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John Daly

John Daly

Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Shell's Alaska Rig Debacle - Tip of the Iceberg?

Shell's Alaska Rig Debacle - Tip of the Iceberg?

Whether one believes 100 percent in the science behind global warming, the fact is that the northern polar ice cap is in retreat, sparking an energy resource scramble among those nations with northern littorals. The U.S., Canada, the Russian Federation, Norway and Denmark (via Greenland) have all rushed to stake sovereign claims on previously ice-bound waters off their coasts, resulting in an energy land rush for subsea hydrocarbon riches.

But working in the extreme Arctic conditions brings its own set of technical hazards, highlighted by the grounding of Royal Dutch Shell’s Kulluk rig on the rocks off Sitkalidak Island on 31 December, after being battered by a northern Pacific gale. In a timeline of accidents, a line between the Aiviq tug and the Kulluk broke, as did four reattached lines between the Aiviq and other vessels in the stormy weather, and the Aiviq’s four engines failed.

Which of course, brings up the question, why was the Kulluk transiting the Beaufort Sea to begin with?

In an article certain to discomfort Royal Dutch Shell PLC, the Kulluk was being towed from Alaskan waters to avoid at least $6 million in Alaska state taxes, a British newspaper reported, writing, "The rig was beached during a violent storm on its way to a Seattle shipyard for routine maintenance, in a round-trip timed so that, thanks to an accounting loophole, Shell could avoid an Alaskan state tax. However, because the rig ran aground late on New Year's Eve and began 2013 within three miles of the Alaskan coast, Shell remains liable for a unique state property tax on equipment dedicated to oil and gas development and exploration." While one Shell spokesman confirmed that the tax structure influenced the timing of the move, a second spokesman insisted it was driven by safety concerns for voyage, as two weeks of favorable weather were forecast for the trip.

Related Article: Why the US should not Invest in Exporting Natural Gas

But Royal Dutch Shell PLC remains upbeat. At a news conference on 5 January Shell incident commander Sean Churchfield said that naval architects have pronounced the Kulluk fit to be towed if the weather, tides and readiness cooperate, telling journalists, “I can’t offer you firm times. Right now, the preparation for the tow depends on the weather and operational constraints. We will be looking to move the vessel as soon as we are ready and able.” If the maneuver takes place, the drill ship will be towed 30 miles to an anchorage in Kodiak Island’s Kiliuda Bay.

Churchfield’s roseate estimate overlooks the fact that the Unified Command Center in Anchorage, which includes Shell staff as well as the U.S. Coastguard and employees from energy firm Noble which operates the drilling ship for Shell is now involved, with the U.S. Coast Guard sending ships to assist and U.S. Army’s 16th Combat Aviation Brigade Chinook helicopters flying heavy equipment to the scene for the salvage operations.

If that’s the good news, then the bad is that the Unified Command Center, while reporting that the rig “continues to remain stable and upright and there is no evidence of sheen in the vicinity,” indicates that the 143,000 gallons of diesel and 12,000 gallons of other oil products on board have not leaked, but seawater has been discovered in the space between the ship’s double hulls, indicating that the outer hull might have been breached. Further inspections determined that watertight hatches on top of the rig were breached during the incident, while both the service and emergency generators had failed.

And Royal Dutch Shell PLC is hardly out of the Washington DC woods yet, as on 3 January the House of Representatives Sustainable Energy and Environment Coalition, consisting of 45 House Democrats, called for the Interior Department and the Coast Guard to jointly investigate the incident, releasing a statement commenting, "The recent grounding of Shell's Kulluk oil rig amplifies the risks of drilling in the Arctic. This is the latest in a series of alarming blunders, including the near-grounding of another of Shell's Arctic drilling rigs, the 47-year-old Noble Discoverer, in Dutch Harbor and the failure of its blowout containment dome, the Arctic Challenger, in lake-like conditions."

Last year a new media buzz term, “energy security,” entered the American political debate as both presidential candidates appealed to the electorate to support their energy policies, and consequently opening up the U.S. arctic coastline for energy development seems inevitable. But the environment imposes its own conditions on energy work there, as Royal Dutch Shell PLC is learning to its cost by trying to save a paltry $6 million in taxes, and this from a company that made $6.1billion in profits in the third quarter of 2012 alone.

Worse than gales in the Beaufort Sea for Royal Dutch Shell PLC in the wake of the incident is the dreaded reappearance of corporate America’s most feared nemesis, Congressional oversight, a development that will earn Shell little gratitude from other energy companies.

By. John C.K. Daly of Oilprice.com

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