In a windowless conference room in Anchorage, a dozen Royal Dutch Shell employees report on the highest-profile oil project in the multinational’s vast global portfolio. Warmed by mid-July temperatures, Arctic ice in the Chukchi Sea, northwest of the Alaskan mainland, is receding. Storms are easing; helicopter flights will soon resume. Underwater volcanoes—yes, volcanoes—are dormant. “That’s good news for us,” Ann Pickard, Shell’s top executive for the Arctic, whispers to a visitor.

Overhead, a bank of video monitors displays blinking green radar images of an armada of Shell vessels converging on a prospect called Burger J. Company geologists believe that beneath Burger J—70 miles offshore and 800 miles from the Anchorage command center—lie up to 15 billion barrels of oil. An additional 11 billion barrels are thought to be buried due east under the Beaufort Sea. All told, Arctic waters cover about 13 percent of the world’s undiscovered petroleum, or enough to supply the U.S. for more than a decade, according to government estimates.

Despite the July 21 meeting’s military-like precision, peculiarities become evident. Radar shows an icebreaker called MSV Fennica heading in the wrong direction—south toward Portland. Three weeks earlier, the 380-foot vessel ripped open a 39-inch-by-2-inch gash in its hull, the result of scraping against a shallow-water hazard in Dutch Harbor, Alaska. Because the multipurpose ship also carries spill response gear, the accident caused federal regulators to restrict drilling to the topmost 3,000-foot section of Burger J—and not farther down into the oil-bearing zone—until the Fennica gets patched up in a Portland repair facility and travels 2,300 miles back north. The detour gave Greenpeace the chance to stage a social media-friendly “#ShellNo” photo op on July 30, with protesters in climbers’ slings hanging from a Portland bridge and temporarily inhibiting the Fennica’s movements, while “kayaktivists” heckled from the harbor. In another setback, U.S. wildlife officials concerned about noise-sensitive Arctic walruses have vetoed Shell’s original plan to drill two wells simultaneously. “That caught us by surprise,” Pickard concedes.

Surprise lurks in the Chukchi, whose frigid waters north of the Bering Strait span from Alaska to Siberia. Logistical and legal obstacles have repeatedly delayed the Arctic initiative, on which Shell is spending more than $1 billion a year—more than $7 billion so far and counting. The single well in the Chukchi Shell aims to excavate this summer could be the most expensive on earth, and it hasn’t yielded its first barrel of crude.

Activists have sued; judges have intervened. In 2010, work stopped when the Obama administration temporarily suspended offshore drilling throughout the U.S. after the BP disaster in the Gulf of Mexico. Back in action in 2012, Shell suffered a maritime fiasco with Keystone Kops undertones: Ship engines conked out, tow lines snapped, and a massive drill barge ran aground, requiring the U.S. Coast Guard to rescue storm-stranded workers. This July 16, former Vice President Al Gore called the Obama administration’s decision to approve Shell’s drilling “insane.”

Two weeks later, on July 30, Shell’s chief executive officer, Ben Van Beurden, announced that as a result of $50-a-barrel oil, a 55 percent decline since last year, the company’s profit fell by a third in the second quarter. Expecting prices to “remain low for some time,” Van Beurden announced plans to eliminate 6,500 jobs, part of a broader contraction in a reeling industry. Even against this challenging economic backdrop, Shell won’t postpone or downsize its Arctic dreams. The offshore Alaska field, Van Beurden said, “has the potential to be multiple times larger than the largest prospects in the U.S. Gulf of Mexico, so it’s huge.”

This raises the question of why Shell is doubling down on the Arctic amid a worldwide supply glut, and at the same time that many politicians are vowing to address global warming. Among the major oil companies, it stands out for its frank discussion of the threat posed by its business to the world’s climate. Its top executives have even professed a desire to rethink fossil fuels and move toward renewable energy sources. And yet it’s assuming immense operational risks to drill in the Arctic.

Shell executives don’t deny the apparent contradiction. “We do believe in climate change,” says Pickard. Shell’s Scenarios group, an in-house think tank that management points to as an emblem of its open-mindedness, has done extensive work undergirding the company’s support for government policies encouraging development of renewable energy sources, she says. But the Scenarios research also justifies aggressive exploration for more crude. With the global population rising from 7 billion to more than 9 billion by 2050 and total energy demand nearly doubling, “hydrocarbons are going to be needed for an awfully long time,” Pickard says. “That’s where Alaska fits into the picture.”

