News Column

Shell Gambles Billions in Arctic Alaska Push

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Standing in front of a brightly colored, 3-D image of the geology far below the floor of the Chukchi Sea, Steve Phelps pointed to the "giant opportunity" that has prompted Shell Oil to pour billions of dollars into the Alaska Arctic.

"Burger -- that's the name you are going to get to know," Phelps recently told reporters gathered here to learn about the huge oil company's plans and promises for Alaska.

Phelps is Shell's Alaska exploration manager, a geologist whose job it is to find big oil. The Burger field, part of a Shell naming theme that revolved around junk food, has been eyed by various oil companies for years. But it's more than 70 miles offshore in the Chukchi Sea -- between Siberia and the northwest coast of Alaska -- and until recently was thought to be too expensive to develop. Now Shell -- for the second time -- holds the leases.

Armed with promising new seismic science, a sort of undersea sonogram of the earth's belly, the Dutch company says Burger is a signature find. It's the spark for ramping up controversial efforts to drill off the northernmost coast of the U.S. in some of the most extreme conditions on Earth.

"This is the stuff that most of the world was finding in the 1930s, the 1950s, the 1960s, in places like Saudi Arabia and the Middle East, Nigeria," Phelps said. "This one potential resource far outweighs any single field we've got in the Americas' portfolio."

More than in the Gulf of Mexico, where drilling rigs checker the ocean and Shell led the way into deep-water zones that produce more oil than anyone predicted.

More than in Brazil, where Shell is the second-biggest oil producer after the state energy company.

More than in Canada, where Shell is investing billions to extract thick, sticky crude from tar sands.

As a result, Shell is at the center of a classic Alaska development battle, gearing up to explore for oil as it confronts ever-higher regulatory hurdles and court challenges by environmentalists who say a big Arctic oil spill would be a disaster.

So far, Shell has spent nearly $4 billion on leases, groundwork and specialized equipment, including a new icebreaker being built in Louisiana.

At stake are billions in oil income and the reputation of a corporation that promotes a culture of safety but has been tarnished by troubles overseas.

In a sense, Shell is an old Alaska hand. Back in the 1960s, the company was the first to produce oil in Cook Inlet waters, where it had to engineer platforms able to withstand harsh winters and severe tides. Some of those platforms still produce today. But Shell sold those interests in the late 1990s, after their heyday.

Shell was an early explorer off Alaska's northern coast in the Arctic, but walked away from those leases in the 1990s. The company missed out on Prudhoe Bay, the most productive oil field in the U.S.

So to many Alaskans today, Shell is an unknown quantity.

What can Alaskans expect from Royal Dutch Shell? After more than 100 years of oil exploration around the world, what is its reputation and record?

Shell executives and scientists talk about its technological know-how and commitment to prudent operations above all. The company's installations withstand 100-foot waves in the North Sea. Shell facilities produce in freezing temperatures offshore from Russia's Sakhalin Island. One of its Gulf of Mexico platforms sits in water eight times deeper than the Eiffel Tower is tall - a deep-water record.

Shell says it has never had a significant spill or incident in 30 years of leading-edge work in deep water, which is inherently more risky because of the high pressures.

"Planning the right well and then drilling the well right," is how Shell managers put it time and again.

Shell's Alaska leases are all in relatively shallow water, no deeper than 150 feet. If its prospects hold the vast amounts of oil that Shell hopes, it plans to build miles of subsea pipelines to transport the crude to shore, then more pipeline on land to get it into the trans-Alaska pipeline.

"Our goal is zero harm to the environment. Zero harm to people. Safety is ingrained in every ounce of the business that we do," said David Lawrence, Shell's executive vice president of exploration and commercial development.

Shell expects employees to intervene if they even suspect something is going wrong, executives said. No gain is worth rushing a project at the expense of safety, they say.

"I'm not paid enough to take those risks. I won't take those risks. I won't let people who work for me take those risks," said Pete Slaiby, Shell's vice president for Alaska. Like many of the company's executives, Slaiby has spent his whole career with Shell in spots all around the world.

The company has a long history of competent work in the Gulf of Mexico, and will tap into the same expertise for Alaska, executives said.

But Shell's record is not unblemished. There have been spills and environmental violations, according to critics, government records and news accounts.

In the Third World oil regime of Nigeria, the company has been accused of serious spills, human rights abuses and missteps that contributed to violence and the deaths of agitators there.

Shell is no different from other major oil producers in its relentless pursuit of profits and commitment to stockholders, critics say.

To industry watchers, Shell's performance in challenging offshore operations is good, but not perfect.

