Shell takes a huge gamble hunting for oil in the arctic

Shell takes a huge gamble hunting for oil in the arctic

Shell takes a huge gamble hunting for oil in the arctic
Shell takes a huge gamble hunting for oil in the arctic

Shell Oil Co.’s president Marvin Odum made the trip on Sept. 2 from Houston to this northern-most town in the United States, a spot whose traditional name, Ukpeagvik, means “place where snowy owls are hunted.” according to

Odum is here hunting, too, for oil offshore and political support from Alaska Natives living in Barrow, a ramshackle town of muddy streets, littered with all-terrain vehicles and guarded by snow fences on one side and on the other a four-foot-high earthen berm to protect against high winds and seas.

With a population of 4,429, Barrow is the major launchpad for helicopters shuttling to and from Transocean’s Polar Pioneer, the rig now drilling an oil exploration well for Shell about 70 miles offshore in the Chukchi Sea. If Shell can pinpoint the rich oil reserves it thinks are lying below the sea floor, Barrow will be the main logistics hub for future production.

But Odum’s $7 billion quest has run smack into opposition. During President Obama’s recent visit to Alaska, environmental groups called him to block Shell’s Arctic drilling, which they said contradicts his message on slowing climate change. At a couple of points along routes Obama traveled, clumps of protesters held signs saying “Shell No” and “Polar Profiteer.”

Obama said that oil use can’t be stopped “overnight” and promised that Shell would be held to “the highest standards possible.” Still, the League of Conservation Voters said it was “deeply disappointed.” The Natural Resources Defense Council called the approval of Shell’s drilling permits “a move wholly inconsistent with the urgent imperative of curbing carbon pollution.”

Lois Epstein, Arctic program director of the Wilderness Society, said: “There are lots of reasons we oppose the drilling. Some of them are technical, some of them are related to the pristine nature of the Arctic Ocean. And some of them are related to the climate change impacts. This is another slug of carbon dioxide and once you have the infrastructure in place it will keep fossil fuels burning that much longer.”

But Shell has received support in the debate over drilling vs. climate change from many Alaska Natives. They acknowledge climate change but say the threat it poses to their subsistence fishing culture means they need some other source of economic welfare. And new oil development is the only option.

“Climate change is real, but let’s say we don’t develop. Climate change continues with or without us, then who’s going to build schools for our grandchildren,” said Richard Glenn, a director of the Arctic Slope Regional Corp. and a geologist. He added that the borough government on the North Slope “depends on oil and gas as the only tax base we have. What we have is what we have. We depend on development.”

Shell is the main hope for that development at the moment. If the company is lucky enough to find substantial reserves of oil, it will spend billions more than it has already to bring it to market. While a relatively modest part of the company’s $30 billion in annual capital spending worldwide, the money that trickles off Shell’s investment helps bolster the tax revenue for the North Slope Borough’s $379 million annual budget.

Glenn’s sentiment was shared by others Odum saw during his trip to Barrow, the capital of the vast North Slope Borough that stretches across the top of the state and includes the giant Prudhoe Bay oil field, where petroleum companies have been working for five decades.

At the Arctic Slope Regional Corp., Odum embraced Crawford Patkotak, chairman of the company, and other officials from Alaska Native corporations who were seated around a new conference table built around a traditional style whaling boat.

Recently, the ASRC, which has 12,000 Iñupiat shareholders, and six other Alaska Native companies reached a deal with Shell. They agreed to pay cash – one source familiar with the discussions said about $45 million – for a small share of Shell’s Chukchi production, if there ever is any. Though the investment is tiny, the deal might help turn potential Shell critics into Shell partners. Only two Alaska Native corporations decided not to join the new consortium.

“Knowing that there is risk, we wanted skin in the game and a seat at the table,” Patkotak said. “We wanted to plan for the future of our people.”

