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Oil companies cooling on Arctic leases

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Oil companies that had locked up more than 1.3 million acres of the Beaufort Sea for drilling in 2007 have since relinquished nearly half that territory, signaling the industry’s appetite for tapping those Arctic waters may be waning even as the Obama administration makes plans to auction off more of the area.

Oil companies have since ceded the rights to drill on roughly 584,000 acres, despite paying tens of thousands — and sometimes much more — to buy individual leases, according to an analysis of government data by the conservation group Oceana reviewed by Hearst Newspapers.

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. Those 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.

“Companies cannot operate safely and are walking away from the leases they bought,” said the group’s Pacific senior counsel, Michael LeVine. He said that means “there is no reason to offer additional leases in the Beaufort Sea.”

But 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 up for grabs during a 2017 auction.

U.S. Arctic waters are estimated to contain 27 billion barrels of oil and 132 trillion cubic feet of natural gas. 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; and the company’s Kulluk drilling unit went aground on a rocky Alaska island on Dec. 31, 2012.

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

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.

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 the needs of natives.

Bureau spokesmen declined to comment this week on future lease sales in the region. And a Shell spokesman declined to speak about the company’s Arctic program or the overall drop in industry holdings in the Beaufort Sea, citing a second-quarter earnings report on Thursday.

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.

Richard Ranger, a senior policy analyst for the American Petroleum Institute, noted that companies may turn over leases or allow them to expire, even after paying big bonus bids and rental payments to the federal government, after further analysis about their potential or the costs involved in exploiting them.

“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. … At the end of the day, they’re interested in production and molecules running through pipelines.”

Arctic oil exploration is an expensive proposition that may be tough for even well-capitalized companies to justify, especially amid an onshore drilling boom.

Lois Epstein, director of The Wilderness Society’s Arctic Program, stressed that Arctic Ocean drilling “is always going to be among the riskiest and most costly” industry endeavors. “If you can get oil somewhere else at less risk and cheaper, there’s some advantage to that.”

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, API’s Ranger said.

Currently, 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, including France’s Total, Canada’s EnCana Corp., and Armstrong Oil and Gas were leasing some 1.3 million acres in the Beaufort Sea.

It’s not clear whether the ocean energy bureau will hold its planned 2016 sale of oil leases in the neighboring Chukchi Sea.

The agency’s call for information to plan that Chukchi Sea auction was effectively boycotted by individual oil companies that objected to the bureau’s decision to limit available acreage to areas with fewer environmental risks and focused on tracts nominated by would-be bidders.

So far, the ocean energy bureau is continuing to work on the Chukchi Sea sale, even though it did not receive a single specific industry nomination for territory that should be sold off. By contrast, the agency was flooded with maps and other data from local communities and conservation groups suggesting areas that should be off limits.


Anchorage Daily News

6 Comments on "Oil companies cooling on Arctic leases"

  1. Makati1 on Thu, 31st Jul 2014 7:00 am 

    Gard to argue with a state sized ice floe headed for your drilling rig…

  2. steve on Thu, 31st Jul 2014 9:05 am 

    This is a lot of what Steve Kopits talked about; CAPEX is way down. I just wish I had his optimism for the future.

  3. rockman on Thu, 31st Jul 2014 9:16 am 

    ““Companies cannot operate safely and are walking away from the leases they bought,” IMHO pretty much BS. First the obvious: if a company didn’t believe they could function in the Arctic they would not have spent $millions taking those leases in the first place. Second here is how the process has worked since the first offshore leases were taken in federal offshore lands. Phase 1: acquire relatively inexpensive non-proprietary seismic data and make preliminary evaluations. Phase 2: determine which areas have highest probability of being “lease worthy”. Phase 3: make bids on targeted lease blocks. Phase 4: conduct proprietary (and very expensive especially in the Arctic) high density seismic. Phase 5: utilize new seismic date to cull leases which have not been proven to be drill worthy and drop those leases.

    OK, take a breath and I’ll explain. No company is going to spend hundreds of $millions on seismic on leases they do not own. Especial if there were a number of other companies doing the same. A company isn’t going to spend $20 million shooting seismic on a 5,000 acre lease and then go to a lease sale and have their bid beaten by that of another company by a couple of $million. Have that happen to them on 5 lease blocks and they just flushed $100 million down the toilet.

    IMHO either these folks are ignorant about the exploration process offshore or they are being intentionally misleading by how they choose to characterize this “pull back” of companies in the Arctic. Let’s be brutally honest: the oil patch takes such risk as just part of the process. Just consider BP: after their huge financial loss from the Macondo blowout they are back leasing and drilling in the GOM. It doesn’t matter how difficult the operation: if the potential for reserves is economically viable companies they will risk environmental damage as well as the lives of oil patch hands and the company’s own financial stability.

    Or as has been said many times around oil patch board tables: “Drilling offshore ain’t for pussies”. LOL. This is the reality whether any of us like it or not. The US gov’t really enjoys the $10 billion it gets yearly from offshore royalty and the tens/hundreds of $millions they collect in lease sale bonuses. They have little interest in killing that “mailbox money”.

  4. rockman on Thu, 31st Jul 2014 3:51 pm 

    And it occurred to me to give a personal example. About three years ago my small company leased 3 GOM lease from the feds. Got them with the minimum bid: $250,000 each. And then paid $4 million for seismic data to flesh them out. After working the data we flushed all three leases. It was a combination of higher risk, smaller reserve potential and, to a large degree, falling NG prices. So the feds got $750,000 for doing nothing more then cashing our chair.

    But I have no hard feelings for the gov’t. This is how it has always been in the oil patch: you pays your money and you takes your chances.

  5. rockman on Thu, 31st Jul 2014 9:10 pm 

    Damn autocomplete. “cashing our CHECK”.

  6. Kenz300 on Sat, 2nd Aug 2014 9:32 am 

    The price of oil, coal and nuclear keep rising and causing environmental damage………. the development costs keep going up as the easy to find and develop oil has run out.

    It is time for OIL companies to change their business models and become ENERGY companies by diversifying the types of energy they develop. Moving into wind, solar, wave energy. geothermal and second generation biofuels made from algae, cellulose and waste will help to diversify the companies assets.

    BP once had a slogan “BEYOND PETROLEUM”……. all oil companies need to think about the long term and not just short term profits.

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