2 january 2013

Shell faces crucial test in the Arctic

By Ed Crooks in New York, Financial Times, January 2, 2013

Royal Dutch Shell is gearing up for a crucial test of its Arctic equipment this month as the oil major’s plans to drill off the north coast of Alaska suffer fresh setbacks.

The company’s Arctic exploration programme is reliant on passing tests by US regulators to check that equipment on its Challenger barge can contain an oil leak by processing oil and gas escaping from a well on the sea bed.

Shell’s Kulluk drilling rig ran aground on Monday on an island off the south coast of Alaska, after the vessel towing it to Seattle for maintenance lost power during a storm. Some 600 people are working on the response to the accident, led by US authorities.

Last week, Noble Corporation, the drilling contractor, revealed that the US Coast Guard had raised concerns over “deficiencies and maintenance issues” on the Noble Discoverer, Shell’s other rig in the Arctic. Noble said it had already resolved some of the issues, and was working on others.

Shell said it still hoped to begin its drilling programme in July, ice conditions permitting. The company is excited about the potential for large oil discoveries in the region, and has already spent more than $4.5bn on preparations, including the cost of leases.

Drilling this summer would come six years after Shell had first hoped to resume its exploration of the region, following a string of delays caused by legal actions, objections from regulators and troubles with equipment.

Last summer, Shell failed to secure permits to drill into oil-bearing rocks because its containment system – described by the company as a “fourth line of defence” in the event of a spill – failed to win approval from the Bureau of Safety and Environmental Enforcement, the US regulator.

When the equipment was being tested in September, it suffered an electrical fault in a valve and the dome was accidentally dropped deep into the water, with part of it “crushed like a beer can”, in the words of a BSEE official in an email obtained by a Seattle radio station.

Marvin Odum, Shell’s director of exploration and production for the Americas, told the Financial Times: “The design of the system itself is sound. We’ve made some tweaks to it, and we’ve specifically addressed this valve problem.”

He said the company had also added structural support to the dome “to prevent that thing happening again”. The equipment is now expected to be tested again this month.

Repairs needed to the Kulluk could be another source of delay, depending on how badly it has been damaged.

The company and US authorities have been waiting for an improvement in the weather before attempting to retrieve the rig.

It has 139,000 gallons of diesel fuel on board, but the US Coast Guard said as yet there had been no signs of any spill from the rig.

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