One of the most powerful women executives in a decidedly masculine industry, Pickard, 59, meets a reporter visiting Anchorage in jeans and a blue button-down shirt. Her rise through the ranks, first at the pre-merger Mobil and since 2000 at Shell, is especially impressive as she lacks the engineering or geology pedigree normally required of senior oil industry management. She has a graduate degree in international relations and has overseen exploration and production in Africa, Australia, Latin America, and Russia. “Ann doesn’t suffer fools,” says a (male) subordinate who pleads for anonymity.

Most of the world’s “easy oil” has already been pumped or nationalized by resource-rich governments, Pickard says, leaving independent producers such as Shell no choice but to pursue “extreme oil” in dicey places. “I enjoy the challenge,” she says. That’s why in 2013, when she was planning to retire to spend more time with her husband, a retired Navy commander, and their two adopted children, she changed her mind and took over the troubled Arctic project.

Pickard emphasizes that she enjoys the outdoors as much as the next person, but she’s no purist. “You hear a lot that the Arctic is pristine,” she says, using air quotes. “Yeah, it’s pristine in parts, but there’s been oil and gas up here for a long time.” She points to maps showing the enormous Prudhoe Bay complex within the Arctic Circle on Alaska’s North Slope. Active since the 1960s and still one of North America’s largest oil fields, Prudhoe has provided more than 12 billion barrels of crude via the Trans-Alaska Pipeline. In 1989, it was Prudhoe oil that sullied Prince William Sound on Alaska’s south central coast after the grounding of the tanker Exxon Valdez.

Shell missed out on the Prudhoe Bay bonanza but later helped develop Cook Inlet near Anchorage. Even on the more temperate southern side of the state, conditions can get harrowing, says Robert Bea, a retired engineering risk professor at the University of California at Berkeley. While consulting for Shell in the late 1980s, he spent two months on a Cook Inlet drilling vessel. He recalls roiling seas, temperatures of -16F, and deck hands continuously chopping and hurling overboard two-foot-thick ice sheets that threatened to throw off the ship’s balance.

While producing in Cook Inlet, Shell also tentatively explored the Chukchi, identifying what looked like oil- and gas-bearing formations 8,000 feet beneath the ocean floor. The Chukchi posed greater engineering challenges than Cook Inlet because of its even more severe weather and sheer remoteness, Pickard says. By the early 1990s, Shell had shut down its Arctic exploration in favor of more readily available prospects in the Gulf of Mexico.

Within the industry, Shell has a reputation for caution associated with its stolid Dutch cultural roots, says Butler, the former BP executive. But 15 years ago, competitive pressure from bulked-up rivals, combined with the growing scarcity of easily produced oil, began weighing on the company. In 2004, around the same time Bea was visiting The Hague, Shell admitted it had overstated its global proven oil reserves by 4.5 billion barrels, or 22 percent. The ensuing scandal led to government fines in the U.S. and U.K., settlement of investor lawsuits, the ouster of the company’s chairman, and consolidation of the Dutch and British branches of the corporation.

Beginning in 2005, Shell moved aggressively to snap up new drilling leases in U.S.-controlled portions of the Arctic Ocean. This process culminated near the end of the Bush administration in 2008, when Shell spent $2.1 billion at auction for rights to more than 2 million acres of subsea Arctic real estate. “Maybe in part to make up for the reserve scandal or maybe just because their [geologic] studies show more oil and gas than others see there, Shell got way out in front in the Arctic,” says Michael LeVine, Pacific senior counsel for Oceana, a Washington-based environmental group. Shell spokesman Curtis Smith says the 2004 reserve controversy had no bearing on the company’s aims in the Arctic.

Shell returned to the Arctic. “It’s just too big a prize,” Pickard says. “We can’t afford to leave it all there.”

That September, the test of a $400 million “containment dome” went seriously awry. A faulty electrical connection caused the gigantic dome, designed to limit the spread of oil in case of a blowout, to rise to the surface without warning—and not in the storm-tossed Arctic but in the relatively tame Puget Sound, off Seattle. The head of the Alaska office of the U.S. Bureau of Safety and Environmental Enforcement reported that the dome “breached like a whale,” sank again, and reemerged, its top “crushed like a beer can.”

