Rig grounding could put Shell's Arctic drilling plans on ice

WASHINGTON -- Even if Shell is able to free its grounded Kulluk drilling rig from a rocky Alaskan island shore, it may be too damaged to resume hunting Arctic oil this summer.

The 29-year-old conical drilling unit is uniquely designed to weather floating ice, and replacements aren't readily available. Even if Shell Oil Co. could find an Arctic-ready rig, it almost certainly would not secure air pollution permits for a different vessel in time to resume drilling wells this July.

"These are very specialized rigs," noted Dave Pursell, managing director of the Houston-based energy investment bank Tudor Pickering Holt & Co. "If Shell figures out there's enough damage they can't get it repaired, I don't know that they have enough time to acquire another."

The Kulluk hit the rocks on Sitkalidak Island near Kodiak City, Alaska, on Dec. 31, following a five-day battle to tow the unpropelled rig to safe harbor amid 70-mph winds and waves that climbed four-stories high. Shell had been towing the 266-foot floating rig to a Seattle shipyard for repairs two months after it finished boring the first half of an exploratory oil well in the Beaufort Sea.

Salvage specialists are devising a plan to wrest the beached rig away from an area that is critical habitat for endangered Steller sea lions, threatened sea otters and other wildlife, without releasing some 140,000 gallons of diesel on board.

While there are no signs of a fuel leak, initial inspections reveal the Kulluk has sustained water and electrical damage.

The episode caps a series of recent mishaps in Shell's seven-year, $5 billion quest for Arctic oil, including the drifting of the drillship Noble Discoverer in Dutch Harbor last July and damage to a unique oil spill containment system during a deployment drill last September.


The latest incident has stoked fears about the dangers of even routine operations in the icy waters around Alaska -- much less full-scale drilling operations high above the Arctic circle -- and environmentalists are pleading with the Obama administration to halt the work.

Shell stresses that the Kulluk and Discoverer incidents were maritime mishaps -- not drilling problems -- and notes that dozens of wells have been successfully bored into Arctic waters.

Shell used its other drilling unit, the Discoverer, to begin a well in the Chukchi Sea last summer. But under Shell's government-approved oil spill response plans and broad drilling blueprints for the region, the company is obliged to have a second rig in the region to drill a relief well in case of an emergency.

Under that requirement, if neither the Kulluk nor a replacement rig is available, Shell would be blocked from oil drilling on the Chukchi and Beaufort sea leases it bought for $2.2 billion beginning in 2005.

Shell spokeswoman Kelly op de Weegh said the company was "fully committed to the regulatory requirements that call for the presence of two rigs when drilling into oil-bearing zones offshore Alaska."

Shell's approach suggests the company could be looking for a way to salvage some of the 2013 season, even if the Kulluk is out of commission, by once again forgoing penetrating underground zones that could contain oil and gas. Shell was forced to limit its 2012 operations to such so-called "top-hole drilling" of only the initial 1,500 feet of its Arctic wells when its oil spill response system could not win approval and get to the area before ice started encroaching.

Bureau of Safety and Environmental Enforcement officials declined to comment on whether the agency would authorize top-hole drilling in Arctic waters without a standby rig.

Environmentalists vowed to fight to preserve the two-rig standard for all Arctic drilling operations. Even top-hole drilling, they say, furthers a "fairy tale" belief that Arctic oil exploration can be done safely.

"To go up there and drill top holes while Shell goes back and moves around the deck chairs and fiddles with their spill-response plan just perpetuates the myth that there's a way to do it right," said Niel Lawrence, senior attorney with the Natural Resources Defense Council.

ConocoPhillips, Statoil and Repsol all hold leases to drill in U.S. Arctic waters, with ConocoPhillips the closest to launching operations.

Even before the Kulluk grounded, Shell's performance was likely to dictate some of the terms for its competitors' planned drilling. For instance, while federal regulations don't explicitly require companies to have a system for reining in a runaway Arctic well, Shell's decision to build one sets a standard other firms will probably have to follow.

The Kulluk grounding also could spark new scrutiny on drilling equipment used in Arctic waters.

While ConocoPhillips has planned to use a tabletop-like jack-up rig with reinforced, ice-capable legs for exploration and appraisal drilling at its Devil's Paw prospect in the Chukchi Sea, it appears unlikely federal regulators will sign off on that approach. A government-commissioned study of Arctic oil technology previously concluded that jack-up rigs are "unsuitable for the Beaufort and Chukchi seas."

Shell can capitalize on potential rewards of being the first in a new era of Arctic oil exploration. But that also means that Shell will take hits, while competitors watch and learn.

A lot of investment is on the line.

Beyond the billions that Shell has spent buying its Arctic drilling leases and renovating rigs, the company has built a broad infrastructure.

Shell has installed crew camps in Wainwright, Barrow and Deadhorse, Alaska and built a new airplane hangar in Barrow. It is leasing a hangar in Deadhorse and has stashed oil spill response equipment along the Alaska coast.


Every dollar Shell has spent toward oil development in the region is further investment -- and commitment to -- its Arctic quest. Analysts say that shows Shell's resolve.

Pursell predicts that even if Shell is forced to delay its planned 2013 Arctic drilling, it will only be a temporary timeout.

"The risk is that you lose a season," he said, adding: "They take this stuff pretty seriously. They know there's a microscope on them."


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