The two permits issued Wednesday clear the way for drilling in Chukchi Sea, but with conditions.
Shell can only drill the top sections of wells because the company doesn't have critical emergency response equipment on site to cap a well in case of a leak. That equipment is aboard a ship headed to Portland, Oregon, for repairs.
The Interior Department's Bureau of Safety and Environmental Enforcement said in a statement that Shell could submit an amended application for deeper drilling when the capping stack can be deployed within 24 hours.
"Without question, activities conducted offshore Alaska must be held to the highest safety, environmental protection and emergency response standards," said the bureau's director, Brian Salerno.
The department had given a conditional OK to Shell's drilling plan in May, pending the company's ability to obtain all necessary permits from state and federal agencies.
Some environmental groups worry the Arctic's remoteness and rugged conditions will hamper cleanup efforts in the event of a spill, risking devastation of a fragile ecosystem.
Cindy Shogan, executive director of the Alaska Wilderness League, called it the wrong choice.
"This decision puts the fate of the fragile Arctic Ocean, and our climate future, in the hands of Shell Oil," she said in a statement.
Proponents say drilling can be conducted safely with existing technologies and that future production decades from now will help sustain the country's energy needs and limit reliance on imports.
Shell spokeswoman Kelly op de Weegh said by email that receipt of the drilling permits signals the end of the permitting process, and drilling will begin when the area is clear of sea ice.
"We remain committed to operating in a safe, environmentally responsible manner and look forward to evaluating what could potentially become a national energy resource base," she said.
Shell and other companies hope to tap into one of the country's last great petroleum reserves. The U.S. Geological Survey estimates the Arctic offshore reserves in the Chukchi and Beaufort seas at 26 billion barrels of recoverable oil.
Arctic offshore drilling is strongly supported by elected officials in Alaska, where upward of 90 per cent of state government is funded by the oil industry. They hope to see undersea and overland pipelines from offshore wells to move oil to the trans-Alaska pipeline.
The permit was expected, and both of Shell's drill rigs are on their way to the Chukchi sea. The drill sites are on the ocean floor in about 130 feet of water. Hydrocarbon zones are about 8,000 feet below the ocean bottom.
Top-hole work consists of drilling to about 1,300 feet and setting the foundation for a well to grow in depth. The work starts with digging a mud-line cellar, an excavation that allows a blowout preventer to sit beneath the ocean floor. According to Shell, top-hole work accounts for about half the time it takes to drill a complete exploratory well.
Shell had hoped to simultaneously drill two wells. However, the U.S. Fish and Wildlife Service requires a minimum of 15 miles between drill sites to avoid significant effects on walrus. Shell's two sites are closer than that.
The missing safety equipment is a capping stack, a roughly 30-foot-tall device that can be lowered onto a wellhead to stop gushing oil after a blowout or connect to hoses to direct oil to vessels on the surface.
Shell's capping stack is carried by a leased 380-foot icebreaker, the Fennica, which was gashed July 3 as it departed Dutch Harbor in the Aleutian Islands for the Chukchi Sea. Under the direction of a registered Alaska harbour pilot, the ship struck an uncharted object, which created a hole in the hull about 3 feet long and a half-inch wide.
A National Oceanic and Atmospheric Administration mapping ship later detected a shallow shoal in the area.
Kevin Freking reported from Washington.