Despite these forbidding omens, in September and October 2012, Shell went ahead and drilled two shallow “top holes,” one in the Chukchi and one in the adjacent Beaufort Sea. The U.S. Department of the Interior banned penetration of hydrocarbon-bearing zones because of the containment dome snafu. Operating in the Chukchi, the Discoverer, a converted log carrier built in 1966, had to detach prematurely from the ocean floor when wind pushed a 10-mile-wide ice floe directly at the vessel. The Discoverer then suffered an onboard fire and propeller shaft malfunction that required the crew to shut down its engines and accept a tow to Seward, Alaska, where the Coast Guard impounded the vessel. Ultimately, Noble Drilling, Shell’s contractor, pleaded guilty to eight federal felony counts related to pollution and safety infractions and paid penalties totaling $12.2 million. The Discoverer was loaded onto a heavy-lift ship and taken to South Korea for extensive repairs.

On Dec. 27, with gale-force winds and 25-foot swells buffeting both vessels, the 600-yard towline snapped, setting the Kulluk and its crew adrift. The Aiviq circled back and reconnected the ships with an emergency line. The next day, however, the Aiviq’s four main engines all failed, apparently a result of seawater flooding. On Dec. 29, hovering Coast Guard helicopters lowered baskets on ropes to scoop the 18 crew members from the Kulluk’s heaving deck. Just in time, as it turned out: The towline broke once again—and later, a third time. On New Year’s Eve, Shell executives gave up. Cut loose, the Kulluk beached itself near Kodiak Island. Declared a total loss, the barge was dry-hauled to Singapore and cut up for scrap.

Following the Kulluk mess, Shell executives at the highest levels describe a period of intense internal reflection on whether to persevere in the Arctic. “I had the opportunity very early on in my tenure to say, ‘That’s it, let’s pull the plug on it,’” Van Beurden, who was named CEO in 2013, told the Guardian in a May 2015 podcast. “I had to go through a personal journey on that.”

A dedicated Scenarios team of a half-dozen engineers, economists, and scientists working in The Hague, periodically supplemented by hundreds of experts from elsewhere around the company, compile monograph-length analyses with titles such as “Scramble,” “Oceans,” and “Mountains.” Pierre Wack, a Frenchman who headed Shell’s planning division in the 1970s, formalized the Scenarios process. “Wack was inspired by George Gurdjieff, a Greco-Roman guru who believed that most human beings who are awake act as if they are asleep,” according to 40 Years of Shell Scenarios, a coffee-table book the company published in 2012. Wack “opted for a confrontational approach, breaking down [top management’s] assumptions.” Arguing for greater reliance on human intuition, he anticipated the 1973 OPEC crisis, the 1979 Iranian oil shock, and the decline of the Soviet Union in the late 1980s—or so goes company lore. Wack died in 1997 at the age of 75, spending his final years in a 14th century château in the Dordogne, in southwestern France.” At the end of his personal journey, Van Beurden gave the Arctic project a green light.

First, she says, on closer inspection, 2012 really wasn’t all that bad: “A lot of things went right. They had a successful exploration season in terms of getting rigs up here, operating to top holes, and then getting back down to Alaska quite successfully.” (From Alaska south, of course, not so much.)

What of the spill containment system crushed like an empty beer can? “That didn’t go well,” she admits. Also, “the Kulluk ended up on the beach. That’s not anything anyone wants to see in pictures.”

But past failure doesn’t guarantee future failure, Pickard points out. “The perception was that the weather is far worse [in the Arctic] than anywhere else we operate,” she continues. Not so. Off the U.K., she says, “North Sea conditions are actually worse.” Before taking over in Anchorage, she oversaw the construction of Prelude, a mammoth floating liquefied natural gas plant off northwestern Australia. It’s designed to withstand Category 5 cyclones, she explains, and those don’t happen in the Arctic. “We know how to operate in places where there’s challenging weather,” she says. “Alaska is no worse, and in many ways better than some other places.”

