ARCTIC:

Shell scraps 2014 exploration, cites 9th Circuit's lease decision

Royal Dutch Shell PLC announced today it will not drill for oil this summer in the Arctic, citing a federal appeals court decision this month that cast doubt over its leases.

It was another stunning setback for the Anglo-Dutch company that has spent roughly $6 billion over the past eight years hoping to become the first company in decades to tap the U.S. Arctic's estimated 27 billion barrels of oil.

Shell's new CEO, Ben van Beurden, told investors the 9th U.S. Circuit Court of Appeals decision raises formidable legal obstacles to moving forward.

"This is a disappointing outcome, but the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014," van Beurden said. "We will look to relevant agencies and the court to resolve their open legal issues as quickly as possible."

In a 2-1 decision last week, the 9th Circuit judges ruled that the Interior Department's environmental analysis of its 2008 lease sale for oil and gas development in Alaska's Chukchi Sea was flawed because it failed to adequately justify its estimate that oil companies will likely extract 1 billion barrels of oil from the sale (E&ENews PM, Jan. 22).

Shell spent more than $2 billion acquiring leases in that sale, including the parcels it intended to explore this summer.

The Obama administration must decide whether to appeal the court ruling or begin the long, arduous process of rewriting the Bureau of Ocean Energy Management's environmental document. That process could take more than a year to complete.

Shell spokesman Curtis Smith said the court's decision will delay efforts to understand how much oil and gas is in the Chukchi Sea. It "further delays the potential creation of tens of thousands of jobs, billions of dollars in tax revenue and much-needed new oil for the Trans-Alaska Pipeline," he said.

Environmental groups that had sued the former Minerals Management Service over the 2008 lease sale cheered Shell's decision.

"Today's announcement that Shell is backing off drilling in the Arctic is no surprise," said Cindy Shogan, executive director of the Alaska Wilderness League, which filed the lawsuit alongside more than a dozen environmental and Native Alaskan groups.

Michael LeVine, senior counsel for Oceana, another plaintiff in the case, said the 9th Circuit decision is evidence the Obama administration should reject future oil and gas exploration in the Arctic.

BOEM will soon decide whether to hold new lease sales in the Chukchi and Beaufort seas in 2016 and 2017, respectively. BOEM also is beginning work on its next five-year outer continental shelf leasing plan, which will decide, among other things, whether to hold lease sales in the Arctic and Atlantic oceans.

President Obama in the past has been seen as a staunch backer of Arctic drilling, but he's now in his second term and the nation's rising domestic oil and gas production now outstrips imports, primarily due to growth on private and state lands in the lower 48 states.

Critics of Arctic development believe the political tide has shifted.

"Now is the time to revisit choices about offshore oil and gas activities in the Arctic Ocean," LeVine said. "Shell's problems did not occur in isolation. Remote and difficult conditions and an obvious lack of preparedness would continue to cause unwarranted risk were the company to proceed."

Some are calling on Obama to cancel the 2008 lease sale outright. But such a move would require Interior to pay back the record $2.6 billion it collected in that sale and could lead to significant legal push-back from industry.

Shell's sea of trouble

Shell had planned this summer to begin drilling up to six wells in the Chukchi Sea, according to a revised exploration plan filed Nov. 6, 2013, to BOEM (Greenwire, Nov. 19, 2013).

With the company's Noble Discoverer drill rig getting a face-lift in Singapore, company officials in November said they were taking "a methodical approach to this exploration phase and will only proceed if the program meets the conditions necessary to proceed safely and responsibly" (EnergyWire, Nov. 8, 2013).

But the company's exploration plan would not win swift approval. In a letter to the company earlier this month, BOEM asked Shell to provide several more details and backup documentation, including certification for its new relief rig and proof the company has fixed issues that plagued its 2012 Arctic drilling program (EnergyWire, Jan. 16).

From icy weather to equipment failures, Shell's 2012 exploration bid in the Chukchi and Beaufort seas was a disaster. It failed to sink a drill bit into oil-bearing rock, it committed air permit violations, it failed to certify its oil spill containment vessels, and its Arctic drilling rig the Kulluk ran aground and was badly damaged (EnergyWire, July 18, 2013).

But Shell's staunchest backers on Capitol Hill said the company's program remained one of the safest in the world. They blamed judicial overreach and regulatory uncertainty for derailing the company's plans -- though they remained bullish on the industry's future in the region.

"It is simply unacceptable that judicial overreach is getting in the way of letting Alaskans develop our own natural resources," said Sen. Mark Begich (D-Alaska), who today announced plans to reintroduce a bill to ensure legal certainty for companies drilling in the Arctic. "I'll be talking with Interior Secretary Sally Jewell today and expect her agency to move quickly to address the court's questions and concerns and do everything possible to get this process back on track."

Sen. Lisa Murkowski (R-Alaska) blasted federal agencies for "failure to provide regulatory and permitting certainty" and said she expects Obama to express his "unequivocal support" for Arctic development in light of the 9th Circuit decision.

"We can't expect Shell to continue to spend billions of dollars on this project when the rules keep changing," she said. "Companies ... must have confidence that the federal agencies responsible for overseeing their efforts are competent and working in good faith. I'm not convinced that has been the case for Alaska."

Shell's decision to push back its exploration plan could also delay the start of exploration by other companies that bid in the 2008 sale, including ConocoPhillips Co. and Norway's Statoil ASA. Conoco previously planned to drill the Chukchi this summer but last year said that "more time is needed to ensure that all regulatory stakeholders are aligned."

Shell's van Beurden this morning said his company had "lost momentum in operational delivery" and that 2014 "will be a year where we are changing emphasis, to improve our returns and cash flow performance."

The company's reported earnings have recently dropped considerably in part due to lower production of oil and natural gas, weak industry conditions in refining and higher exploration expenses.

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