ConocoPhillips puts Arctic drilling plans on ice

ConocoPhillips on Wednesday said it would abandon its plans to begin drilling in Arctic waters north of Alaska because of regulatory uncertainties, underscoring the oil industry’s growing reservations about developing the icy, remote region.

Following similar decisions by Shell and Statoil, the move amplifies questions about whether drilling in the remote, icy region is worth the financial costs and environmental risks as energy companies extract ever more crude on U.S. lands.

Shell paused its own Arctic oil hunt after experiencing several high-profile mishaps last year, including the grounding of one of its drilling rigs on New Year’s Eve. Separately, Statoil has delayed its planned exploration until at least 2015 and threatened to abandon its U.S. Arctic leases altogether.

ConocoPhillips Alaska President Trond-Erik Johansen insisted that the company’s decision was designed to allow time for regulatory requirements to shake out, following an Interior Department report that scrutinized Shell’s 2012 operations.

“While we are confident in our own expertise and ability to safely conduct offshore Arctic operations, we believe that more time is needed to ensure that all regulatory stakeholders are aligned,” Johansen said in a statement.

Shell’s high-profile blunders and growing concerns about the potential costs of drilling in the new Arctic frontier have sparked questions about whether the work is worth the financial risk, especially as energy companies extract ever more oil from South Texas, North Dakota and other states.

Federal warning: All companies should heed Arctic drilling lessons

ConocoPhillips had been on track to soon give federal regulators a broad drilling blueprint for its Devil’s Paw prospect in the Chukchi Sea. The company had tentatively planned to use a jack-up rig next year to drill up to two wells about 80 miles off the coast of Alaska.

But it has been unclear whether federal regulators would allow a jack-up rig to operate that far from Alaska’s shore. When Shell launched a new era of exploratory oil drilling last year, the company relied on two floating rigs that were anchored to the seabed during work.

Federal regulators also have insisted they would demand any oil companies drilling in U.S. Arctic waters prove they can swiftly contain a runaway well. While Shell developed a unique containment system for such emergencies in the Arctic, Bureau of Ocean Energy Management director Tommy Beaudreau told a Senate committee last month that the emphasis was on containment ability, not any specific device or equipment.

“Generally, we are going to look for the same things from ConocoPhillips that we looked for with respect to Shell’s operation, which is a performance standard around the ability to address any loss of well control at the source,” Beaudreau said at the time. “We don’t prescribe a one size fits all solution to this issue, but we will be very demanding on this issue.”

From scratch: Arctic oil development carries Alaska-sized challenges

Separately, environmentalists and engineers advising the Interior Department on ways to boost the safety of offshore drilling have recommended regulators develop Arctic-specific standards to govern oil development in the area, because of the unique challenges of working in icy, slushy waters far from big cities and deep-water ports.

Johansen said ConocoPhillips would work with the federal government and other companies with Arctic leases to further clarify requirements for drilling in the region.

“Once those requirements are understood, we will re-evaluate our Chukchi Sea drilling plans,” Johansen said. “We believe this is a reasonable and responsible approach given the huge investments required to operate offshore in the Arctic.”

Cloudy departure: Shell exec leaves by ‘mutual consent’ after Arctic mishaps

Environmentalists cheered the decision and noted the delays by ConocoPhillips, Shell and Statoil create an opening for the Interior Department to begin advancing new requirements specifically written for the Arctic.

“We need new standards,” said Michael LeVine, Pacific senior counsel for Oceana. “We also need a regulatory process. There now is a window to make that happen. How do we decide what we ant the Arctic region to look like? What rules will govern those choices?”

Cindy Shogan, executive director of the Alaska Wilderness League, said ConocoPhillips’ move provides “a real opportunity for President Obama to revisit his position on Arctic Ocean drilling.”

“With no infrastructure or ability to clean up an oil spill in ice and Shell’s extensive laundry lists of mishaps and failures, it is a no brainer to suspend drilling in the Arctic,” Shogan added.

Industry analysts suggested the move could signal growing skittishness among oil companies and their investors when it comes to expensive, risky Arctic ventures that carry regulatory and legal risks.

For instance, there still is legal uncertainty surrounding the 2008 government auction at which ConocoPhillips bought its Chukchi Sea leases. Conservationists have challenged the lease sale in federal court; if they prevail, a judge could order federal regulators to redo environmental studies or conduct other work before allowing further activity on the leases, possibly delaying that work for several more years.

Sen. Lisa Murkowski, R-Alaska, said ConocoPhillips’ decision was disappointing but understandable, given the massive investments required to launch Arctic oil exploration.

“Companies can’t be expected to invest billions of dollars without some assurance that federal regulators are not going to change the rules on them almost continuously,” Murkowski said. “The administration has created an unacceptable level of uncertainty when it comes to the rules for offshore exploration that must be fixed if we’re going to end our dependence on oil from the Middle East.”

Jack Gerard, the head of the American Petroleum Institute, said ConocoPhillips’ decision is a reminder of the way oil companies assess regulatory uncertainty in planning investments.

“They have to look at political risk,” Gerard said. “The United States’ political risk is high when there is regulatory uncertainty.”

Some oil company executives have signaled they may seek to share Arctic drilling and emergency infrastructure in a bid to keep down costs while complying with federal mandates. For instance, it’s possible oil companies could plan to utilize competitor’s contracted drilling rigs to bore relief wells in case of an emergency.

Interior Secretary Ken Salazar said in an interview last month that such infrastructure sharing makes sense in the region.

Oil companies can already tap into some established spill response vessels and equipment in Alaska, but the resources are far different in the Gulf of Mexico, where two companies have built giant capping stacks and other containment systems in response to the 2010 Deepwater Horizon disaster.

Because few companies now have plans to operate in the remote, icy Arctic — and they are generally targeting just one prospect at a time — that collaboration is essential, Statoil executive vice president Tim Dodson said in a recent interview.

“I think we all agree that generically, this is not really the place to go it alone,” Dodson said. “This is the place where you need to be learning from each other, where you need to be sharing both experiences and sharing facilities and common costs.”

ConocoPhillips holds 98 leases to drill in the Chukchi Sea and has until 2019 to begin developing the tracts or else forfeit them to the federal government. Statoil is a minority partner in ConocoPhillips’ Devil’s Paw prospect.

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Read more ongoing FuelFix coverage of drilling troubles in the Arctic: