A few summers ago, the oil and gas industry’s first major foray into the US section of the Arctic Ocean got off to an inauspicious start. While Statoil and ConocoPhillips hold leases in the Beaufort and Chukchi seas (sections of which currently comprise the only part of the American Arctic that has been declared fair game to the industry), Royal Dutch Shell was the first to push forward with its exploratory drilling programme in 2012.
While the company did manage to get underway with two non-oil producing preparatory drilling operations, a slew of potentially dangerous slip-ups essentially crippled work for the season, a window that due to sea ice usually runs from July to October each year.
Along with safety equipment test failures and Shell’s subsequent struggle to obtain certification for its spill containment vessel, the Arctic Challenger, in time to start exploratory drilling, there were separate transport emergencies involving the company’s two drilling rigs.
Rewind to summer 2012: Shell’s Arctic woes begin
In July, the Noble Explorer rig slipped its mooring and almost ran aground in Alaska’s Dutch Harbor. More serious still was the floundering of the Kulluk drill barge at the end of December 2012 while it was en route to its winter base in Seattle, reportedly on an accelerated schedule to avoid Alaskan taxes on oil and gas extraction equipment.
The rig was caught in a storm and drifted aground off Sitkalidak Island in the Gulf of Alaska. None of the hundreds of thousands of litres of fuel and lubricants carried by the Kulluk were reported spilled, but the message was clear – the conditions of the Arctic had definitively proved too much for one of the industry’s top players, both in experience and resources. Soon after, Shell announced a hiatus for its campaign in the Arctic.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below formBy GlobalData
As one of the biggest CO2 emitters, how can the industry credibly inform the debate?
Having already experienced its worst offshore nightmare at the Macondo Prospect a few years earlier, the US government was understandably quick to assure the American people that it would do everything in its power to make sure the same disaster would not befall the Chukchi or Beaufort planning areas, where the effects of a spill would likely be more serious and far harder to clean up.
Then-secretary of the interior, Ken Salazar, was blunt when he addressed journalists in a conference call in early 2013: "Shell screwed up in 2012 and we are not going to let them screw up after their pause is removed."
US response: Arctic-specific offshore regulations
With 2015’s summer operating window in the Arctic approaching and Shell once again asserting its desire to return to the region this year if possible, the main thrust of the government’s response to Arctic drilling risk has arrived in the form of new proposed Arctic-specific regulations, unveiled by the Bureau of Ocean Energy Management (BOEM) and the Bureau of Safety and Environmental Enforcement (BSEE) – the principal regulators for the US’s Arctic Outer Continental Shelf (OCS) – in February.
The Department of the Interior’s (DOI) new rules represent the first codified acknowledgement of the unique challenges posed by the Arctic, with its unpredictable weather, dangerous sea ice and remote location, and propose strict requirements to match.
Among the major environmental requirements in the draft regulations is the obligation for offshore operators in the region to pressure test platform blowout preventers (BOPs) every seven days rather than the standard 14-day testing cycle. The regulations also propose levels of redundancy in offshore Arctic operations, including the local presence of a back-up relief rig, which in the event of a large spill would be able to drill a relief well – the action that finally plugged the leak during the 2010 Deepwater Horizon disaster – if other required control and containment equipment, such as capping stack, cap and flow system and containment dome, should fail.
The draft regulations, which are in a comment phase until 27 May and have an unclear timescale for implementation, attempt to negotiate the delicate balance between making all reasonable efforts to protect the fragile Arctic environment and providing regulatory certainty so that industry can pursue the government’s longstanding commitment to the "expeditious and orderly development" of the country’s OCS.
Assistant secretary for land minerals management, Janice Schneider, summed up this balance in the initial announcement of the proposed regulations: "These rules would facilitate exploration planning efforts and provide regulatory certainty, while ensuring that the US maintains its leadership position in overseeing safe exploration operations that protect this unique and sensitive environment."
Are the new regulations fit for purpose?
Unsurprisingly, while some industry commentators cautiously welcomed the regulatory certainty provided by the proposals, there were a number of immediate complaints from companies and industry associations, chiefly regarding the relief rig requirement, which was described by American Petroleum Institute director of upstream, Erik Milito, as "unnecessarily burdensome" given the ability of the capping stack to provide relief "with equal or higher levels of safety and environmental protection".
Regulators, for their part, reason that the back-ups are necessary due to the Arctic’s unpredictable conditions and the distance between license areas and the nearest offshore infrastructure. Local countermeasures might be the only way to contain a spill before winter ice effectively seals off the damage until the next season. After the spectacular failure of Shell’s containment dome in a test in the relatively simple conditions offshore Seattle in September 2012, during which it was "crushed like a beer can", the wisdom of having a Plan B should be self-evident.
Nevertheless, it can’t be ignored that, by the DOI’s own estimates, the new regulatory burden for Arctic operators will cost companies an extra $1.2bn over 10 years, a significant disincentive for companies that are already taking a massive gamble by taking on the costs risks of developing this new frontier. Other concerns, including the seven-day BOP pressure test requirement being counter-productive due to the increased wear-and-tear involved, prove the value of industry feedback during the draft regulations’ ongoing comment period to refine the finished laws.
Given the stakes, however, it’s easy to understand why US regulators are approaching the Arctic situation with extreme caution, despite the industry’s concerns and Republican attempts to change the terms of the conversation. The Chukchi and Beaufort seas combined might contain as much as 21.5 billion barrels of oil and 93.4 trillion cubic feet of natural gas and could play a significant role in America’s future energy security situation, but the potential consequences of an uncontrolled spill in the Arctic could be terminal for one of the world’s last remaining pieces of pristine wilderness, and BOEM itself has projected that there is a 75% chance of one or more major spills taking place over the 77-year life of the wells.
A number of companies have backed away from plans to explore for oil in the Arctic.
The Arctic-specific regulations might place their burden on the first companies to explore the region rather than building up to regional shared safety assets as is common in the Gulf of Mexico, but hoping for the best with weak initial requirements seems like less a gamble and more a game of environmental Russian roulette with the gun pointed at one of the world’s last remaining pieces of pristine wilderness.
The human element
In fact, many environmental groups question whether, regardless of the strengthened regulations, the risks of Arctic offshore development will ever be adequately mitigated. Technical requirements are vital, but as ExxonMobil CEO Rex Tillerson noted in an April 2015 interview with CBC News, the human factor presents a risk that is almost impossible to regulate.
"We can develop all of the best technologies and we can prove their efficacy, but at the end of it, it always comes down to execution," Tillerson said. "Almost always – and you can look at all of the catastrophes that the industry has experienced – it was never a failure of the technology, it was a failure of people to execute. We are always dealing with the human element. And that’s probably the most challenging element for us."
One of the biggest limitations of the Arctic-specific regulations is that so far, there is little indication of when they will come into force; speculation suggests they are intended to kick in at the start of the OCS Oil and Gas Leasing Program for 2017-2022. Before that time, the performance of Shell whenever it next returns to the Arctic – be it this summer or next – could have the largest impact on the national approach to oil and gas in the Arctic in the future.
Strong regulation will help to support the safety and environmental responsibility of these operations, but ultimately, if E&P goes ahead, the fate of US Arctic waters and the surrounding regions will rest on the execution of the men and women at the controls, as well as the companies behind them.