Royal Dutch Shell PLC said Monday it would push back to next year its plans to explore for oil in Alaska's Arctic offshore after a key oil-containment system was damaged during a test.
The delay is a major setback for the Anglo-Dutch oil company, which has spent six years and $4.5 billion in a bid to open up one of the world's last great oil frontiers, which geologists say contains vast amounts of oil and gas.
Shell's effort had been hampered by delays due to regulatory issues, mishaps and persistent sea ice, but it had expected to drill wells to depths where they might strike oil before harsh weather set in between late September and late October. Now, the company will have to focus solely on drilling the initial stages of the exploration wells, known as "top holes," reaching a limited depth. Shell said it would concentrate on drilling as many of these as possible before winter ice takes hold.
Analysts with Tudor, Pickering, Holt & Co. said the delay is "disappointing news," as the drilling campaign "was a landmark event and major potential catalyst for the stock this year." Shell shares were up 1% at $73.28 at midday in New York.
Marvin Odum, the head of Shell's exploration and production operations in the Americas, said in an interview that "it's a disappointment that we won't be drilling into hydrocarbons this year." He added, however, the company has been successful at building the basis of a multi-year exploration program, and expectations for its outcome haven't changed.
Shell was expecting to receive a permit from U.S. authorities to drill wells all the way to oil-bearing depths once its Arctic Containment System, a newly designed set of safety equipment designed to contain oil spills, was successfully tested. But during a final test, a containment dome, designed to be put on top of a leaking well, was damaged, the company said. "It is clear that some days will be required to repair and fully assess dome readiness," Shell said in a statement. "We are disappointed that the dome has not yet met our stringent acceptance standards."
Mr. Odum said Shell would seek to make sure the containment system works as soon as possible, even if it is not intended for use this year.
Shell had begun drilling the top hole of a Chukchi Sea well Sept. 9 but the following day had to suspend operations to move its drilling vessel away from encroaching sea ice. The company said it expects to resume drilling the top hole there in the coming days. Another drill ship in the Beaufort Sea is expected to begin drilling a top hole after local inhabitants finish the fall whale hunt and the company receives a permit from U.S. regulators.
Shell, which has assembled a fleet of more than 20 vessels for its Arctic campaign, says the wells it plans to drill off Alaska don't present major technical complexities, because they are in shallow water and have normal pressures. The harsh environment, the danger of sea ice and the remoteness of the area present major logistical challenges, however. There has also been fierce resistance from environmentalists who argue the oil industry isn't ready to safely drill in the Arctic.
Greenpeace said the delay was a victory for environmentalists opposing Arctic drilling. "As one of the world's biggest oil companies, Shell was set to lead the pack and spark the Arctic oil rush. But a few hours ago they admitted defeat for 2012," Greenpeace said on its website.
Some of Shell's supporters said Monday the company this time around is simply the victim of uncontrollable circumstances, and not U.S. regulators.
"We're not blaming the administration," said Robert Dillon, spokesman for Sen. Lisa Murkowski (R., Alaska), Shell's most vocal supporter on Capitol Hill. "Certainly there were delays in the past ... but what we've got right now is an issue of the clock. Nobody's pointing a finger here."
BP PLC in July shelved drilling plans for the Beaufort Sea after deciding it couldn't meet the strict standards it pledged to follow in the wake of the 2010 Deepwater Horizon spill in the U.S. Gulf of Mexico. In the Russian Arctic, the giant Shtokman natural-gas exploration project has been delayed indefinitely amid doubts over its economic viability.
Copyright (c) 2012 Dow Jones & Company, Inc.
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