U.S. launches review of Shell Arctic drilling program

WASHINGTON Tue Jan 8, 2013 8:25pm EST

The U.S. Interior Department building is shown reflected in a pond in Washington, September 10, 2008. REUTERS/Jason Reed

The U.S. Interior Department building is shown reflected in a pond in Washington, September 10, 2008.

Credit: Reuters/Jason Reed

WASHINGTON (Reuters) - The Interior Department will review Royal Dutch Shell's (RDSa.L) 2012 Arctic oil drilling program to assess the challenges the oil company faced and to help guide future permitting in the region.

The announcement on Tuesday follows the grounding of one of Shell's rigs off the coast of Alaska last week, the latest mishap the company has encountered as it undertakes an ambitious Arctic exploration effort.

"Exploration allows us to better comprehend the true scope of our resources in the Arctic ... but we also recognize that the unique challenges posed by the Arctic environment demand an even higher level of scrutiny," Interior Secretary Ken Salazar said in a statement.

Any changes in permitting requirements or delays due to the review could threaten Shell's drilling plans for 2013. The company faces a limited window during the summer when weather conditions and regulators will allow drilling.

Interior said it hopes to complete its "high-level" assessment within 60 days.

Also on Tuesday, the U.S. Coast Guard in Alaska ordered a special investigation into the causes of last week's grounding of Shell's Kulluk drill ship, a probe that the Coast Guard said was expected to take several months.

Known as a formal marine casualty investigation, it is convened when a shipping accident has considerable regional significance or may indicate vessel class problems, or if such an investigation is the best way to assess technical issues that may have contributed to the problem, the Coast Guard said.

Shell has spent $4.5 billion since 2005 to develop the Arctic's vast oil reserves, but the company has faced intense opposition from environmentalists and native groups, as well as regulatory and technical hurdles.

The oil company made some strides last year, actually beginning preparatory drilling in the Chukchi and Beaufort seas. But the work was far short of completing up to three wells in the Chukchi and up to two in the Beaufort, as Shell planned.

Instead, its 2012 drilling season was beset by delays due to lingering ice in the water and problems with getting a mandatory oil spill containment vessel certified by the Coast Guard.

Shell welcomed the department's review, conceding that it had experienced some challenges.

"We have already been in dialogue with the DOI on lessons learned from this season, and a high level review will help strengthen our Alaska exploration program going forward," Shell spokeswoman Kelly op de Weegh said in a statement.

Interior said it would examine the issues with Shell's containment vessel, as well as issues with Shell's two Arctic drilling rigs, the Kulluk and Noble Corp's (NE.N) Discoverer, which Shell has under contract there.

It was the Kulluk that broke away from tow boats and ran aground on New Year's Eve in what were described as near hurricane conditions before being towed to safety on Monday.

U.S. Senator Mark Begich, an Alaska Democrat and strong supporter of offshore Arctic drilling, called on Tuesday for a hearing to examine the Kulluk situation.

"While this incident notably involves marine transportation and not oil exploration or drilling, we must quickly answer the many questions surrounding the Kulluk grounding and improve any regulatory or operational standards as needed to ensure this type of maritime accident does not occur again," Begich said in a letter to Coast Guard Commandant Admiral Robert Papp and to Shell.

Environmentalists see the Kulluk accident as new evidence that oil companies are not ready for Arctic drilling, calling on the government to put permitting there on hold.

One group calling for a pause in permitting, conservation group Oceana, said Interior's review was a step in the right direction, but it must be "more than a paper exercise."

"The Department of the Interior, after all, is complicit in Shell's failures because it granted the approvals that allowed Shell to operate," said Michael LeVine, Pacific senior counsel at the ocean conservation group.

As for the Kulluk itself, the unified command for the accident response said it remained anchored in its bay of refuge and still showed no signs of leaks or spills. Later on Tuesday, remote operated vehicles are expected to examine the hull and divers will be called in if necessary, the statement said.

(Additional reporting by Yereth Rosen in Anchorage and Braden Reddall in San Francisco; Editing by Ros Krasny, Gary Hill, Jim Marshall and Andre Grenon)

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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