Seattle planning officials say the Arctic drill rig at the Port of Seattle has to leave or get a new permit by June 4.
The city issued a notice of violation to the Port of Seattle, Shell Oil and Foss Maritime on Monday afternoon.
The notice says the port's permit is only good for cargo ships, not oil rigs like the Polar Pioneer.
"We think that is ridiculous and transparently political," said Foss spokesman Paul Queary. The company appealed the city ruling last week and is continuing to work on the Shell oil rig. "We expect to prevail in the appeal," Queary said.
Several hundred protesters attempted to stop work on the rig at the Port of Seattle on Monday. They blocked the main entrance to the Port's Terminal 5, where the rig is parked, for most of the day.
"If Shell was following regulations, that'd be fine, but they're not listening," protester Sue Hodes of Seattle said. "The only thing to do is speak truth by speaking out. It's our only recourse."
Protesters wrote the phone number of a legal-aid group on their bodies with permanent markers before marching to Terminal 5, in case they were arrested.
At least 60 Seattle police observed the protest blockade. There were no arrests or citations, according to Seattle police.
Shell has invested nearly $7 billion trying to find oil in the Arctic Ocean.
The notice from the Seattle Department of Planning and Development said fines could start at $150 a day and go up to $500 a day.
Oil companies lease rigs like the Polar Pioneer for an average of $350,000 a day, according to industry website Rigzone.com.