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Shell may abandon Arctic drilling plans without lease extension: letter

Highlights

A variety of unanticipated delays may force Shell to abandon its roughly $6 billion venture in Arctic waters if the Obama administration does not extend its leases by five more years, according to a company letter made public this week.

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Peter Slaiby, a Shell vice president, wrote in a letter to the US Bureau of Safety and Environmental Enforcement that despite Shell's "best efforts and demonstrated diligence, circumstances beyond Shell's control have prevented, and are continuing to prevent, Shell from completing even the first exploration well in [the Beaufort and Chukchi seas]."

Slaiby's letter, dated July 10, was released by environmental group Oceana on Monday after it uncovered it through a Freedom of Information Act request.

Slaiby said circumstances disrupting Shell's Arctic operations include seasonal restrictions, weather and sea ice conditions, various federal court and administrative challenges, federal air permitting delays, limited rigs capable of drilling in the Arctic and a lack of clarity over BSEE's new Arctic drilling regulations, expected to be released later this year.


Slaiby said these delays "significantly impacted Shell's fundamental ability to execute a sustainable strategy."

Many of Shell's leases in the Beaufort, which the company acquired in 2005 and 2007 lease sales, will expire in 2017, but Slaiby wants BSEE to issue a five-year "suspension of operations," which effectively serves as an extension by stopping the clock on the Arctic leases. The extension needs to be granted "now" before Shell invests hundreds of millions of dollars on its Arctic drilling plans, which have already cost the company roughly $6 billion, Slaiby said.

"In Shell's circumstances, the totality of all the various delays and unanticipated circumstances has precluded, and likely will further thwart, Shell's ability to exercise its lease rights and proceed with exploration and development before most of those leases expire," Slaiby wrote.

A Shell official who asked not to be identified said Tuesday the company has heard "nothing" from BSEE on the request. He said the company does not have a deadline for when it needs an extension to be issued before it decides whether to proceed with its Arctic plans, but said "it has our attention."

Shell is preparing to resume exploratory drilling in the Chukchi next summer.

Nicholas Pardi, a BSEE spokesman, said Tuesday the agency is still considering Shell's request, adding that suspensions of operations or production are granted on a case-by-case basis.

"Each application is unique and is given careful consideration," Pardi said.

Earlier this year, BSEE issued a suspension of operation for all Chukchi leases acquired in the 2008 Chukchi Sea OCS Sale 193, which essentially stops the clock on the 10-year leases until the Bureau of Ocean Energy Management completes a court-ordered environmental review. Shell's leases in the Chukchi are expected to expire in 2020.

Susan Murray, Oceana's vice president, said in a statement BSEE should deny the new suspension request.

"Shell spent billions of dollars fully aware of the risks to that investment, and the government should not bend the rules to allow the company to continue business as usual," Murray said. "Shell deserves no special treatment and, to the contrary, has a track record of irresponsible choices that warrants close scrutiny and the highest standards."

--Brian Scheid, brian.scheid@platts.com
--Edited by Kevin Saville, kevin.saville@platts.com