Royal Dutch Shell plc failed to maintain "adequate oversight" of its Alaska offshore contractors, on which it relied for "many critical aspects of its program," and that led to problems in the inaugural drilling program in the Beaufort and Chukchi seas last summer, the Department of Interior said Thursday.

Interior in January launched a high-level assessment of Shell's 2012 Arctic operations following a series of mishaps that plagued the operator from start to finish (see Daily GPI, Jan. 11). Outgoing Interior Secretary Ken Salazar said the high-level review would scrutinize preparations for last year's drilling season and Shell's maritime and emergency response operations to identify challenges and lessons learned.

Most troubling to Interior were Shell's inability to certify its oil spill containment vessel, the Arctic Challenger, on a timely basis; the deployment difficulty of the Arctic Challenger's containment dome; and "serious" marine transport issues associated with both of Shell's contracted drilling rigs, the Noble Discoverer and the Kulluk (see Daily GPI, Jan. 8).

"Shell simply did not maintain strong, direct oversight of some of its key contractors," said Interior's Tommy Beaudreau, who led the review. Beaudreau is principal deputy assistant secretary for Land and Minerals Management. "Working in the Arctic requires thorough advance planning and preparation, rigorous management focus, a close watch over contractors, and reliance on experienced, specialized operators who are familiar with the uniquely challenging conditions of the Alaskan offshore.

"In some areas Shell performed well, but in other areas they did not, and Alaska's harsh environment was unforgiving."

The assessment found that Shell "entered the 2012 drilling season without having finalized key components of its program, including its Arctic Challenger containment system, which put pressure on Shell's operations and schedule and limited Shell from drilling into oil-bearing zones last summer.

"Weaknesses in Shell's management of contractors on whom they relied for many critical aspects of its program -- including development of its containment system, emission controls to comply with air permits, and maritime operations -- led to many of the problems that the company experienced," Interior determined.

The report recommended that Shell submit to Interior "a comprehensive, integrated plan describing every phase of its operation from preparations through demobilization." Also, Shell should "complete a full third-party management system audit that will confirm that the company's management systems are appropriately tailored for Arctic conditions and that Shell has addressed the problems that it encountered during the 2012 drilling season."

Interior's report also stressed the "critical need for coordination -- across the federal government and with state and local partners, as well as with companies, local communities and other stakeholders." One success of the 2012 season, Interior said, was "Shell's extensive efforts to communicate and minimize conflict with Alaska Native communities that rely on the ocean for subsistence use."

The report reinforced that an "Arctic-specific model is necessary," and it recommended continuing work on safety and environmental practices appropriate for the Arctic.

Shell's 2012 drilling program was subject to several Arctic-specific conditions and standards, such as requiring subsea containment systems to be deployed as a prerequisite to drilling into hydrocarbon-bearing zones; limits on the Chukchi Sea drilling season to provide time for open-water emergency response; a blackout on drilling activity during the subsistence hunts in the Beaufort Sea; and surrounding vessels with pre-laid boom during fuel transfers.

"Our findings reinforce the importance of taking a regionally specific approach to offshore oil and gas exploration the Arctic," said Beaudreau. "We must recognize and account for the unique challenges of this region, which holds significant energy potential, but where issues like environmental and climate conditions, limited infrastructure, and the subsistence needs of North Slope communities demand specialized planning and consideration."

In addition to Interior's report, the U.S. Coast Guard is undertaking a comprehensive marine casualty investigation of the Kulluk drilling rig grounding on New Year's Eve. The Coast Guard also provided technical assistance for the Interior report.

Shell in late February said it would pause exploratory drilling activity this year in Alaska's Beaufort and Chukchi seas to ensure that its program was safe (see Daily GPI, Feb. 28).

Beaudreau's review team included senior staff from several bureaus at Interior and other federal agencies. The review team met with representatives from Shell, as well as key contractors that Shell retained for work related to its Alaska operations, the State of Alaska, the mayor of the North Slope Borough, and the Arctic Slope Regional Corporation.

The review team also sought information from a broad range of other stakeholders and experts, including representatives from the oil and gas and maritime industries and conservation non-governmental organizations. Interior retained PwC to provide expertise and support in reviewing issues related to safety and operational management systems.

Whether the critical report could waylay other potential pursuits in the frigid waters was alluded to reaction to the report by Deputy Interior Secretary David J. Hayes. He chairs the Interagency Working Group on Domestic Energy Development and Permitting in Alaska, which was established by President Obama. ConocoPhillips' Arctic program planned for 2014 now is under review (see Daily GPI, March 12).

"We have held Shell to very high standards specific to the Arctic, including the requirement for in-theater subsea containment systems capable of responding in the event of an emergency, and coordinating across the federal government to review and oversee Arctic exploration," said Hayes. "The report confirms that we need to continue using a cautious, coordinated approach that adopts specialized practices for conducting drilling and related operations in the Arctic."

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