http://www.bloomberg.com/news/articles/2016-05-10/big-oil-abandons-2-5-billion-in-u-s-arctic-drilling-rights
[video in on-line article]
Big Oil Abandons $2.5 Billion in U.S. Arctic Drilling Rights
Jennifer A Dlouhy
May 9, 2016 — 10:00 PM EDT
Updated on May 10, 2016 — 11:16 AM EDT
After plunking down more than $2.5 billion for drilling rights in U.S.
Arctic waters, Royal Dutch Shell, ConocoPhillips and other companies
have quietly relinquished claims they once hoped would net the next big
oil discovery.
The pullout comes as crude oil prices have plummeted to less than half
their June 2014 levels, forcing oil companies to slash spending. For
Shell and ConocoPhillips, the decision to abandon Arctic acreage was
formalized just before a May 1 due date to pay the U.S. government
millions of dollars in rent to keep holdings in the Chukchi Sea north of
Alaska.
The U.S. Arctic is estimated to hold 27 billion barrels of oil and 132
trillion cubic feet of natural gas, but energy companies have struggled
to tap resources buried below icy waters at the top of the globe.
Shell last year ended a nearly $8 billion, mishap-marred quest for
Arctic crude after disappointing results from a test well in the Chukchi
Sea. Shell decided the risk is not worth it for now, and other companies
have likely come to the same conclusion, said Peter Kiernan, the lead
energy analyst at The Economist Intelligence Unit.
"Arctic exploration has been put back several years, given the low oil
price environment, the significant cost involved in exploration and the
environmental risks that it entails," he said.
80 Percent
All told, companies have relinquished 2.2 million acres of drilling
rights in the Chukchi Sea -- nearly 80 percent of the leases they bought
from the U.S. government in a 2008 auction. Oil companies spent more
than $2.6 billion snapping up 2.8 million acres in the Chukchi Sea
during that sale, on top of previous purchases in the Beaufort Sea.
Shell relinquished 274 Chukchi leases and others in the neighboring
Beaufort Sea. In doing so, the company forfeits what it paid the U.S
government for the rights to drill in those tracts -- and the millions
of dollars it spent on annual rent since then.
"These actions are consistent with our earlier decision not to explore
offshore Alaska for the foreseeable future," Shell spokesman Curtis
Smith said by e-mail. The decision also reflects the high costs of
operating off Alaska’s northern coast and evolving regulatory standards,
Smith said.
Other energy companies have followed Shell out of the Arctic, according
to Interior Department records obtained by the conservation group Oceana
under a Freedom of Information Act request and reviewed by Bloomberg News.
ConocoPhillips formally relinquished its 61 Chukchi Sea leases on April
26, and spokeswoman Christina Kuhl said the company will end Interior
Board of Land Appeals proceedings that aimed to extend their life.
Statoil dumped 16 Chukchi Sea leases and its working interest stakes in
50 others in the U.S. Arctic last November, conceding the portfolio was
"no longer considered competitive."
Iona Energy Inc., a Canadian oil and gas company that began insolvency
proceedings last November, ceded its one lease in the Chukchi Sea on
March 31. Italy’s Eni SpA also gave up four leases in the Chukchi Sea on
April 28.
Shell indefinitely halted oil exploration in the U.S. Arctic, but is
seeking an extension of leases that begin to expire in 2017. That legal
battle, playing out in the Interior Board of Land Appeals, will continue.
Final Lease
Shell is holding on to one parcel in the Chukchi Sea: the tract it
drilled last year. Smith said Shell is maintaining that lone lease -- at
a potential cost of $132,456 over the next four years -- because there
is value in the data the company gathered during its 2015 exploratory
drilling. Companies generally have to give the U.S. government the
geological information they glean from oil and gas development in
federal waters, but they can get an extra two to 10 years to turn over
that data as long as they still hold the territory.
The rash of relinquishments means "we are an important step closer to a
sustainable future for the Arctic Ocean," said Michael LeVine, Pacific
senior counsel for Oceana, which opposed government decisions to
authorize oil development in the area and wants science to guide
industrial development there. "Hopefully, today marks the end of the
risk, litigation and expense caused by the push to drill in the Arctic
Ocean."
Now, only 535,586 acres remain locked up in the Chukchi Sea. Besides
Shell’s one lease there, the tracts are in the hands of just one oil
producer: Spain’s Repsol SA. Spokesmen for the company did not return
requests for comment.
The news was a blow to political leaders in Alaska, which derives much
of its revenue from oil development. Democratic Governor Bill Walker
said in a statement that Arctic oil and gas "represent incredible
potential for American energy security, jobs and revenue for the
government." But tapping those resources requires a stable permitting
and regulatory regime that gives certainty to would-be investors, he said.
Next Auction
It could be years -- if ever -- before oil companies get another chance
to buy drilling rights in the region. The U.S. could turn around and
resell the forfeited leases if any companies actually wanted to buy
them, but the Interior Department canceled upcoming lease sales amid low
industry interest last year.
The Interior Department is considering selling leases in the Beaufort
Sea in 2020 and the Chukchi Sea two years later, but those auctions are
far from certain, and environmentalists are pushing the Obama
administration to rule them out entirely. Oceana’s LeVine said oil
companies’ decision to forfeit Arctic drilling rights shows "there is no
compelling reason to schedule new lease sales."
Cindy Shogan, executive director of the Alaska Wilderness League, said
the lease forfeiture illustrates that "no oil company should drill in
America’s Arctic Ocean" and should convince President Barack Obama to
cancel potential sales there.
Even beyond the U.S., there are strong headwinds discouraging oil
companies from sending drill bits spinning below Arctic waters. Last
month, Shell withdrew an application for a drilling license in Norway’s
share of the Arctic Ocean.
The high costs of working in the area mean it is generally attractive
only to large oil companies with big balance sheets. But evolving
regulatory environments in the U.S. Arctic can discourage those
businesses, said Richard Ranger, a senior policy analyst with the
American Petroleum Institute.
"There are only so many companies that are going to be interested in the
Arctic," he said by phone. "To the extent they are, they can look at
other jurisdictions. With regulatory uncertainty and price uncertainty,
you start looking at other opportunities -- and you re-rank what your
longer term, more frontier prospects look like. That’s what’s happening."
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