Is Shell Up to Alaska’s Challenge?

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Since Royal Dutch Shell’s (NYSE:RDSA)(NYSE:RDSB) offshore Alaska drilling rig, the Kulluk, ran aground 300 miles southwest of Anchorage on the night of December 31, environmentalists, lawmakers, and shareholders alike have questioned the wisdom of Arctic energy programs. While Shell successfully rescued the stricken rig without any oil spills or leaks, the escalating concerns have prompted the U.S Interior Department to assess the challenges of oil and gas exploration in Alaska’s Arctic waters.

The Kulluk was part Shell’s $4.5 billion attempt to resuscitate offshore oil production in the Arctic waters, which have not seen any exploratory activity in two decades. But even before this incident, the company’s project faced numerous regulatory and technical problems. The near-hurricane weather conditions that caused the rig to come loose from the two tugboats pulling it to Seattle for maintenance have brought attention back to the region’s formidable weather conditions and the consequences they can have on drilling.

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“Exploration allows us to better comprehend the true scope of our resources in the Arctic…but we also recognize that the unique challenges posed by the Arctic environment demand an even higher level of scrutiny,” Interior Secretary Ken Salazar said in a statement, seen by Reuters. The department expects to complete its assessment of the situation within 60 days, but any changes in permitting or review delays could hamper Shell’s drilling efforts this year, as there is only a small period of time when weather conditions allow drilling. The U.S. Coast Guard in Alaska also ordered a formal marine casualty investigation on Tuesday that may take several months.

Shell’s vessel accident has further implications for the company than the Interior Department’s review. As the Financial Times reported on Monday, the incident suggests that the oil producer’s technology is not up to the challenges created by Alaska’s weather conditions. BP (NYSE:BP) claims to be the region’s largest producer, and its success proves that that the ability to heavily invest in appropriate equipment is a prerequisite for drilling in Alaskan waters. “The main operators in Alaska are the big boys,” the Times wrote about ExxonMobil (NYSE:XOM), ConocoPhillips (NYSE:COP), BP, and Chevron (NYSE:CVX), “so deep pockets prevail.” Therefore, Shell’s comparative difficulties could be a concern for shareholders as Alaska is a huge source of oil and gas.

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