Yet many of the people at the meeting said they didn’t join forces with Shell lightly. Alaska Natives – and the Interior Department – worry that the noise of drilling would disrupt the feeding and migration patterns of bowhead whales, beluga, walruses and seals. Any oil spill would come ashore in an Alaska Native village or fishing ground.

There are also plenty of indicators of climate change in Barrow. The ice cellars, or outdoor holes in the ground that people use for freezers, have been flooded recently by melting ice. Shell’s gangly stakeholder manager Maniksaq Baumgartner, who as a youth knocked over one of the iconic whale ribs planted near the sea with his four-by-four vehicle, said that residents now need to chip away at the ice in cellars after the water refreezes.

George Ahmaogak Sr. – a twinkly-eyed whaling captain, five-time mayor of Barrow, a former Shell employee and a member of the ASRC board – said that when he went searching for whales last spring, the ice was dangerously thin. Moreover, he said, the whales migrated about a month earlier than usual because of warming waters.

Yet Ahmaogak and many other people here, especially those working for the Native corporations, see climate change as a reason to push ahead with developing new oil resources, not as a reason for holding back.

“It’s an investment,” Patkotak said after the meeting. “We are not going to be victims of change, climate change or social change.”

It’s just one twist in the saga of Shell’s costly voyage into the Chukchi Sea. Odum, a fit 56-year-old, likes climbing and has gone up Mount Rainier and the Matterhorn. But the Chukchi exploration program is one of the biggest mountains he has tackled.

A top executive at Shell in the Americas since 2005, he has been part of this project since the lease sale in February 2008, when the company paid $2.1 billion for the right to explore in federal waters more than three miles from shore. It was part of the biggest sale in Alaska history, with 667 bids on 488 blocks.

In the 1990s, five wells were drilled in the area and abandoned without fanfare after yielding only natural gas, but by early 2008 oil prices had soared and Shell had taken another look at the data. Armed with new technology, the company thought it could find more lucrative oil.

Since then, Shell has spent another $5 billion or so as it grappled with a string of problems, some of its own making: An icebreaking ship hit an uncharted shoal and tore a gash in its side; a containment vessel couldn’t be deployed; a drilling rig ran aground en route to warmer waters. In addition, one rig spent two weeks avoiding unusually heavy summer ice floes.

Some of Shell’s tribulations were not of its own making. When a blowout on a BP exploration well in the Gulf of Mexico triggered the massive oil spill in the Gulf of Mexico in 2010, the Obama administration imposed an offshore drilling moratorium, and the Interior Department tightened environmental and safety requirements.

When a new chief executive, Ben van Beurden, took charge at Shell’s parent, Royal Dutch Shell, he axed some projects to focus on those with better profits or prospects. He left the Chukchi program alone.

“We go into these decisions together,” Odum said. “We have so many dollars, and this is how we want to do it. It’s a corporate decision.”

He added, “to be perfectly transparent . . . did we have a good idea of how long the permitting process take? No.” But he said Shell would do it again. The U.S. Geological Survey estimates that crude oil output from the Chukchi Sea could one day reach 1.2 million barrels a day, as much as the Gulf of Mexico, and Shell owns most of the leases. Of course, the USGS doesn’t know for certain, either. For a company of Shell’s size, few discoveries could add as much to oil reserves, a key measurement for stock analysts.

“Arctic drilling is a textbook example of frontier exploration – that is to say, drilling in remote, historically underexplored regions,” said Pavel Molchanov, an energy analyst at the advisory firm Raymond James. “Frontier exploration, no matter the specific geography, is inherently high-risk.” And without any infrastructure, the construction lead time is long. Shell says if all goes well, it could have oil flowing by 2030.

“A discovery here would make for an intriguing headline,” Molchanov said. “But its economic value is debatable in a sub-$50 oil price environment.”

Odum said that although oil prices are low now, no one can predict what they’ll be by 2030. Most likely, they will be higher.

“If it’s there in a scale that we need, this could be very competitive with other oil and gas projects around the world,” Odum said. “That’s what we’re trying to prove.”

So seven or eight years of preparation are coming to a head.

