Shell officials on Thursday said the oil company plans to make another, dramatically scaled-back bid to find crude in Arctic waters, following a headline-grabbing 2012 season that left the firm with air pollution fines and embarrassing equipment failures.
But first, the company is preparing to scrap the floating Kulluk conical drilling unit, which ran aground near an Alaskan island on Dec. 31 after a five-day fight to tow the vessel through a fierce storm. Shell has contracted the Polar Pioneer rig to replace the Kulluk as soon as early 2014, while final assessments are made on whether it is cost effective to repair the damaged drilling unit in an Asian shipyard.
Simon Henry, Shell’s chief financial officer, said the company was bracing for a fourth quarter impairment of “a few hundred million dollars” if the Kulluk’s repair costs exceed the benefits of rehabilitating the 30-year-old vessel.
The disclosure, which came during a call with reporters to discuss Royal Dutch Shell’s third-quarter earnings, ends months of speculation about whether the firm would be ready to return to the Chukchi and Beaufort seas north of Alaska once ice clears next summer.
The company has devoted nearly $5 billion and eight years of work into a new generation of Arctic oil exploration, decades after floating rigs drilled the last offshore wells in the Chukchi and Beaufort seas. The project is the largest single exploration prospect in the Shell group, but Henry stressed it has multibillion-barrel potential.
“It is very important to get the drill bit into the reservoir,” Henry told reporters. “What do we have ? Is there oil there ?”
Shell was forced to constrain its 2012 operations to “top-hole” drilling of the initial 1,500 feet of its Arctic wells, after its unique oil spill containment system was damaged during a deployment drill and could not get to the area in time.
Henry said Shell would soon file a broad Chukchi Sea drilling blueprint with federal regulators at the Interior Department. The company will not seek to resume drilling in 2014 in the shallower Beaufort Sea, where the floating Kulluk had operated last year.
“We have not yet confirmed if we drill in 2014,” said Simon Henry, Shell’s chief financial officer. “Clearly, we would like to drill as soon as possible, so we are putting the building blocks in place. There remains a permitting and regulatory process through which we need to go, before we can confirm a decision to actually drill in 2014.”
Shell in February decided it would abandon work in U.S. Arctic waters in 2013, while repairs on two drilling rigs were underway. Shell’s self-described “pause” in Arctic drilling also would give the company time to stand up an emergency oil spill containment system and leave room for federal regulators to draft specific standards for oil and gas development in the region.
But there are major hurdles for Shell to restart its Arctic drilling operations in 2014, even on a much more limited scale.
The company still has not fulfilled regulators’ request for a third-party audit of Shell’s management systems.
Its Chukchi Sea exploration plan will be subjected to environmental reviews and public comment, a process that can stretch for months. Drilling permits for specific wells also may be needed.