Protecting the Arctic

Supplementary written evidence submitted by Shell

Inquiry into protecting the Arctic – response to follow-up questions to Shell

How does Shell’s business plans reflect the impacts of approaching climate change? (Q141)

Energy demand continues to grow, with increasing population and prosperity, particularly in developing countries. The challenge facing the energy industry is to produce much more energy, at an economic cost and to minimize the environmental impact. Shell has two objectives: one is to help provide energy over the coming years to meet the projected growth in demand which will fuel development and higher living standards. For Shell this will mean contributing to the supply of fossil fuels, which will remain our core business activity. The second objective is to contribute, at the same time, to lowering the CO₂ footprint of the future energy mix.

Our approach is to consider CO2 emissions in our commercial decisions and to seek to reduce or mitigate them across our global portfolio. Our focus is on four concrete actions – producing more gas, developing low CO2 biofuels, progressing carbon capture and storage (CCS) technology and implementing energy efficiency measures in our operations. Shell welcomes increasing use of renewables in the energy mix, but notes that fossil fuels are projected to provide the majority of energy supply well into the mid-century.

Below is a brief summary of those actions, and we would be happy to offer to Committee members a meeting with Shell CO2 specialists to discuss Shell’s approach to climate change in more detail.

Around one third of CO2 emissions from the energy system come from electricity generation. We are producing more gas which, on a well to wire basis, when used in power plants emits around half the CO2 of coal. Displacing coal-fired power with natural gas is the fastest and cheapest route to CO2 emissions reductions in the global power sector over the next 20-plus years. Natural gas will stay attractive in the future.  It complements the intermittency of renewable electricity because it can quickly produce more power when needed and, when combined with CCS, could cut power plant CO2 emissions by 90%. 

Around one fifth of CO2 emissions from the energy system come from road transport. Options like electric and hydrogen will play their part in the future but we believe biofuels offer the most practical, commercial way to reduce CO2 emissions from this sector over the next 20 years. At present, in most markets demand for biofuels is driven solely by mandates flowing from government CO2 reduction policies. But biofuels vary and Shell (which is the world’s largest distributor of biofuels) believes use of the lowest-CO2 types should be incentivised. Shell has made a leading investment in production of Brazilian sugarcane ethanol, which is the lowest- CO2 biofuels available at industrial capacity today. And we continue to develop advanced biofuels.

We are also playing our part to help push carbon capture and storage (CCS) technology through its demonstration phase to industrial scale roll-out (2020+). Given many agree that most of the energy demand to 2050 will have to be met by coal, oil and gas, CCS will be a crucial tool to help mitigate the rate of world CO2 emissions growth from energy. Like all new energy technologies (similar to advanced biofuels), government support is absolutely vital in this demonstration phase for CCS. We have made an investment in the Gorgon CCS project in Australia and the TCM Mongstad CCS project in Norway. We are also assessing commitments to more, for example, at our oil sands operations in Canada (Quest) and in UK (Peterhead). The Peterhead CCS is would demonstrate the use of CCS with gas-fired power stations.

And we continue to work on operational energy efficiency. We have made great strides in this area in recent years and we are committed to sustaining our investment (multi-billion dollar) and focus. But the technical challenge for oil and gas companies is going to get harder. It will take more innovation, technology and energy (with consequent CO2 emissions) to unlock ‘difficult’ oil and gas resources previously considered stranded.

What is your view on whether a ‘carbon bubble’ is developing in financial markets, where the carbon dioxide emissions potential of investments in fossil fuels reserves exceed the UK’s statutory carbon emissions targets. Is this an issue that your company factors into its business planning? (Q152)

Shell provides information on its greenhouse gas emissions through its annual Sustainability Report (link below) and has for a number of years provided data through the Carbon Disclosure Project.   We cannot predict long term global CO2 emissions as that will depend on a range of factors, including portfolio investments and divestments as well as investments in light of evolving climate legislation. For that reason, Shell has robust management systems in place to ensure that we have a good understanding of the impact of current and future climate change legislation. 

http://reports.shell.com/sustainability-report/2011/servicepages/welcome.html

The information in the sustainability report covers Shell’s global emissions, while the UK’s statutory carbon targets are domestic, so may not be directly comparable.

As policies develop to address climate change, some energy technologies that do not currently provide a significant return on investment could start to do so. Therefore Shell continually monitors its portfolio with the aim of providing an ongoing return for our investors. 

