Ladies and Gentlemen, good afternoon. It’s a pleasure to be here with you to discuss the future development of oil and gas resources in the Arctic.
Joining me on stage is Rex Rock, President of Arctic Iñupiat Offshore, a new company based in Alaska and owned by six native corporations.
The plan is for me to speak for around 20 minutes. Rex will speak for five minutes. Then we’ll both take your questions.
First, though, here are three questions of my own. Is now the right time for oil and gas exploration to take place in the Arctic? Do Arctic nations want their energy resources to be developed? And can Shell operate in the Arctic at a level of safety which is expected by the majority of people affected by our operations?
I have asked these questions again and again since I took over responsibility for Shell’s Arctic exploration plans in July 2013. And during many conversations, I followed one of the principal rules I lived by when growing up in Wyoming: never, ever miss a good opportunity to shut up and listen.
After a lot of listening to North Slope residents, federal agencies, contractors, mariners, scientists, board members, environmental activists, employees and others, I became convinced the answer to these questions is a resounding ‘yes’. My remarks today will explain how I reached this conclusion.
While Arctic states, including Canada, Greenland, Norway and Russia, have decided to proceed with oil and gas exploration programmes, today I’ll focus on another Arctic country, the US, and the waters off the coast of Alaska.
So here goes.
As everyone in the room appreciates, many factors need to come together if new oil and gas resources are to be developed. The Arctic is no exception.
In the late 1970s and mid-1980s, Shell drilled offshore exploration wells in the Gulf of Alaska and Bering Sea. Later that decade we went on to drill exploration wells in the Beaufort Sea and the Chukchi Sea, where we discovered both oil and gas.
Despite this significant progress, we reined in our Alaska exploration efforts in 1991 to pursue opportunities in the Gulf of Mexico. One key reason for pulling out was the outlook of sustained low oil prices against the back drop of high costs of technologies, at that time.
Another reason was that the Trans-Alaska Pipeline was operating at full capacity. Given the huge competition among producers to use this pipeline to move their product, Shell didn’t feel favourable commercial terms were possible.
This shows that a lot of things can be going well. But add a couple of hurdles like these into the mix, and companies can stop pursuing developments in the Arctic.
So why are we going back to Alaska now, especially with the price of WTI hovering at around $60 a barrel? For me, there are two clear reasons.
First off, although the price of oil has plunged since last August, Shell doesn’t believe prices will remain this low in the long term. As has been the case time and time again, rising global demand and the need for new supplies will remain the central drivers of the oil market.
Looking a long way forward, demand for oil will grow, while production from existing fields is declining at an average rate of 5% per year. With this in mind, the need for new supply could be as high as five million barrels a day until at least 2030.
But it’s going to take multiple sources of energy to meet this demand, from renewables to oil. And given the long-term nature of oil and gas projects, it’s not good enough to take a step back and rely on production from existing projects. We need to plan for decades down the road. Arctic resources are critical to this planning.
The second reason is related to technological improvements. For example, today’s seismic imaging capabilities allow us to characterize the subsurface far more precisely than 30 years ago, resulting in fewer exploration and appraisal wells needing to be drilled.
And the use of state of the art modelling developed by industry, but used in cooperation with governmental agencies, provides us with a clearer understanding of the Arctic ecosystem and the potential impact from operating in the sensitive environment.
Ultimately, advances in technology such as these provide the basis for improved safety, a reduced environmental footprint, and a more efficient operation.
And these reasons give me confidence in our ability to explore responsibly in this region.
That’s not to say that the present situation is perfect. In Alaska, there’s one clear way in which the current situation could improve. The US regulations are robust, but they are overly-prescriptive and the permits arrive too late.
Shell believes current regulations should be adjusted so they are performance based. This is the case in Norway where the responsibility of setting the performance metrics is with the government. How best to safely execute programmes lies with the operator.
This was one of the key findings in a report published earlier this year by the National Petroleum Council. It states that prescriptive regulation may inhibit the development of new, improved technologies.
The report singles out oil spill response as a key area where the regulations could benefit from adapting to better, more effective technologies.
For example, there have been major recent improvements in well control systems. The latest technologies are designed to stem the flow of oil in a matter of minutes, hours, or days compared with weeks or even months. Consequently, they can provide a superior alternative to same season relief well and oil spill containment systems. However, this isn’t recognised by the current regulations.
The report also says that the regulations governing the length of the drilling season – currently around three to four months – and the length of the lease – currently 10 years – need to adapt.
Arctic oil and gas resources are likely to be spread over larger areas than, for example, the Gulf of Mexico. This could require a higher number of exploratory wells. If this proves to be the case, then 10 years may not be enough. Other Arctic countries have recognised this and generally offer longer leases.
A lesson we have learned is that operating in the Arctic requires meticulous advanced planning and financial commitments. Shell’s programme in 2015 will cost over $1 billion. Most of that money is already spent or committed. But we don’t yet have all the permits and we face litigation risks that could stop us yet again. I believe the US government understands this and other related issues including that lease terms must be longer if the US Arctic is to be successfully and safely explored.
So, with the expectations of change, we’re convinced that the time is right for exploring the Arctic’s oil and gas resources in Alaska. I’ll explain why shortly.
But before that, there’s an essential consideration which must be addressed. Do those living near operations want these energy resources to be developed?
Over the past year and a half, I’ve spoken with many from local communities who will be affected in some way by future operations.
It’s not for me to speak on their behalf, and I’m not seeking to do so now. I simply wish to share some of the thoughts I heard expressed.
There are, of course, those who believe that the Arctic should not be developed any further by energy companies. But I found there are also many who are keen on the development. I believe I can best distil their points of view into one camp: responsible economic development.