But Mother Nature could interfere again. During the last week of August, drilling halted for five days because of high winds and 40-foot swells in the sea.

The years of delay and court battles have been so great that some of Shell’s leases could expire before the company has time to explore them. One federal regulation, barring the drilling of wells within 15 miles of one another to reduce noise that harms walruses, makes it difficult to drill more than a well at a time.

Michael LeVine, Pacific senior counsel with the environmental advocacy group Oceana, said the administration should simply let Shell’s leases expire. Ann Pickard, Shell’s head of international Arctic exploration and production, said some leases in the Beaufort Sea expire as early as 2017 while those in the Chukchi expire in 2020 if the company is not actively exploring or developing them.

If Obama blocked Shell, however, the government would have to return the $2.1 billion the company paid for the federal leases and part of the money Shell has spent since.

“There are a lot of reasons the administration didn’t move in that direction,” Oceana’s LeVine said. “I suspect this is one of them.”

Odum said that Shell will seek extensions, citing unusual delays such as post-BP spill. The Obama administration has encouraged Shell to apply for extensions early, and Pickard says that there has been “a strong commitment” at the Interior Department “for us to go forward.”

Shell is going forward in Barrow, where it is building more and more support infrastructure. At a new dormitory for workers, Odum pokes his head into a cramped bedroom for two, part of housing for 73 people. More rooms will be added.The mess hall next door is big enough to feed 500.

A helicopter hangar has been overhauled for a search-and-rescue helicopter, and other choppers are shuttling back and forth to the rig. Shell has trained 7,000 people to work in Arctic conditions, Pickard said, though only 78 are there now. The training includes, among other things, how to get in and out of a full-body life preserver.

If Shell does find oil, that will open up entirely new questions, such as how to get it to market. Pickard said the company is studying four pipeline routes through water, ice, permafrost and wetlands to get to the Trans-Alaska Pipeline, which needs new supplies to replace the dwindling volumes coming from Prudhoe Bay. If oil flows fall below a certain level, the line might need to be shut down, though there is oil on state lands that could also contribute. A jolt from Chukchi, however, would solve a lot of problems for the state, which gets most of its revenue from oil and gas.

A new Chukchi pipeline, about 280 miles long, would trigger new environmental controversy. The routes cross the National Petroleum Reserve and coastal areas that the National Audubon Society says are home to migrating birds including king eiders, spectacled eiders and half the world’s population of Arctic-nesting geese called the Pacific black brant.

Meanwhile, however, the company has been pleased with Obama’s defense of Shell’s Arctic oil drilling. Odum says Shell executives are not “climate deniers” and that they back the president’s approach to the problem.

“Obama’s message is: Climate change is real. Society has to do something. But he recognizes that the world will need oil for a long time,” Odum said.

He said that Obama also realizes that by drilling in the United States “we can control how it’s done” and that “this resource makes strategic sense for us” because it can displace oil imports. As Odum sees it, “what he’s saying makes a lot of sense.”

Pickard added that “one misperception is the idea that a barrel out of the Arctic has a different effect on climate change than one from the Gulf of Mexico or Middle East. Yes, Alaska is suffering from climate change more than other places, but a barrel of oil is a barrel of oil.”

The oil might be the same, but location matters and some people from the North Slope still want to preserve it.

Othniel Art Oomittuk Jr., an Iñupiaq artist, wrote in an Aug. 31 opinion article in The Guardian that when he was growing up in the coastal village Point Hope 50 years ago people used dog sleds for transport, seal oil for warmth and whale bones and sod for shelter. The fossil-fuel-based economy starting four decades ago made life easier, financed schools and brought luxuries. But, he argued, it hooked the communities on oil.

“President Obama, time changed and it will change again,” Oomittuk wrote. “There will be a time that talking about fossil-fueled car will sound as old as dog sled transportation sounds now.”

He wrote: “Shell believes there is oil in our ocean. But extracting it comes at too big a risk for the indigenous people of the Arctic.”

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