel offered similar recommendations in 2013.

Right now, no specific mandates govern Arctic oil development. Federal agencies regulate drilling in the Arctic using the same basic rules that apply generally offshore, whether the target is in the balmy Gulf of Mexico or icy Chukchi Sea.

Some critics worry that other companies planning to drill in the region might not follow Arctic-specific safeguards Shell Oil adopted voluntarily in 2012.

"The key thing will be to ensure these rules are finalized before President Obama leaves office, and there isn't much time remaining," said Lois Epstein, director of The Wilderness Society's Arctic Program.

Interior Department officials have suggested the measures are likely to focus closely on drilling in the Arctic and not on potential development and production activities later on. So, for instance, while the rule could force companies to have oil spill response equipment and the personnel to deploy it, the proposal is widely expected to steer clear of requirements for installing pipelines and other infrastructure in the region.


Shell CEO Ben van Beurden said in a conference call last month that the company is continuing to pursue permits needed to return to the Arctic in summer of 2015, although he stopped short of saying the company is committed to another drilling venture then.

Regulators have signaled that the rule will largely codify steps Shell took already, possibly including its decision to build a specialized, first-of-its-kind containment system for the company's Arctic operations. The government might require Arctic operators to prove they can contain a well swiftly in an emergency.

Regulators previously have suggested their emphasis in developing the new rules would be on containment capability -- not specific equipment for capping a well. But if new Arctic rules do include a containment requirement, it could force other oil companies that hold oil and gas leases in the region, including Houston-based ConocoPhillips and Norway's Statoil, to procure such emergency equipment before they could begin drilling.

Other possible mandates include requirements for redundant emergency equipment to control blowouts and seal off well holes in emergencies. The proposal also could force companies to have a drilling rig on standby to bore a relief well in case of an emergency.

When it drilled the first stages of two exploratory wells in the region in 2012, Shell had two rigs working simultaneously. A requirement for an idle rig could boost the cost of drilling operations significantly. Rigs designed for more temperate waters can cost up to a million dollars a day in rental rates, and few are geared toward Arctic conditions.

Offshore operators also could be forced to harden their fleets of vessels, ensuring they are Polar Class ships capable of working in icy conditions. Although exploratory drilling is limited to the ice-free open-water season of the summer months, an emergency late in the drilling operations could require vessels and workers to be on the scene after ice starts encroaching.

The proposed rule, drafted by Interior Department's Bureau of Safety and Environmental Enforcement, has been deemed "economically significant," meaning it is expected to have an annual impact on the economy of $100 million or more or have a material adverse effect on the economy, productivity, jobs, or state, local and tribal governments.

Some environmentalists say minimum standards aren't sufficient to protect the fragile Arctic ecosystem.

They warn that an oil spill at the top of the globe would be devastating, in part because most cleanup methods are geared toward warmer, calmer waters.

And they point to the mishaps Shell experienced two years ago, including air pollution violations and the grounding of its Kulluk drilling unit during a failed tow mission, as evidence that even a well-heeled oil company can't ensure operations are error-free.