Royal Dutch Shell PLC’s announcement today that it is putting an indefinite pause on its Arctic exploration activities could play a major role in the Obama administration’s decision whether to hold additional oil and gas lease sales in the region.
Shell today announced it was shelving its Arctic exploration campaign "for the foreseeable future" after its first fully drilled well in the Chukchi Sea in decades turned up "disappointing" results (EnergyWire, Sept. 28).
The company’s decision offered a political boost to Democrats and conservation groups that are lobbying the administration to cancel the Arctic lease sales it scheduled for 2016 and 2017 in the Chukchi and Beaufort seas, respectively, and to yank additional sales the administration included in its draft 2017-2022 leasing plan.
The decision also comes months after White House hopeful Hillary Clinton first publicized her "doubts" about Arctic oil and gas exploration, a position that is shared by her competitors for the Democratic nomination (Greenwire, July 29).
Those two developments, combined with the low price of oil and tepid interest from other major companies to explore the U.S. Arctic, may provide political cover if the administration decides to pull back on its Arctic energy ambitions.
"Today’s news may be the nail in the coffin for scheduled [Arctic] lease sales," said Michael LeVine, senior counsel for the environmental group Oceana. "We hope that one outcome from today’s announcement is a focus on the future. … [T]he right thing to do is wipe the slate clean and allow existing leases to expire."
But Senate Energy and Natural Resources Chairwoman Lisa Murkowski (R-Alaska) said she was "extremely disappointed" by Shell’s decision, which she blamed on onerous government regulations.
"It is clear that the federal regulatory environment — uncertain, ever-changing and continuing to deteriorate — was a significant factor in Shell’s decision," she said. "What we need — but still do not have — is a predictable and sensible regulatory system both onshore and offshore that encourages companies to make major investments in our future."
Murkowski urged the administration to move forward with future Arctic leases, extend expiring leases held by Shell and others, and support her proposal to share outer continental shelf revenues with local governments.
Shell’s Chukchi leases are due to expire in five years unless regulators stretch the lease deadline or the company begins producing hydrocarbons at the site. The company’s Beaufort Sea prospects are scheduled to lapse in 2017 (EnergyWire, Sept. 15). Shell formally petitioned the Obama administration last year to extend its Chukchi and Beaufort leases by an additional five years. ConocoPhillips Co. and Statoil USA, which also hold leases in the Arctic, filed similar requests.
Shell’s CEO this summer said five years is far too short a window for it to build the pricey infrastructure needed to get Arctic oil to market.
Interior continues to lay the regulatory groundwork for future exploration in the Arctic, which holds what scientists believe to be the nation’s largest untapped source of oil. The agency is expected to soon finalize a suite of safety regulations it unveiled last February.
But the administration’s next major decision is whether to proceed with the two Arctic lease sales it included in its 2012-2017 plan. As of last week, the Bureau of Ocean Energy Management had not yet initiated a National Environmental Policy Act review for its Chukchi sale, a sign that, at a minimum, those sales could be at risk of being pushed back.
"The sales are still on the schedule," said Connie Gillette, a spokeswoman for BOEM. "And yes, NEPA reviews would occur."
Environmentalists do not believe the administration has enough time to complete those reviews before leaving office. Erik Grafe, an attorney for Earthjustice in Alaska who has litigated against the administration’s Arctic policies, said BOEM’s most recent reviews for a Chukchi lease sale would need significant updates.
"There’s a lot of process left for a new environmental impact statement," he said. "And I don’t know what industry demand is there."
Industry demand will likely be a big factor in Interior’s decision. One conservationist who asked not to be named said Interior officials are considering how the low price of crude and the high cost of development in the Arctic might influence how aggressively companies would bid on future Arctic leases and how that would affect revenues to the U.S. Treasury.
In 2013, major oil and gas groups balked at Interior’s request that they rank which areas of Alaska’s Chukchi Sea should be opened to exploration in next year’s lease. The groups were protesting the administration’s decision to only offer portions of the Chukchi and Beaufort planning areas, a break from its policy of offering entire planning areas for sale in the Gulf of Mexico (Greenwire, Dec. 4, 2013).
In 2008, the most recent year leases were sold in the Chukchi, the government netted a record $2.6 billion for 460 leases.
Democrats who oppose Arctic drilling seized on Shell’s decision.
"At a time when the oil industry is warehousing tens of millions of acres of leases on public land that it already holds and is arguing that we need to allow American oil to be exported overseas, there is no justification for continuing to push to drill offshore in Alaska or off the East Coast for oil that will then be shipped away to foreign nations where they can get a higher price," said Sen. Ed Markey (D-Mass.).
If the administration decides against holding its 2016 and 2017 Arctic lease sales, it may choose to roll them into the next five-year plan. BOEM’s draft proposed leasing program for 2017-2022 already calls for a sale in the Beaufort in 2020 and in the Chukchi in 2022. The administration is expected to finalize the new leasing plan before leaving office in January 2017.
Randall Luthi, president of the National Ocean Industries Association, said he’s hopeful other companies will continue efforts to explore the Arctic, which he argued will continue to be a strategic resource for the United States.
"Hopefully other companies will continue their efforts offshore Alaska, so that Americans can gain a better understanding of the location and size of the valuable oil and natural gas resources in the region," he said.
He commended Shell for its investments in the Arctic and its ability to explore this season without major incidents. The company’s decision to leave is a blow to energy diversification as well as to Alaska Natives who stood to benefit from the additional jobs and tax revenues that development could have brought, he said.
The role that federal regulations played in Shell’s decision "merits examination," he added.
"Due to federal regulatory constraints, Shell was forced to put all their exploratory eggs in one basket — one well, rather than a suite of exploratory wells that would have given a more complete picture of potential resources," he said. "Unfortunately, the results serve as an example of the harsh reality of the exploration business; dry or noncommercial wells are not uncommon."