"They are one of the industry's most credible offshore operators, bar none, with a very long track record," said Mark Gilman, a New York oil analyst with The Benchmark Co.

"It's not an unblemished track record. But then again, in the industry, virtually no one's track record is unblemished, either financially or environmentally."

One former top engineer for Shell who went on to become a famous academic and expert on risk says it's up to government regulators to keep a close eye on oil company operations.

Even after BP's Deepwater Horizon blowout last year in the Gulf of Mexico, U.S. regulation still trails countries like Norway and the United Kingdom, said Robert Bea, the former Shell engineer and retired University of California-Berkeley engineering professor.

Everyone with oil and gas interests in the high Arctic will be watching.

"If we do this one right ... resource development can continue," and Shell will be justly proud, Bea said. "But if we do it wrong, we're going to be - I'll call it sorry - for a long time."

In Louisiana, Shell has made a name for itself as both an industry pioneer and savvy corporate citizen.

After Hurricane Katrina devastated New Orleans in 2005, organizers of the treasured Jazz Fest didn't think they could pull it off that next year. In stepped Shell.

The event is now known as the New Orleans Jazz & Heritage Fest Presented by Shell, sponsorship that has met with mixed reaction.

"Some people are just absolutely offended by it. I know people haven't been to Jazz Fest since that happened. Some people are very thankful. They go, 'Oh, they saved Jazz Fest,' " said Aaron Viles, deputy director of the Gulf Restoration Network, a 17-year-old environmental advocacy organization.

Shell is No. 1 in employee contributions to the United Way in Southeast Louisiana; company executive John Hollowell is chairing this year's fundraising campaign there.

One Shell Square, its 51-story skyscraper in the heart of downtown New Orleans, is Louisiana's tallest building, a cousin to its U.S. headquarters in Houston.

If Shell gets to move ahead with its plans for the Arctic, the company expects to build an Alaska headquarters in Anchorage.

"In one very significant way, that is what success looks like," said Curtis Smith, a spokesman for Shell in Alaska.

The 65 or so Shell employees already here work out of two floors in the Frontier Building in Midtown. Just recently, one of its New Orleans-based contractors, Superior Energy Services, signed a five-year lease on part of the building housing the Anchorage Daily News, a McClatchy newspaper and the publisher of this report.

When other oil companies moved their Gulf operational headquarters out of downtown New Orleans, Shell stayed.

"Here in New Orleans, they're a much-admired company," said Eric Smith, a Tulane University professor and associate director of the business school's Energy Institute. "They've been here as long as there's been oil around here."

And they're the oil company others learn from. Literally.

"They have pioneered all the development of deep-water (wells) in the area," Eric Smith said.

When Shell and BP joined up years ago on a deep-water Gulf of Mexico platform, Shell was the operator.

"BP went to school on Shell," Smith said.

Shell's training center near here -- with classes in drilling, production, safety, electronics and more - is open to its competitors. The facility served as an initial base of operations during the Deepwater Horizon crisis.

The blowout on BP's Macondo prospect, involving the Deepwater Horizon rig, killed 11 workers and spewed millions of gallons of oil into the Gulf of Mexico.

Shell's chief well scientist, Charlie Williams, was a top adviser to the Deepwater Horizon incident commander. Williams is now board chairman of the new Center for Offshore Safety, an industry-led group that will help oil companies comply with tougher requirements, some of them mirroring what Shell already does.

Shell had a disastrous Gulf of Mexico well blowout and fire, too, back in 1970 in the Bay Marchand field, which was offshore though not in deep water.

Four men were killed; 2.2 million gallons of oil leaked into the Gulf over a number of months; 10 relief wells were drilled.

The spill was Shell's worst ever. As with the Deepwater Horizon, things went wrong in ways no one expected and people made mistakes.

Bea, who worked as a Shell engineer in the 1960s and '70s, helped design the multiwell platform in the Bay Marchand field.

"Something overcame Shell. I'll call it the drive to make money," Bea said.

Still, Shell learned and became more cautious after system failures, including that one, he said.

"Overall in terms of industry and being able to handle these kinds of complex systems - and I include the arctic environment in those systems - Shell is among the best in the world," Bea said.

In the mid-2000s, Shell planned to build a liquefied natural gas terminal offshore in the Gulf of Mexico. The terminal was designed to suck up hundreds of millions of gallons of seawater a day in the process of warming and vaporizing the super-chilled liquid gas. Eggs and larva in the water would have been killed.

