High risk, no reward
Royal Dutch Shell's artic dream is dead
Royal Dutch Shell is back in the Arctic three years after a contractor's drilling rig ran ashore. In late July, after receiving approval from the U.S. federal government for an exploratory project in the Chukchi Sea northwest of Alaska, USA, the oil giant started drilling.
This and other Arctic drilling projects face remote and harsh terrain, regulatory hurdles and outspoken environmental activists, along with low oil prices that complicate the business case for such high-cost projects. Yet some organizations have decided to plow through with projects aiming to pump and process Arctic oil. If successful, these initiatives could forge a path not only for their own organizations’ long-term growth but also for other oil and gas companies to follow.
The potential rewards are massive: The Arctic holds almost a quarter of the world's undiscovered petroleum, according to the U.S. Geological Survey. Beneath the U.S. area of the Arctic Ocean lie an estimated 27 billion barrels of recoverable oil and 130 trillion cubic feet (3.7 trillion cubic meters) of natural gas—more than 30 times the amount the U.S. annually imports from OPEC.
“The Arctic holds what we believe are the last remaining big discoveries of oil, but they'll be the hardest to develop—certainly the costliest and probably the riskiest,” says Foster Mellen, senior oil and gas analyst, Ernst & Young, Wilmington, North Carolina, USA. “The question is: Are those resources big enough to justify the huge cost and risk?”
Low oil prices have led Chevron, ConocoPhillips and ExxonMobil to table plans for Arctic drilling projects. However, Shell, along with the Italian oil company Eni and Norway's Statoil, has taken a long-term view: Right now oil might be plentiful and cheap, but that won't always be the case. Shell has already invested more than US$6 billion in its Arctic drilling initiatives and plans to spend another US$1 billion. It will likely take a decade for Shell to turn this year's exploratory project into regular production.
Bear guards wait to take a flight with scientists working for Shell Oil in Wainwright, Alaska, USA. The guards protect scientists who might encounter bears out in the field.
PHOTO BY BONNIE JO MOUNT/THE WASHINGTON POST VIA GETTY IMAGES
The Arctic holds almost 25 percent of the world's undiscovered petroleum.
Source: U.S. Geological Survey
Also this year, Eni and Statoil completed a US$5.5 billion joint project to build the oil rig Goliat and ship it to the Norwegian region of the Arctic. At 574 feet (175 meters), Goliat stands 16 stories higher than Norway's tallest building. When it begins pumping about 100,000 barrels of oil each day, it will join Russia's platform in the Pechora Sea as the only offshore rigs producing oil in the Arctic.
Arctic drilling has become more attainable as ice melts at faster rates due to global warming. Still, potential drilling sites remain extremely remote.
The Alaskan Arctic's closest port is 1,000 miles (1,609 kilometers) away, which means that project teams installing oil rigs lack nearby infrastructure to support them quickly if something goes wrong. “If you do have difficulties, it's extremely time-consuming and expensive to remedy those difficulties,” says Robert Bea, PhD, professor emeritus at the Center for Catastrophic Risk Management, University of California, Berkeley, California, USA.
That's not the only major challenge the far-flung location poses. “There's not a whole lot of infrastructure anywhere near there in terms of equipment to move the oil and gas once they find it and develop it,” Mr. Mellen says.
In addition, project teams have a tight timeline to complete their work. “Where Shell is planning to drill is the real Arctic,” Mr. Mellen says. “They have maybe two and a half to three months [July-September] when it's even physically possible to drill. It will be iced over most of the year, and all year it will be subject to extremely harsh weather.”
By contrast, Eni and Statoil's project is located in the Norwegian sub-Arctic, so it's relatively closer to infrastructure and suffers comparatively less severe conditions.
“The Arctic holds what we believe are the last remaining big discoveries of oil, but they'll be the hardest to develop—certainly the costliest and probably the riskiest.”
—Foster Mellen, Ernst & Young, Wilmington, North Carolina, USA
Even if they can manage the risks of difficult weather and a remote location, project teams will have yet another challenge: planning for and controlling a high number of contractors, all of whom can affect the project's outcome, Dr. Bea says. With many contractors and subcontractors in the mix, each with their own organizational habits and standards, it is crucial to preserve a commitment to quality to avoid some very significant uncertainties.
Shell experienced that uncertainty during its Arctic exploratory project of 2012, when a contractor's drilling rig ran ashore; the contractor was fined US$12 million. That mishap put an end to the project and a years-long damper on Shell's efforts to drill again in the area. To avoid a similar fate this time around, Shell will have to be “extremely redundant” with the standby safety equipment it can quickly ship to the region if an accident does happen, Mr. Mellen says.
That preparedness will also help mitigate another difficulty: concerned environmentalists. To address their concerns, oil groups have trained workers to avoid accidents and quickly cap uncontrolled releases of oil, according to the American Petroleum Institute.
But while Shell says it now has managed safety and cost risks, its current project hit a hurdle this year when it discovered a breach in the hull of a ship that carries spill-response equipment. Shell made a similar mistake as the one Exxon made back in 1989: trying to take a shorter path through too-shallow waters, Dr. Bea says.
“That's a lesson I thought we learned from the Exxon Valdez,” he says, adding that Shell will have to do a better job of learning from past lessons to manage the long list of risks. —Novid Parsi
OCTOBER 2015 PM NETWORK
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