Aug 10, 2015

Shell starts drilling for oil in the Arctic

Russia has just staked a claim to a big chunk of the Arctic. A big reason is the oil under the water. Several countries and companies are betting on this, and first out of the gate is Royal Dutch Shell. It is one week into exploratory drilling there.

In oil company speak, the Arctic is one of the last "elephant fields." Some 20 percent of the world's untapped oil and gas is there. And for big companies like Shell, stock price depends on proving the energy is there.

"Ten years ago, Shell in particular felt that it was going to be very hard to find oil," Steven Kopits of Princeton Energy Advisors says. "And so they looked around the world to see where they could go. And one of the very few places you could add oil in big quantities was in Alaska." Specifically, the Alaskan Arctic just north of the Bering Strait. A Shell rig is doing early exploring now.

If oil is struck, it may take a decade to flow. Kopits considers that good timing. By then, American oil fracked from shale may be fracked out.

"The U.S. shale revolution is slated to last probably through 2020, maybe through 2025," Kopits says. "But it doesn't last forever."

For all the challenges, drilling may be the easy part. It's low-pressure drilling, in shallow waters of less than 150 feet in depth. What's hard is logistics, hauling 20-some vessels to frigid waters far from the Coast Guard, hospitals and other help.

In one attempt two and a half years ago, a Shell rig named the Kulluk separated from its tow boat.

"The cable snapped," McKenzie Funk, author of "The Wreck of the Kulluk," says. "And this giant rig drifted until it slammed into the rocks near Kodiak Island. And it was just a total loss."

The towing disaster came after challenges encountered during the drilling process. Ice floes proved to be unpredictable.

"Suddenly an ice floe the size of Manhattan came drifting, and they had to pull up everything and basically run away," Funk says. "Having been up there a few times and studied this, that's what I think people don't understand, how entirely remote this is."

These problems concern environmental critics, who also argue there's no good fix for a spill. Shell and industry groups counter that machinery to cap leaking wells has a proven track record.

All the interested parties are watching: environmental groups, regulators and other major oil companies who also have their eyes on the Arctic prize.

"It's a multiyear process," says Rice University business professor William Arnold, who once worked in Shell's government relations department. "This year just about has to be error-free in order to get to next year and years of development following that."

If not, $7 billion in investments to date may be lost.

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