Federal regulators this week received Royal Dutch Shell’s application to bore an exploratory well in the Arctic waters of the Chukchi Sea. Although the company has not made any final decisions, the application, filed with the Bureau of Ocean Energy Management, strongly indicates Shell intends to ramp up its Arctic drilling campaign
as early as the summer of 2015, following several years of repeated failures to initiate the multi-billion dollar project.
Shell’s application comes at a time when the Obama Administration is carefully reviewing
its Arctic drilling policies. Last week, the administration sent an undisclosed copy of its federal requirements to the Office of Management and Budget. The rules may codify existing steps already undertaken by Shell that include the use of ice-worthy sea vessels, as well as ready access to emergency equipment in treacherous waters.
Earlier setbacks forced Shell to enhance its safety precautions beyond scant federal requirements for Arctic development. In 2012, the company’s Kulluk exploratory rig ran aground
near Kodiak Island, Alaska, causing the oil giant to scrap its $200 million dollar investment. Environmentalists point to the incident as a precaution against extensive drilling in the region. “Shell and its contractors are no match for Alaska’s weather and sea conditions, either during drilling operations or during transit,” said Lois Epstein, director of The Wilderness Society’s Arctic Program.
But Shell has invested upwards of $6 billion dollars into its Arctic exploration program, which until now has been limited to shallow wells near the Alaskan coast. The company wants to explore much more extensive reserves that could, ultimately, produce 400,000 barrels per day in the Chukchi Sea.
Competition for new energy resources has pushed the global search for untapped oil and gas reserves northward. In a ceremony at the Kremlin, Chinese President Xi Jinping hailed an agreement with Russian President Vladimir Putin to explore three offshore Arctic areas as a “breakthrough.” More recently, Texas-based ExxonMobil, and Norwegian national oil company Statoil separately entered into joint ventures with Russia’s state-owned Rosneft, despite a new round of U.S. and European sanctions on Russia.
Shell’s investment in exploratory Arctic drilling coincides with its competitors’ unconventional investments in untapped resources worldwide. In the lower 48 states, Chevron has invested billions of dollars developing the Marcellus and Utica shale plays. In addition, the company recently signed a deal with the Argentine national oil company YPF, which has turned the Vaca Muerta region into the second-largest producer of unconventional oil outside North America.
Shell, ConocoPhillips, ExxonMobil, and others see tremendous opportunity in developing Arctic oil and gas reserves. In 2008, the U.S. Geological Survey estimated
that 90 million barrels of oil, 1.7 trillion cubic feet of natural gas, and 44 billion barrels of natural gas liquids (NGLs) remain to be discovered in the Arctic Circle. If accurate, the Arctic accounts for 13 percent of undiscovered oil, 30 percent of undiscovered natural gas, and 20 percent of undiscovered NGLs in the world. Eighty four percent of those technically recoverable oil and gas resources are thought to be in offshore areas.
A 2011 Department of Interior study
of Alaska’s undiscovered and technically recoverable oil and gas reserves estimated that its Outer Continental Shelf (OCS) contains 26.6 billion barrels of oil and 131.4 trillion cubic feet of gas. This means that the whole Alaska OCS could represent 30 percent of undiscovered, but technically recoverable resources in the United States.
It is little wonder that oil companies are interested in developing these risky and often unforgiving offshore areas. Alaska’s OCS could contain nearly as many oil reserves as the Central Gulf of Mexico, where deep water production (greater than 1,000 feet) started in 1979. In 2013, the Gulf region produced 1.25 million barrels per day, a significant piece of total U.S. production.
The key difference between the Alaska OCS and the Gulf of Mexico is accessibility.
The waters off Northern Alaska are climatologically challenging
. Seasonal changes in daylight hours are dramatic, and range from 24 hours of daylight during the summer months to 24 hours of darkness during the winter months. For large portions of the year, the lack of sun dips seasonal temperatures to frigid levels that are frequently fatal. Barrow, Alaska, which sits between the Beaufort and Chukchi Seas, has observed winter temperatures below negative 50 degrees Fahrenheit. And for eight to nine months out of the year, multiyear sea ice, sometimes several hundred feet thick, encase much of the region. Indeed, a 2011 Department of Interior review
of Shell’s 2012 Alaska offshore oil and gas exploration program noted that federal requirements must account for the unique challenges of the region that include extreme environmental and climatological conditions, as well as limited infrastructure.
A 2013 Pew Charitable Trusts report identifies only 106 days from early July through the second week in October where oil and gas is technically recoverable in open waters. In their assessment, in the event of a blowout or oil spill, drillers would take an average of 60 days to bore a relief well. Thus, for drillers to achieve maximum risk prevention, a maximum 46 day window would limit their operations in the Alaskan OCS.
Until now, there has been very limited offshore oil and gas development in the region. Federal rules governing offshore Alaskan development have treated the temperate waters of the Gulf of Mexico and the waters of Northern Alaska as one in the same. However, the administration has signaled its intention of decoupling the Alaska OCS from the Gulf of Mexico. The Pew report identifies several specific recommendations for new federal rules governing pipeline and onshore infrastructure. But neither are likely to be regulated by these new rules. Jennifer Dlouhy of the Houston Chronicle reports
that the administration may instead focus on oil spill response and containment.
Nevertheless, industry interest has ignited a long and cantankerous debate over how to protect the region’s wildlife and native ecology. As industry embarks on its latest attempt to tap these resources, a comprehensive safety strategy is imperative to prevent catastrophic accidents from resulting in drilling moratoriums and severe environmental backlash.