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More Oil Companies Abandoning Arctic Plans, Letting Leases Expire

More Oil Companies Abandoning Arctic Plans, Letting Leases Expire

After years of mishaps and false starts, some oil companies are giving up on drilling in the Arctic.

Many companies have allowed their leases on offshore Arctic acreage to expire, according to an analysis by Oceana that was reviewed by Fuel Fix. Since 2003, the oil industry has allowed the rights to an estimated 584,000 acres in the Beaufort Sea to lapse.

It wasn’t supposed to happen this way. The oil industry was once enormously optimistic about drilling for oil in the Beaufort and Chukchi Seas, off the north coast of Alaska. The U.S. Geological Survey estimated in a 2008 study that offshore Alaska holds almost 30 billion barrels of oil and 221 trillion cubic feet of natural gas.

Shell Oil has been the leader in the Arctic, venturing into territory where other oil companies were unwilling to go. It promised billions of dollars in revenue and enhanced energy security.

But it ran into a seemingly endless series of accidents and setbacks.

In 2009, the Department of Interior approved Shell’s drilling plan. But the following summer, a court suspended Shell’s lease until the offshore regulators could conduct a more thorough scientific review. After providing more detail, Shell received another go-ahead, with high expectations for drilling in the summer of 2012.

But that proved to be a fateful year for Shell’s Arctic campaign (the events are nicely summed up by Climate Progress here). In July 2012, Shell temporarily lost control of its Noble Discoverer rig, which almost ran aground. Shell’s oil spill response ship also failed inspections, which delayed drilling.

Shell ultimately had to throw in the towel for the year as the summer season drew to a close. Finally, on December 31, Shell’s Kulluk ship ran aground as the company was towing it out of Alaskan waters.

The events forced Shell to take a step back, and the company announced in February 2013 that it would suspend its drilling campaign for the year. It hasn’t returned.

Related Article: Can the Arctic Reshape Global LNG Shipping?

Not surprisingly, Shell’s misadventures in the Arctic have scared away other oil companies. In 2012, several majors, including Statoil and Total, put their Arctic plans on hold indefinitely, citing too many dangers.

As the Fuel Fix/Oceana analysis shows, Shell is now all but alone in the icy northern waters; it owns all but seven of the 141 active oil leases in the Beaufort Sea.

“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 Oceana’s Pacific deputy vice president Susan Murray.

The U.S. Department of Interior is moving ahead with its plans to auction off another round of leases in 2016. It is asking for feedback from the public on what tracts to auction off next, and has solicited comments from both the oil industry and groups that oppose drilling. But thus far there is negligible interest from the industry. Interior could cancel the lease sale if there is not sufficient interest.  

Whether or not the Arctic offshore becomes a major source of oil development largely rests with Shell Oil, the company that has invested the most in the region. But earlier this year, a court issued a critical setback to the oil company, ruling that the Interior Dept. didn’t follow the law in an earlier Arctic auction. In response to the ruling, Shell’s new CEO Ben van Beurden cancelled drilling for yet another year. “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,” he said.

Van Beurden has also embarked upon a $15 billion two-year divestment program, with the intention of shedding higher cost assets around the world in an effort to improve Shell’s financial position, which had deteriorated in recent quarters due to high-cost “elephant projects.”

That would suggest that the Arctic program could get the axe. For now, Shell is keeping open the possibility of returning to the Arctic in the summer of 2015.

By Nick Cunningham of Oilprice.com

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