Environmentalists mobilized against the "open loop" design. A group went to The Hague in the Netherlands to protest at a Shell shareholder meeting. Others railed about different issues, including Shell's troubles in Nigeria. People waved signs. Protesters took to the mic. As Viles, the activist with the Gulf Restoration Network, remembers it, Shell let them all vent.

About the same time, Greenpeace activists were going after Exxon at its annual meeting in Dallas.

"My friends from Greenpeace were getting arrested, and Shell was greeting us with coffee and chocolate and inviting us to stay after the meeting to drink Heineken at the bar with their executives," Viles said.

It wasn't just to smooth things over -- Shell wanted to hear what they had to say, he said.

Ultimately, Shell dropped the project. An executive flew to New Orleans to tell the environmental opposition before announcing the decision publicly.

But in a different case, according to Viles, Shell flubbed it.

A large coalition of environmentalists, fishermen, corporate watchdogs and others - including some Alaskans -- confronted Shell in 2008 about a growing and expensive problem: the rapid loss of wetland in coastal Louisiana. Scientists have found that dredging for oil and gas pipelines was one of the chief contributors to the loss, the group, led by the Gulf Restoration Network, said in a November 2008 letter.

"Shell, we are asking you to act to restore the wetlands that have been damaged due to your oil and gas exploration and development in Louisiana," the group said. It wanted Shell to pay up to $362 million for restoration efforts.

Shell replied with a form letter.

"Thank you for your recent inquiry requesting our financial support," the "Dear Applicant" denial said. "Your inquiry, unfortunately, falls outside the scope of our current guidelines for grant-making."

Viles said he followed up with Shell, but didn't get much more of a response.

Meanwhile, Shell has its name as world sponsor on an effort called America's Wetland Foundation. The initiative, which includes a variety of businesses and environmental groups, puts attention on problems arising from the loss of Mississippi River Delta wetland and advocates for solutions.

The group supports federal funding for restoration of the wetland.

Shell executives stress that the company has a history of operating safely in Alaska.

The company drilled four exploration wells in the Chukchi Sea and 15 in the Beaufort Sea; it was the biggest player in the frigid north in the 1980s and early '90s.

While there were some small spills of fuels and crude, almost all of it was cleaned up, according to a federal environmental assessment of Shell's current plans. There was no big spill, no blown-out well, no environmental disaster.

In the late 1990s, with the price of oil less than $10 a barrel and high costs to build platforms and pipelines in the remote Arctic, Shell walked away from its leases.

In federal waters offshore in the Gulf of Mexico, Shell has had 22 spills of at least 2,100 gallons of oil, drilling mud, fuels or chemicals between 2000 and 2010, according to an analysis of statistics kept by the Bureau of Ocean Energy Management, Regulation and Enforcement.

That's two fewer than BP and three more than Chevron, the other big operator there.

Shell's work in Cook Inlet in the 1990s generated sharp complaints from environmentalists over its handling of wastewater generated on its platforms.

The company was able to settle the complaints in part by paying into a fund for the creation of Cook Inletkeeper, an environmental watchdog group. Shell's share of the blame, as measured by the settlement, was a relatively small $48,000.

Marathon and Unocal, two other big operators of oil and gas platforms in Cook Inlet at the time, split the bulk of the $895,000 for Cook Inletkeeper's creation, according to an agreement filed in court. The three companies also paid a combined $194,000 in federal civil penalties under the deal.

Shell had a reputation as a good performer overall, said Mark MacIntyre, a spokesman for the U.S. Environmental Protection Agency, which brought its own claims against the operators and helped negotiate the settlement.

Shell maintains that the allegations were exaggerated. The producers changed some practices and moved on, said Curtis Smith, the Shell spokesman for Alaska. The continued strong salmon runs in Cook Inlet illustrate its health, he said.

But environmentalists said the case reflects on Shell.

"There were definitely discharges of toxic substances," said Pam Miller, a former Greenpeace research biologist who now heads Alaska Community Action on Toxics.

In the U.K., Shell is drawing fresh scrutiny after an August pipeline leak that ranks as the biggest North Sea spill in a decade. A pipeline from a Shell platform 110 miles off the coast of Aberdeen, Scotland, leaked about 55,000 gallons of oil.

The case grabbed headlines around the world. The spill "tarnished Britain's reputation for avoiding such problems," The New York Times reported.

"They cannot come into Alaska and pretend they have an impeccable record," said Rick Steiner, a marine conservation biologist and former University of Alaska professor who has watched Shell for years, especially in Nigeria.

Although it did inform regulators, Shell did not tell the public about the North Sea spill for two days. Environmentalists accused Shell of trying to keep it hush-hush.

