Oil companies forfeit Arctic drilling rights

WASHINGTON — Oil companies that locked up more than 1.3 million acres of the Beaufort Sea for drilling in 2007 have since relinquished nearly half that territory.

The industry’s appetite for tapping those Arctic waters may be waning even as the Obama administration plans to auction off more of the area.

Oil companies have ceded rights to drill on roughly 584,000 acres, despite paying tens of thousands _ and sometimes much more — in bonus bids for individual leases in auctions since 2003, according to an analysis of government data by the conservation group Oceana reviewed by FuelFix.

And now, all but seven of the 141 still-active oil and gas leases in the Beaufort Sea along Alaska’s northeast coast are partly or completely held by a single firm, Shell Oil Co. The tracts, which generally span about 9 square miles, include territory the company began drilling in 2012.

“Nearly half of the leases purchased in the 2003 to 2007 lease sales have been allowed to expire as company after company decides to forgo or delay activities in the U.S. Arctic Ocean,” said Susan Murray, Oceana’s Pacific deputy vice president.

Still on Tuesday, the Obama administration took the first formal steps to do precisely that, inviting oil companies, environmentalists, Alaska residents and other stakeholders to weigh in on what parts of the U.S. Beaufort Sea should be open for leasing during a 2017 auction. The Interior Department’s Bureau of Ocean Energy Management also has asked for public input on what coastal waters — from California and Alaska to the Gulf of Mexico — should be available for leasing from 2017 to 2022.

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A similar appeal for information to plan a 2016 sale of oil leases in the neighboring Chukchi Sea was effectively boycotted by individual oil companies, which objected to the bureau’s decision to limit available acreage to areas with fewer environmental risks and other concerns, with tracts nominated by would-be bidders. By contrast, when the government sells oil and gas leases in the Gulf of Mexico, it follows an “area-wide leasing” approach that puts most territory up for grabs and is not limited to specific industry nominations.

“With a nomination process, companies wind up providing information that by some way or another, parties interested in opposing or stopping exploration activities can gain advantage from,” said Richard Ranger, a senior policy adviser with the American Petroleum Institute.

Balanced approach

Interior Department officials have stressed they want to balance any future oil development in the Arctic with preservation of the area’s unique ecosystem and subsistence fishing in the region.

So far, the ocean energy bureau is continuing to work on the Chukchi Sea sale, even without a single specific industry nomination for territory that should be sold off. The agency was flooded with maps and other data suggesting areas that should be off limits from local communities and conservation groups.

Administration officials have suggested they are looking for ways to get more input from oil companies as they decide whether to hold the Chukchi Sea auction or cancel it. It was always cast as a “potential” sale, meaning it could be canceled for scant industry interest or other reasons.

“We’re still figuring out how to engage all parties, including industry, around whether, in fact, there actually is any interest in the 2016 sale,” Tommy Beaudreau, the former bureau director, told Hearst Newspapers in May. Beaudreau, now chief of staff to Interior Secretary Sally Jewell, said she would decide how to proceed with that potential sale.

Baseline requirements: Minimum standards needed for safe Arctic drilling

Bureau spokesmen declined to comment on the planned Beaufort and Chukchi sea lease auctions.

U.S. Arctic waters are estimated to contain 27 billion barrels of oil and 132 trillion cubic feet of natural gas, with much of the prize concentrated in the Chukchi Sea.

But oil companies have struggled to tap the potential lurking under those remote and icy waters — vividly illustrated by the series of mishaps that befell Shell as it drilled exploratory wells in the Chukchi and Beaufort seas two years ago. A specialized, first-of-its-kind oil spill containment system was not ready on time, engines discharged more air pollution than authorities had permitted to be released and the company’s Kulluk drilling unit ended up beached on a rocky Alaskan island’s shore on Dec. 31, 2012.

Other oil companies that hold Arctic leases, including Statoil and ConocoPhillips, have put their exploration plans there on hold, while Shell may seek to resume drilling in 2015.

A Shell spokesman declined to comment on its Arctic program or the overall decline in industry holdings in the Beaufort sea, citing the company’s second-quarter earnings report on Thursday.

BP has been producing oil from leases in shallow Beaufort Sea waters close to shore, with much of the related infrastructure on land or man-made gravel islands. In April, the company agreed to sell some of those assets to Hilcorp. Those ongoing projects were not reflected in Oceana’s analysis.

Expired leases

Many of the forfeited Beaufort Sea oil leases documented by Oceana may have simply been allowed to expire — the likely fate for 39 blocks sold for $9 million in a 2003 auction. Others may have been relinquished early.

Industry representatives say the decline in active Beaufort Sea oil leases represents a natural release of acreage based on individual company’s decisions about what they believe to be the most promising prospects.

API’s Ranger noted that companies may turn over leases or allow them to expire even after paying big bonuses and rental payments to the federal government after further analysis about their potential.

“On a case-by-case basis, some companies have made the decision to relinquish leases in the Beaufort and move somewhere else,” Ranger said in an interview. “Companies aren’t sitting around accumulating vast amounts of acreage on which they aren’t doing anything. They are constantly evaluating and making carefully considered decisions on which acreage to keep and what to let go. At the end of the day, they’re interested in production and molecules running through pipelines.”

Costly operation

Arctic oil exploration is also an expensive proposition that may be tough for even well-capitalized companies to justify amid an onshore drilling boom. Legal challenges to the government’s Arctic leasing decisions and uncertainty about the requirements to operate in the region also have dissuaded some would-be drillers, Ranger said.

Environmentalists say Arctic drilling is too risky for marine life and the subsistence culture of Alaska natives who live in the area. Cold, icy conditions also mean it could take far longer than in the much warmer Gulf for any spilled crude oil to naturally break up in the water.

Shell has 100 percent ownership of 406,283 leased Beaufort Sea acres and 40 percent ownership in an additional 310,573 acres where leases are jointly held with ENI and Repsol. Outside of Shell and BP’s close-to-shore operations, ENI and Repsol are the only other companies holding active Beaufort Sea leases, about 23,861 acres’ worth.

That’s a big contrast from 2007, when seven companies held active leases in the Beaufort Sea, including France’s Total, Canada’s EnCana Corp., Armstrong Oil and Gas, and Conoco.


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