Our goal is to be competitive (continued growth and portfolio performance) in a future, which will include CO2 regulation and cost to our business. We think that a CO2 price – with some range of certainty – will be needed to encourage innovative companies like Shell to invest in lower CO2 energy solutions for the future. And we support governments implementing market-based approaches, such as CO2 cap and trade schemes. Shell is strongly supportive of the EU ETS, and has actively supported proposals to make prices more robust, eg through set-aside of allowances.

Shell currently uses a $40 per tonne value for CO2 in our investment economics, which is an indicative ‘project screening value’ that reflects Shell’s belief that regulatory constraints on CO2 will evolve over time and result in certain price signals. However, it is not a price forecast for CO2 or a strict threshold past which Shell projects cannot progress. Rather, we use it for rounded consideration – to help quantify the risk all of our projects may face, to reflect CO2 price signals, and to drive investment and design choices that will help us develop a robust portfolio.

What case-study evidence do you have that it is technically possible for a rig involved in a well blowout to drill its own relief well without weakening the spill response? (Q208).

In Shell’s scenario developed for a well control incident in Alaska, the primary drilling vessel (either the Kulluk or Discoverer) will attempt to stop the well control by pumping mud and/or some other specially formulated fluid down the hole. Should these efforts fail, the drilling vessel will activate its Blow Out Preventer system, and if needed, immediately disconnect and pull away to a site upwind and upcurrent from the well control location and initiate relief well drilling operations. As a precautionary measure, relief well preparation operations are initiated in parallel with surface capping intervention and containment methods being employed on the well. Unless it is damaged, the original drilling vessel will commence relief well drilling if intervention measures prove to be unsuccessful.

As a case-study example, a published paper from The Society of Petroleum Engineers is attached [1] which details a case-study on an instance of a self- drilled relief in the Ekofisk area of the North Sea, carried out by Saga Petroleum. During drilling operations in January 1989, there were problems with well control, which necessitated shearing the drillpipe down the hole. The well flowed for about 1 minute before being shut in by the fail-safe valves. The riser pipe was then disconnected and the rig moved off location. The chosen method of killing the well consisted of drilling a relief well into the blowout near the reservoir. The Treasure Saga rig which was the rig employed drilling the original well, was immediately available to drill the relief well.  Eleven days after the rig disconnected from the well, the relief well was well underway. There were no loss of hydrocarbons due to this incident.

In the event that the primary drilling vessel operating in Alaska becomes disabled and not capable of drilling the relief well for any reason, Shell’s other rig in the area will cease drilling and temporarily plug the well so that it cannot flow, recover its Blow Out Preventer stack and moorings, and transit to the relief well drill site. The rig will then initiate relief well drilling operations upon arrival and mooring, and will remain at the site through plugging operations on both the relief well and the blowout well before returning to its own well to resume drilling operations on the suspended well. A reciprocal arrangement is in place should the rig in the other location have well control problems and require a relief well to be drilled.

Appendix L of Shell’s Camden Bay Exploration Plan (EP), which has full detail on Shell’s Well Control Plan is attached. [2] Also attached [3] for more background is the letter sent on 3 August 2011 from the Vice President of Shell Alaska to the US Bureau of Ocean Energy Management, Regulation and Enforcement, responding to criticisms of Shell’s Exploration Plan by the Pew Foundation and Earthjustice.

What are i) the differences between the regulatory regimes for oil and gas exploration and extraction adopted by the different Arctic states? Ii) Does Shell go beyond regulatory requirements in some Arctic States to ensure its systems and processes are consistent across the Arctic? Iii) Do you intend operating a same-season relief well in the Chukchi Sea, as you do in Canada?

i) The regulation of offshore drilling can be situated on a spectrum between prescriptive requirements and performance-based regulation. Many regimes include elements of both approaches. Prescriptive regulation sets specific technical or procedural requirements with which regulated entities must comply. Performance-based or goal-based regulation identifies functions or outcomes for regulated entities but allows them considerable flexibility to determine how they will undertake the functions and achieve the outcomes. Each of these approaches has strengths and limitations.

Canada has adopted a hybrid approach that combines the use of prescriptive and performance-based requirements depending upon which one is considered to be most appropriate. Prescription is used when compulsory means of compliance are desired. Goals are used when circumstances can differ greatly among the regulated companies or where superior outcomes are likely to be achieved through innovation or new technology.

The US system has mainly prescriptive regulations, often requiring industry standards through regulatory incorporation.

Norway’s regulatory regime is mainly performance-based, supplemented with prescriptive elements.

