Shell faces 12 month setback in $4.5bn Arctic drilling campaign

The oil company has converted a 300-foot vessel to comply with heightened safety standards
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The Independent Online

Shell is racing to begin a massive drilling campaign in US Arctic waters before they freeze over and postpone activities by a year.

The FTSE 100 oil company has invested about $4.5bn (£2.9bn) over the past seven years and fought off more than 50 lawsuits, including from environmentalists and indigenous Alaskan groups, in its controversial attempt to access the US Arctic's vast oil reserves in the Chukchi and Beaufort seas. It had hoped to begin exploratory drilling in July off the coast of Alaska.

But delays in securing certification for its giant spill-containment barge, the Arctic Challenger, mean Shell has already missed that deadline and concerns are fast mounting in the City that if the vessel is not authorised this week the company will miss its chance to begin drilling this year.

"I'm starting to think it won't happen this year," Andrew Whittock, an analyst at Liberum Capital, said.

Iain Pyle, an analyst at Sanford C Bernstein, added: "We're at a crunch time. I don't know exactly how much time they need but we're at a point now where it's looking like it might not happen this year. And any wells they do begin drilling they will really want to complete. There is no point in starting a well this year, plugging it, and finishing it off next year. That will only add to the cost."

Shell has converted the 300-foot Arctic Challenger to comply with heightened safety requirements imposed by the US in the wake of BP's Gulf of Mexico oil spill in 2010. But the US Coast Guard still believes there are deficiencies in the barge's safety systems and so it remains moored in Bellingham in Washington State, while Shell fixes them. A Shell spokeswoman said it expected to have everything mended by the end of the month.

Shell's permit means it cannot begin drilling in the Chukchi sea until July each year and has to in effect end by 24 September, when the ice which has typically formed by that point makes it increasingly difficult to work – and to clean up oil spills. The Beaufort Sea has a later deadline of 31 October.

Analysts said it typically takes between two weeks and a month to drill an Arctic well, while it is expected to take between two and three weeks to sail the Arctic Challenger from Bellingham to northern Alaska, meaning any drilling would be unlikely to commence much before mid-September, at the earliest.

Last week, US Interior Secretary Ken Salazar, cast doubt on whether Shell would kick off its long-awaited drilling campaign this year, although he did not put a deadline on the proceedings.

A Shell spokeswoman said: "Our goal remains to drill and complete as many wells as time will allow this open-water drilling season."

Failure to start its drilling campaign this year could cost Shell "tens of millions if not hundreds of millions of dollars" by having highly specialised equipment lying around that can't practically be used elsewhere and could have been bought or rented a year later, one analyst said.

However, because any production in the US Arctic would be unlikely to commence for at least five years, delays are unlikely to impact Shell's bottom line much in the near future, he added.