Economic expansion brings opportunities. This means the development of infrastructure, such as roads and airports, as well as education and jobs for future generations.
Analysis conducted by Northern Economics and the University of Alaska several years ago found that oil and gas development in Alaska could generate an average rate of more than 35,000 jobs over the next half century.
When I spoke with Iñupiats, including whaling captains, like Rex, and their family members, they told me that they recognise the benefits of economic development and jobs from offshore oil and gas, but that they also want to preserve their traditional Iñupiat subsistence way of life for future generations. The Chukchi and Beaufort Seas are their garden. We must go there with great care.
I heard repeatedly that they want to work with us to achieve a balance between economic development and their traditional subsistence way of life.
During most of the conversations I’ve had, the views expressed were contrary to many of the myths I’d heard before taking up this job.
These myths are best be summed up by the World Economic Forum Global Agenda Council on the Arctic. Its members put together a report which seeks to demystify the Arctic.
For example, they debunk the myth that the Arctic is an uninhabited, unclaimed frontier with no regulation or governance. They point out that the annual economy of the Arctic is $230 billion and 4 million people live there. In addition, the Council add that it is governed under similar national structures and international frameworks to nations in other parts of the world.
Undiscovered oil and gas
Although myths like this one pervade, developing the Arctic’s resources is, of course, hardly new.
Take a look at this slide. It’s a summary of the recent NPC study I mentioned earlier. It highlights the history of successful projects in the Arctic over the past five decades.
For Shell’s part, we’ve been researching and exploring at various times in the Arctic for almost 100 years. And over many decades we’ve built up extensive operating experience in the region, not only in Alaska but in Canada, Norway, Greenland and Russia.
Currently, about 10% of world oil and 25% of world gas is produced in the Arctic to meet global energy demand, according to the International Association of Oil and Gas Producers.
But the future potential is even greater. The US Geological Survey estimates that the Arctic holds around 30% of the world’s undiscovered natural gas and 13% of its yet-to-find oil.
Shell is one of the companies looking to explore this resource base. And I’m confident that we’re ready to do so.
Successes and setbacks
For one thing, we’ve learned a lot from our successes and a lot from our setbacks. Among these setbacks in Alaska, as you’re aware, were delays with an oil containment system, issues with one drilling rig and the grounding of another.
Although we have addressed all of these situations, they marred the achievements of our 2012 season in Alaska.
We’ve learned valuable lessons, listened to recommendations, and have adapted our approach accordingly.
We’ve improved our planning, processes and strengthened our Arctic organisation within Shell and among our contractors. We now have contract managers with more experience overseeing fewer contractors. This will translate to improved integration and safety performance.
In addition, we’re making better, more effective use of our global capability and subject matter experts – our shipping team from London is working more closely with us now.
We also commissioned an independent audit which confirmed that our current management system conformed with all 17 elements of the safety and environmental managements systems used by regulators.
Other changes include upgrading our fleet as well as making modifications and conducting sea trials on our towing vessel. We’ve also contracted additional ships to provide redundancy in operation support.
These are just a handful of the changes we’ve made. All are important. But none will mean anything unless they’re executed with the utmost care.
As I’ve mentioned, we began our Arctic journey long before our current operations in Alaska. This means we’re able to draw heavily on our experiences operating in other regions, including in Russia’s Far East.
Sakhalin-2 is one of the world’s largest integrated oil and gas projects. Although subarctic, Sakhalin shares many of the Arctic characteristics – winter lasts around 240 days, and there is ice for most of the year.
As well as overcoming the many engineering challenges, much time was spent examining and understanding the social and environmental implications of this project. We listened. We learned. And addressed concerns raised by people living near our operations.
For example, when we arrived in the area, there were fewer than 100 of the rare Western Grey Whale. We set up an independent panel of experts to learn more about these whales. We had them tagged to find out more about their migration, pipelines have been re-routed away from their feeding grounds and we conducted seismic operations outside the migration period.
And we have taken this knowledge to Alaska, where we have spent more than $100 million on scientific research since 2006. Through this research, we’ve gathered data on everything from the weather to the behavior of animals living near potential operations.
One such animal is the bowhead whale. Our network of sound recorders on the sea floor, which is the largest of its kind in the US outside the military, has gathered a wealth of data on its migration paths.
Managing the unexpected
On top of listening, learning and adapting, the key to successful exploration in the Arctic will be in ‘Managing the Unexpected’.
This term comes from the title of an excellent book by Karl Weick and Kathleen Sutcliffe, which I’ve been recommending to colleagues ever since I read it.
The authors examine how organisations that operate in a complex environment actively manage the unexpected and, as a result, perform reliably.
A highly reliable organisation, argue the authors, is one that is preoccupied with the possibility of failure, takes absolutely nothing for granted, and strives to catch small problems before they grow into something bigger.
Managing the unexpected is our mantra as we approach this summer’s exploration season.
I’ve made a career taking on some of the most challenging opportunities in the oil and gas sector, from Russia to Nigeria to Australia.
The Arctic is no exception. Coming in to my current role, I saw the challenges lying ahead after our setbacks in 2012. Standing here now, I’m confident we can operate safely in the upcoming exploration season.
We will keep talking with people living where we work and learn from them. We depend greatly on their local knowledge. For example, we have local residents on our vessels who are trained to spot species that could be affected by our operations. And during operations, we speak daily with the communities to ensure subsistence hunting and fishing aren’t affected.
We will take one step at a time. We will not take anything for granted. We will continue to recognise that operating in this region is a great opportunity, but also carries with it a great obligation to create real benefits we can share with local communities.
And if the results of upcoming exploration efforts are positive, the energy resources in this region could be a further boost for the Arctic nations themselves, and, indeed, throughout the world as we continue efforts to meet the growing global demand for energy.