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Offshore Alaska Drilling: Private Effort versus Regulatory Constraints

Royal Dutch Shell has spent billions of dollars over six years preparing to drill for new oil in Alaska. The hidden treasure is an estimated 20–25 billion barrels of oil beneath the Beaufort and Chukchi seas.

Not surprisingly, drilling for oil in Alaska is complicated and expensive (See map of proposed offshore exploration and drilling in Alaska). Part of the complexity is the distant Arctic location and short summer exploration and drilling window, and part is caused by drifty U.S. federal regulations.

Oil exploration and production is never easy (as in “the ‘easy oil’ has been found”), and new frontiers, technological and geographical, are always the challenge. And in this case, federal regulation from an anti-oil administration is at work.

Shell’s Coming Restart

on Shell’s suspended Arctic drilling operations for 2013, the company hasn’t given up. Shell just needs time to repair its ships. U.S. government agencies will continue review and regulation while Shell ships are repaired. As reported in the New York Times: “The Interior Department, the Coast Guard and the Justice Department are reviewing Shell’s operations, which have included groundings, environmental and safety violations, weather delays, the collapse of its spill-containment equipment and other failures.”

The NYT article also reports:

Shell has had numerous serious problems in getting to and from the Arctic, as well as problems operating in the Arctic,’ said Lois N. Epstein, Arctic program director for the Wilderness Society and a member of an Interior Department offshore drilling safety advisory panel…. “Shell’s managers have not been straight with the American public, and possibly even with its own investors, on how difficult its Arctic Ocean operations have been this past year,” she said.

Well, maybe so, but this is an assertion by a program director at an environmental advocacy group, also chosen to advise the Interior Department on regulations.

Insight on the advice received from this Wilderness Society (WS) program director can be found on their webpage, Save the Arctic from Oil Drilling. Another Wilderness Society story (or fund-raising blurb) is titled: On the brink of catastrophe: Help protect Arctic animals from devastating oil spill.

Safer than Critics Want You to Believe

No one desires a “devastating” oil spill for ecological or other reasons. But there are reasons for optimism and against drilling obstruction in this major new energy frontier.

Royal Dutch Shell is a very large company with extensive expertise in drilling for oil in difficult places. Deep ocean drilling technology has advanced a lot. The average depth of the Beaufort sea is 1,000 meters. Deep water oil drilling offshore in Brazil is 2,000 meters down (Economist story). Shell’s drilling in the Arctic is about 20 miles offshore and in water about 120 feet deep according to this Interior Department review (pdf). It is very doable, in other words.

But the negativism is wide. A September 14, 2012, Popular Mechanic article, “Everything You Need to Know About Shell Oil and Arctic Offshore Drilling in Alaska,” could as easily be titled: “Everything You Need to Know About Why Shell Oil Arctic Offshore Drilling in Alaska is Really Risky.” The website introduction to the article provides background: “After years of arguments over drilling in the Arctic National Wildlife Refuge (ANWR), the debate about Arctic oil exploration has moved offshore, into the waters of the Chukchi and Beaufort seas.”

Clean Air Act Issues

Clean Air Act regulations limit NOx and VOC emissions to reduce ozone that is harmful to people (and presumably polar bears). So maybe EPA is concerned Arctic volatile organic compounds (VOCs) will mix with the NOx released by the Shell drilling ships to create harmful Arctic ozone.

Such is far fetched. You can see from the EPA image the VOCs emission sources, and there are few trees, motor vehicles, consumer solvents, or industrial commercial processes in the Arctic.

Maybe there is some other harm caused by NOx emissions from a factory-like drilling ship twenty miles offshore in the Arctic. But whether people or polar bears can be harmed by these emissions seems less the issue than Clean Air regulations as a tool for regulators to slow or stop projects deemed dangerous or environmentally immoral.

This online editorial from the Fairbanks Daily News-Miner suggests the permitting process is a bureaucratic mess:

Environmental and North Slope community groups appealed the permits to an internal EPA review board. … The first stumbling block was an argument about how to define the precise moment when a drilling rig becomes “stationary.” Air quality rules are different for mobile and stationary sources, so it’s obviously an important definition. The appeals board, made up entirely of former EPA attorneys, said agency personnel didn’t explain their decision well enough. After decades of such work in other U.S. offshore waters, how could such an essential question still be in play?

The editorial also noted that

the agency failed to analyze the potential health effects of the hour-to-hour variations in nitrogen oxide levels that exploratory drilling equipment would cause in the air breathed by North Slope residents. The agency analyzed the annual effects and found them insignificant.

But a new requirement for hourly analysis came down the regulatory pipeline about the same time. So, the board said, the agency should have reviewed the emissions’ effects in an hourly time frame. It’s a good bet the conclusion would be the same, but no matter — it’s back to the drawing board.

The objections that stopped the permits were neither new nor substantive. That didn’t prevent them from provoking bureaucratic fussing of the highest order.

Treasure Awaits

There is lots more oil in Alaska. But is it safe to drill there? Should Shell should be allowed access to a reasonable Federal permitting process? Should Arctic oil reserves should be left untapped due to harsh winters and difficult logistics, human ingenuity aside. To say “no” is to shortcircuit the entrepreneurial process–resourceship in this case–that is responsible for human betterment.

There are risks of oil spills, but it cannot be said that unsafe practices, neglect, and actual accidents are profit-maximizing. The Valdez accident (1989) in Prince William Sound, Alaska, involving as much as 750,000 barrels, rocked the mighty Exxon Mobil. And the Deepwater Horizon blowout (2010), relreasing 4.9 million barrels in the Gulf of Mexico, has cost BP tens of billions of dollars. Company and industry-wide reforms in the wake of these accidents, however, have lead to new investments and safety protocols, all part of the oil-finding challenge. 

Can the self-interest of private parties to assess the risks and be ready to pay a pretty price if things go wrong? Can government under real world political pressures be assumed to know what is best and act accordingly? Thousands of students are now debating these key public policy questions.

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Reform of federal marine natural resource policies is one of the national debate topics this year. Greg Rehmke directs EconomicThinking.org and holds economics workshops on debate topics. For a longer version of this post, see here.

1 comment

1 Brian A { 07.19.13 at 2:40 pm }

One piece in the Shell drilling program in 2012 that has not been widely discussed is how the regulatory delays were a prime cause of the delay in mobilizing for drilling by Shell. This played a significant role in pushing the work into the later part of the short weather season, increasing operational risks to the environment and the personnel involved. I thought the regulators were supposed to make the operation safer….

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