Shell says it wanted to understand the problem first, but some executives agree that holding back was a mistake.

"If it were my operation, we would have done it immediately," said Slaiby, Shell's vice president for Alaska.

Efforts to stop the North Sea spill were complicated by subsea conditions on an old pipe surrounded by marine growth. After the sheen was spotted from the air, the well was shut in and the line depressurized, Shell said. But a relief valve opened to release the pressure failed to re-close completely and a small amount of oil continued to seep. The oil stopped leaking after divers closed the valve, nine days after the spill began.

At any rate, Shell says the well was never out of control and that oil ultimately was trapped between two points in the pipeline as intended.

"Shell transports over 2 billion barrels of oil and gas through sub-sea pipelines annually, and we expect every ounce of that oil to reach its intended destination," Shell said in a written response to questions from McClatchy Newspapers. When it doesn't, the company is fully responsible for cleaning it up, Shell said.

The company insists the North Sea incident doesn't foretell what might happen in the Alaska Arctic.

Shell set its sights anew on Alaska in 2005, buying up leases in the Beaufort Sea and expanding its holdings there two years later.

Then, in 2008, Shell left no doubt it wanted to be a major player, paying $2.1 billion to the federal government for Chukchi leases the second time around. Now it owns the rights to more than 2 million acres in the seas off Alaska's northern coast, far more than any other explorer.

But it has not yet been able to drill. It still needs additional permits. Environmental organizations, with support from some Alaska Native communities, have sued at every turn.

Shell now aims to begin its exploration in mid-summer 2012, during the open water season.

Technology has advanced over the decades to lessen the risk of drilling, and oil production, in the Arctic, Shell scientists say. And, they say, blowouts are unlikely here.

"The Arctic wells are really straightforward wells with few challenges on executing them," said Williams, the chief well scientist for Shell. "They are in shallow water. They are at low pressure, and they have what we call a margin. It gives you a lot of room to operate."

Before Shell drills a well, a team of engineers and operators plans it out step by step and evaluates what could go wrong and how to prevent it.

"The last one we do, we call 'drill the well on paper,' " Williams said.

If part of the spill prevention system breaks down, work must stop until a backup is in place, he said.

"It all fits into what we call safety culture," Williams said. "It's where people ... make the right decision at the right time."

Shell says it was the first major oil company to staff an operations center that monitors drilling as it happens -- 24 hours a day, seven days a week -- in high-risk and high-stakes situations. If the company is able to develop fields off Alaska, Shell said, it plans to build a satellite center in the state.

The company is pushing its safety message hard. It paid to air a 30-minute, documentary-style program entitled "Arctic Ready" in prime time, on Nov. 20 on Alaska's KTUU-TV NBC affiliate.

For years, Shell has worked to build relationships with Alaska villages along the Chukchi and Beaufort seas to give residents confidence in its ability to handle trouble, Slaiby said. The company has held hundreds of meetings in Barrow, Alaska, and the seven surrounding villages, according to Shell's count. Shell Oil President Marvin Odum, the company's top executive in the Americas, came to a number of them.

Shell put a half-million dollars into a fund for villages and didn't dictate how the money had to be used, said Dennis McMillian, who coordinates the effort as chief executive of the Foraker Group, which helps nonprofit organizations. Much of the money was spent on equipment like computers and fax machines.

Bessie Kowunna is a Point Hope, Alaska, villager who works for Shell as a community liaison officer.

"It's the first time we're dealing with an oil company here. And a lot of our hunters and our whalers -- they bring up this oil spill, what if it happens and ruins our hunting. Because we depend on the hunting and the harvest of the bowhead whale every spring, just this circle of life, how we catch our food from the ocean," Kowunna said.

She said some residents are upset she works for the oil company.

"My response is -- I'm not drilling out there. I'm an in-between person to let you know what is going on," she said.

Environmentalists say more research needs to precede any drilling. Too little is known about the science of the ocean there, they say. What about an oil spill under ice? What about studies that show problems with cleanup during periods of broken ice?

Shell's oil spill contingency plan is one of the best, but if a disastrous spill happened in the remote Arctic, maybe 3 percent of the crude could be cleaned up, estimated Steiner, the former university professor who now works as an environmental consultant.

Shell maintains otherwise.

"Our whole philosophy has been, in the Arctic, we are remote -- we've got to contain any oil close to the source literally as quick as we can," Slaiby said.

Tapping the Arctic's resources takes big money, operational expertise and advanced technical know-how, he said. "I think there's probably only a handful of companies that can do what we're doing right now."

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