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Shell looks for silver linings in decision to cancel 2014 drill season

Posted: February 2, 2014 - 8:45pm

Shell’s investment in its Arctic Alaska offshore exploration is approaching $6 billion after eight years. For all that, the company has two test wells partly drilled in 2012, one in the Chukchi Sea and one in the Beaufort Sea.

Shell’s latest setback is the U.S. 9th Circuit Court of Appeal ruling invalidating part of the environmental impact statement, or EIS, for the 2008 Chukchi Sea lease sale.

It will take time for the Interior Department to correct that defect, and the company has canceled its planned 2014 exploration in the Arctic.

The decision not to proceed with 2014 drilling was a tough one for Shell, the company’s Alaska president, Pete Slaiby, said in a Jan. 30 interview. However, one silver lining was that the ruling was on a narrow issue that can be remedied, Slaiby said.

Unfortunately, that can’t be done in time for Shell to drill this summer.

The issue is now back in Judge Ralph Beistline’s U.S. District Court in Alaska. Slaiby wouldn’t speculate on the options before Beistline, but he said the fault identified by the 9th Circuit was very specific.

The appeals court invalidated Beistline’s district court order that approved the EIS for the 2008 Outer Continental Shelf lease sale in the Chukchi Sea. Shell and other companied bid $2.6 billion on leases in the sale.

A coalition of environmental groups and two Alaska Native organizations sued the Interior Department, arguing the EIS was inadequate. The one area on which the three-judge panel of the appeals court agreed with the plaintiffs, although it was a split decision, was that the government assumption of a discovery in the lease sale area — one billion barrels of recoverable resources — was unrealistic, and too low.

All of the environmental analysis was based on that number, however. If a larger discovery was assumed, the environmental analysis would have to be broader.

“It was a very narrow issue the court identified,” Slaiby said. “The good news here is that the decision didn’t open up a wide range of areas for discussion.”

“We believe this means all the other work accomplished in the EIS is adequate.

We believe there will be a very focused amount of work to bolster the EIS.”

Slaiby wouldn’t speculate in the interview on the mechanics of how the U.S. Bureau of Ocean Energy Management, or BOEM, would remedy the defeat. BOEM is the Interior Department agency that manages offshore leasing, which was previously done by the Minerals Management Service before that agency was reorganized.

People familiar with federal procedures say it could require a Supplemental EIS, which could take up to 18 months or more.

There was an earlier Supplemental EIS on the 2008 sale which corrected certain defects found at the District Court level, and that took about 18 months.

As for the Jan. 30 announcement that the program would stand down, Slaiby said, “our decision was very clearly based on the ruling by the 9th Circuit court. We had the 9th circuit taking issue with the EIS and this would leave our Exploration Plan very vulnerable to challenge. Because of that decision we could not even get permits. This has been hard for us because we’ve worked hard this year get our assets in place. But looking at the results of the ruling, moving forward with any kind of certainty is impossible.”

Slaiby said it was fortunate the ruling came before Shell had starting moving vessels. Had the company been able to proceed the drill ships and various support vessels would have started moving in February to Alaska waters.

“We will have some costs, because these vessels had been contracted, but we’ll be working to farm them out,” to reduce the impact, Slaiby said.

Shell expected the mobilization would have cost tens of millions of dollars, Slaiby said. Had the 9th Circuit ruling come later in the spring much of that would have been lost.

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