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Shell Diving Back into Alaska Waters

Royal Dutch Shell plc wants to tiptoe back into Alaska's frigid waters as soon as next summer after taking a pause following a series of blunders and miscalculations.

CFO Simon Henry on Thursday disclosed the news during a quarterly earnings conference call. He said efforts would be scaled back from attempts in the summer of 2012 to find oil and gas. Shell has contracted with Transocean Ltd. to secure the semi-submersible Polar Pioneer as soon as early 2014 while it makes final assessments on whether it would be cost effective to replace a damaged drilling unit used in the inaugural drilling venture.

The project is the largest single exploration prospect in the Shell group, said Henry, who stressed that it has multi-billion-barrel potential.

"It is very important to get the drillbit into the reservoir," he said. "What do we have? Is there oil there?"

Shell in its summer 2012 operations used top-hole drilling to explore 1,500 feet beneath Alaska waters in the Chukchi Sea. Its unique oil spill containment system was damaged during deployment and could not reach the site before the drilling season had ended.

Shell plans to soon file a broad drilling blueprint to pursue Chukchi drilling with Department of Interior regulators, Henry said. Shell has no plans to resume drilling efforts in the shallower Beaufort Sea, where the Kulluk rig had operated in 2012.

"We have not yet confirmed if we drill in 2014," said Henry. "Clearly, we would like to drill as soon as possible, so we are putting the building blocks in place. There remains a permitting and regulatory process through which we need to go, before we can confirm a decision to actually drill in 2014."

For years and with billions of dollars, Shell has worked to drill offshore Alaska, finally launching an inaugural campaign in summer 2012, only to suffer a continuing series of mishaps. Following the brief drilling effort, the two drilling units were shuttered and towed back to shore. However, the Kulluk drilling unit separated from a tow vessel on New Year's Eve 2012 and ran aground (see Daily GPI, Jan. 8).

The grounding, just one of the mishaps, led the Department of Interior in early January to launch a high-level assessment of Shell's program (see Daily GPI, Jan. 11). Six weeks later, shortly before Interior's report laid blame at Shell's feet, the producer took a "pause" in its Alaska efforts and canceled 2013 plans (see Daily GPI, March 18;Feb. 28).

Henry disclosed that Shell may have an impairment in the final three months of 2013 of a "few hundred million dollars" if Kulluk's repair costs exceeded the benefits of fixing the 30-year-old rig.

To explore again in the Chukchi, Shell needs to submit a new exploration plan that would be subject to environmental reviews and public comments, which could require several months. Drilling permits for specific wells also could be required. More than 20 support vessels were used by Shell for its 2012 program, and any additional vessels also would need to be approved.

In addition, if Shell were to use the Kulluk again, the 29-year-old Polar Pioneer would require an OK to function as a back-up drilling rig to bore a relief well in case of a blowout. Interior regulators require Arctic offshore operators to have relief drilling rigs nearby because the area is 1,000 miles from the nearest major port in Dutch Harbor, AK.

Net earnings in 3Q2013 were $4.25 billion ($1.42/share), down by one-third from year-ago profits of $6.15 billion ($2.10). Shell uses current cost-of-supplies, which strips out inventory, a method used by European producers to match U.S. producers' net earnings numbers. Revenue was $116.5 billion, up from $112.1 billion. Operating cash flow came in at $10.4 billion, versus $9.5 billion a year ago, while cash flow from operations was $9.9 billion versus $11.7 billion.

CEO Peter Voser, who is retiring at the end of the year, said Shell was "facing headwinds" on weak industry refining margins, factors that have weighed on other integrated majors, including ExxonMobil Corp., which also issued its third quarter report on Thursday. Those factors "continue to erode the near-term outlook," he said.

Other factors impacting the latest results included upstream operating expenses and exploration costs, as well as production volume impacts from maintenance and asset replacement activities. The impacts were partly offset by higher contributions from the chemicals business and increased underlying production volumes, led by the integrated gas business.

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