Shell’s Arctic drilling plan under threat after US government orders review

The Shell-owned Kulluk rig ran on the southeast shore of Sitkalidak Island about, 40 miles southwest of Kodiak City, Alaska. Photograph: AFP/Getty Images

The Obama administration ordered a sweeping review of Shell’s plans to drill in the Arctic on Tuesday, after a series of mishaps ending with the New Year grounding of the company’s Kulluk rig.The review – and a separate investigation of the grounding of the Kulluk – raises the possibility that Shell, after investing six years and $5bn trying to extract oil in harsh and remote conditions, may be forced to re-evaluate entirely its plans to drill in the Arctic.

The high-level review will home in on some of the most difficult moments for Shell since it began exploring for oil beneath the Beaufort and Chukchi seas last summer: a series of equipment breakdowns and safety and environmental violations.

The department of interior, in announcing the review, said it would help determine whether the company is prepared to operate in the Arctic.

“Our review will look at Shell’s management and operations in the Beaufort and Chukchi Seas,” said Tommy Beaudreau, the director of the Bureau of Ocean Energy and Management, who will be heading the 60-day review. “We will assess Shell’s performance in the Arctic’s challenging environment.”

The review will pay special attention to the series of mishaps that culminated in the grounding of the Kulluk, including the botched test of its made-to-order oil spill containment dome, and equipment breakdowns and safety and environmental violations aboard the Arctic Challenger barge and the Noble Discoverer and Kulluk drilling rig.

Shell’s safety and environment practices will come under additional scrutiny with a separate US Coast Guard investigation announced on Tuesday into the grounding of its drill rig.

Tuesday’s moves come at a time when the Obama administration has been under growing pressure from Arctic scientists and campaign groups to reconsider its decision to open up the Arctic to oil companies.

The Arctic is believed to be one of the last great unexplored deposits of oil and natural gas remaining beneath the Beaufort and Chukchi, but conditions are far more difficult than anywhere else – and so are the risks to a pristine environment and wildlife including endangered polar bear.

“The unique challenges posed by the Arctic environment demand an even higher level of scrutiny,” the interior secretary, Ken Salazar, said.

The company said it welcomed the review. “While we completed our drilling operations off the North Slope safely and in accordance with robust permitting and regulatory standards, we nevertheless experienced challenges in supporting the program,” Curtis Smith, a company spokesman, said in an email. “A high-level review will help strengthen our Alaska exploration program going forward.”

Campaign groups said the review was a step in the right direction, but renewed their call on Obama to ban drilling in Alaskan waters outright.

“Again and again we are learning the hard way that Shell is not prepared to operate in Alaskan waters,” said Michael Levine, a senior attorney for the Oceana conservation group. “There is no way Shell should be allowed to drill into hydro-carbon bearing zones in 2013 or in the foreseeable future.”

The review could clear the way for further restrictions on Shell. Eleanor Huffines, who manages the Arctic programme for the Pew Environment Group, said it was time for the Obama administration to impose an Arctic-specific regulatory regime. ” What I would really like to see is the Obama Administration take a step back and impose Arctic specific safety, training, and spill response standards,” she said. “We would like to see training, equipment and spill response standards that are geared towards the reality of the weather, the remoteness of infrastructure, the fog, the sea, the winds – all those things that you are not going to encounter in the Gulf of Mexico.”

The Kulluk drilling ship ran aground on rocky shores off Alaska on New Year’s Eve, after breaking free from tug boats pulling it to Seattle. Before the grounding, Crew had struggled for five days through four-storey waves and 70mph winds to tow the rig to safe harbour. Salvage crews finally pulled the rig to sheltered Kiliuda Bay on Monday.

But the stranding was only the latest in a string of setbacks. Arctic groups said the repeat equipment failures and the oil company’s failure to meet air pollution standards for the region should have been a warning sign.

Separately, the US Coast Guard on Tuesday formally announced it was launching an investigation into the Kulluk’s grounding.

Even without the review, Shell is facing severe challenges to resume its billion-dollar quest for Arctic oil. It was unclear whether the Kulluk can be repaired in time for any drilling next summer – even if the company is cleared to return to the Arctic – and there are not many vessels designed to weather the region’s high waves and floating ice.

All of those mounting costs – and now the prospect of more stringent regulations for the 2013 season – may even persuade oil companies to stay out of the Arctic, said Paul Sullivan, an economics professor at the National Defence University. “The number one lesson is that it’s not easy to do oil exploration and production in the Arctic,” he said.

Meanwhile, new technologies were making unconventional oil and natural gas more attractive, he said. “The Arctic has a lot of potential but it could be that there are lot of better potentials elsewhere.”