Continuing to accentuate the positive, Pickard says the Burger J prospect lies beneath only 140 feet of water, and its crude oil reservoir is under relatively low pressure as these things go. In contrast, BP’s ill-fated Macondo well lay beneath a mile of ocean and was under extremely high pressure. “The blowout scenario is quite different than the case of BP’s Macondo,” Pickard says. Burger J “is the kind of thing we’ve done all over the world for decades.”

Not to say there will be a blowout. “It’s not going to happen on my watch,” Pickard maintains. She has hired new talent, including a retired Navy admiral and several ex-Coast Guard officers. She’s “flattened the organization a lot.” Her predecessor and his inner circle in Anchorage perched several floors above the operations people; Pickard and her aides-de-camp mingle with the rank and file.

Ninety percent of the hands-on crew on an offshore project work for contractors. Pickard acknowledges that in 2012, Shell didn’t supervise the hired help adequately. “The contract management side has entirely changed,” she says. She has designated senior Shell employees as “contract holders” who each supervise one or two outside companies to the exclusion of other duties. “I expect our contract holder to know what the captain of the Aiviq had for breakfast yesterday.”

Yes, she confirms, that’s the same Aiviq that was part of the misadventure three years ago. It’s been repaired and returned to action; same with the rehabilitated Noble Discoverer and containment dome. The wrecked Kulluk has been replaced by the Polar Pioneer, a rectangular eight-leg drilling unit 279 feet long and 233 feet wide. Built in 1985, the Pioneer is owned and operated by Transocean, the same Switzerland-based drilling contractor responsible for the Deepwater Horizon rig that exploded while working for BP in the Gulf of Mexico in April 2010, killing 11 men. Thirty vessels are expected to be in the vicinity of the Burger J prospect, about the same as in 2012, with the Discoverer backing up the Pioneer and available to drill a relief well in the event of the blowout Pickard guarantees won’t occur.

The National Research Council, the working arm of the National Academies of Sciences, Engineering, and Medicine, has a more pessimistic view. “Coast Guard personnel, equipment, transportation, communication, navigation, and safety resources needed for oil spill response are not adequate for overseeing oil spill response in the Arctic,” the council concluded in a report last year.

Pickard disagrees. She says she can get all of her gear—capping stack, containment dome, surface booms, skimmer boats, tankers—in position within 60 minutes of an accident.

As she sees it, the damaged Fennica’s detour to Portland proves her point. Yes, the icebreaker suffered a puncture wound in Alaska. But rather than attempt a quick fix, she sent it to Portland for a more thorough repair in dry dock. The Fennica also happens to carry the capping stack, a massive piece of spill response equipment that would come into play to plug an out-of-control well if another device, the blowout preventer, failed to do the job. Pickard left the capping stack on the Fennica, even though that decision prompted the Department of Interior to ban Shell from penetrating Burger J’s oil zone until the Fennica returned to the vicinity of the well.

Pickard calls the management of the Fennica “a perfect example of operating exceptionally well.” On July 30, the ship maneuvered past nine remaining protesters hanging from Portland’s St. Johns Bridge and headed out to the Pacific on its way to the Chukchi. Anticipating the Fennica’s return, the Polar Pioneer’s drill bit began spinning into the seafloor to carve a “mud-line cellar,” a 20-by-40-foot space that will house the blowout preventer (BOP). In most offshore projects, the BOP projects above the seabed. Shell is burying the device to minimize potential damage from any large, unseasonal underwater ice floes of the sort that forced the Discoverer to detach and retreat from its top hole in 2012.

If all goes well, Shell will drill through in late September, at which point Pickard says she’ll order the fleet to move south for the cold months. Shell will have to come back for 15 summers before “first oil” flows through an as-yet-unconstructed 70-mile seafloor pipeline to the Alaska coast and then a 350-mile overland connector (also yet to be built) to the Trans-Alaska Pipeline.

Pickard acknowledges that if 2030 oil prices are no higher than today’s, all the effort will have been for naught. If prices are 40 percent higher, or $70 a barrel, Chukchi oil would be “competitive,” she says. At $110, which the company sees as a realistic possibility, it would be a smashing success. The vicissitudes of petroleum pricing aren’t Pickard’s concern right now. A Norwegian oil regulator she’s friendly with reminded her recently that if Shell makes progress, other companies and nations will be emboldened to try the Arctic. “A lot’s riding on your performance,” the Norwegian told her. “The world’s watching you.”

Source: www.bloomberg.com