13 February 2013

Nigeria: Shell Risks Production Decline Over Rigs Repair

Royal Dutch Shell's production output is likely going to suffer a major decline this year, following its decision to send its two offshore drilling rigs to Asia for repairs.

According to reports, sending the rigs for repairs will likely mean the cancellation of its second summer of drilling in the U.S. Arctic Ocean, unless it can find replacements fit to do the work.

The report stated that rigs that are able to operate in harsh Arctic conditions are rare and even if available, would have to be modified and receive approval from the United States' government to operate in a remote and environmentally sensitive area in less than five months.

According to the report, if Shell cannot drill this summer, it will have to wait until 2014 to get another shot at finding oil in the Beaufort and Chukchi seas, a high-profile and expensive effort that is being closely watched by investors and U.S. regulators.

Shell said the Kulluk and Noble Discoverer rigs will be moved from Alaskan waters to Asian dry dock facilities.

It disclosed that the Kulluk suffered hull and electrical equipment damage when it ran aground 300 miles Southwest of Anchorage while being towed during a storm January 1, while the Discoverer suffered an engine fire and may need to have its entire propulsion system replaced.

Both incidents, Shell said, occurred after the drilling season had ended and took place far from the Beaufort and Chukchi seas where the rigs drilled a pair of partial wells last summer.

James West, an analyst with Barclays Capital, said that aside from the Kulluk, there are only two other rigs able to operate in sea-ice conditions - the Orlan and the SDC Drilling Rig - but neither appears to be available.

The Orlan is part of drilling and production operations at the massive Exxon Mobil Corp. and OAO Rosneft joint project off Sakhalin Island in Russia.

Continuing, he said, even if a pair of new rigs was found to do the work they would likely need to undergo modifications for the job, and Shell would have to file amendments to its drilling permits to use the vessels.

Greenpeace, an environmental rights group, said that the litany of issues Shell has run into during its Arctic drilling campaign shows the company can not drill safely in that region.

"Shell made a mess of its operations last year and there's every likelihood it will do the same this year," Greenpeace said.

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