The UK uses a performance-based approach, referred to as "goal-setting," that requires companies to continually demonstrate that they are taking measures to minimize the risk of oil and gas releases to ‘as low as reasonably practicable.’

For greater detail on the different national regulatory regimes, we attach "Comparing the Offshore Drilling Regulatory Regimes of the Canadian Arctic, the U.S., the U.K., Greenland and Norway", a June 2011 report by the Pembina Institute. [4] Section 2 (pages 18-38) contains in in-depth comparison of the relevant national regimes.

ii) Together with the regulators, academics and other stakeholders, Shell have developed and continue to develop the highest standards for arctic drilling. We have strict Shell Group standards for our well and facility designs around the world including designing, constructing and operating wells in a safe and responsible way.

iii) We do not operate offshore in Canada. However for the Shell Alaska operations, the relief well could begin immediately as all of the equipment, including extra pipe, casing and a second Blow Out Preventor will already be staged onboard the drilling rig. If for some reason the original drill rig is not able to drill a relief well, Shell has committed to having a secondary relief well rig and ice-management vessel nearby that will be mobilized.

To what extent is the Arctic Council able to ensure that a consistent regulatory regime for oil and gas exploration and extraction is adopted across the Arctic?

The Arctic Council is a high-level intergovernmental forum to provide a means for promoting cooperation, coordination and interaction among the Arctic States, with the involvement of the Arctic Indigenous communities and other Arctic inhabitants on common Arctic issues, in particular issues of sustainable development and environmental protection.

Although - as a coordinating body - the Arctic Council has no authority to ensure a consistent regulatory regime, the Council does exert influence on Arctic policy and regulations, leading by influence, and the expectation is that this influence will strengthen over time. For example, in the 2011 Arctic Council Ministerial meeting in Nuuk, Greenland,  two important developments were announced which were relevant to the oil and gas industry and demonstrated a move towards more of a governance role for the Council:  

The first legally binding instrument negotiated under the auspices of the Arctic Council was signed on Cooperation on Aeronautical and Maritime Search and Rescue in the Arctic. This defined, for each Arctic State, an area of the Arctic in which it will have lead responsibility in organizing responses to search and rescue incidents. The Agreement also commits Parties to provide appropriate assistance in the event of such an incident and to take other steps address growing search and rescue needs in the Arctic region.

Secondly, the Ministers also decided to establish a Task Force, reporting to the Senior Arctic Officials, to develop an international instrument on Arctic marine oil pollution preparedness and response, and called for the Emergency Prevention, Preparedness and Response (EPPR) and other relevant working groups to develop recommendations and/or best practices in the prevention of marine oil pollution. The results of which will be reported out at the 2013 Ministerial meeting. Representatives of the oil and gas industry (including Peter Velez of Shell representing the International Association of Oil and Gas Producers) are also contributing to these efforts.

How do the UK Government and UK authorities get involved in reviewing or auditing your operations in the Arctic? Would you welcome further scrutiny from the UK Government?

The UK is not an Arctic State and therefore does not have jurisdiction to authorise or permit activities in the region. Any drilling operations in the Arctic – deepwater or otherwise - are a matter for the Governments of the sovereign Arctic States, supplemented and complemented by international agreements and treaties on specific issues. The UK has a long history and strong environmental, political, economic and scientific interests in the region, is an observer state to the Arctic Council, and so can also play an active role in advocating for a well-governed process of mineral exploitation, with transparent market principles and fair access for British companies.

Shell already cooperates closely with the relevant UK regulatory authorities over Shell’s offshore exploration and production activities in the UK sector of the North Sea, where UK is a world leader in offshore drilling regulation and already works closely with Norway on several offshore safety initiatives through the EU, G20, Oil Spill Response and Advisory Group (OSPRAG), and the Convention for the Protection of Marine Life.  

Who are you answerable to on protecting wildlife in international seas?

For oil and gas exploration and p roduction activities, which are carried out on the offshore continental shelf of host governments we comply with national, regional and - where appropriate – local regulations with respect to  protection of wildlife.

There are currently no Arctic oil and gas activities in areas outside national boundaries or in international waters but shipping has to comply with IMO regulations for international maritime areas. The IMO Conventions cover maritime safety and security, including conventions relating to the prevention of marine pollution, oil spill preparedness, response and cooperation and dumping of wastes at sea.  The Ship owner is responsible for safe management, manning and maintenance of the vessel and the Classification societies set standards of construction and assess condition.  The Flag states regulate the standards of ships under their registry.

24 April 2012