Big Oil abandons $2.5 billion in U.S. Arctic drilling rights

  • By Jennifer A. Dlouhy Bloomberg
  • Tuesday, May 10, 2016 9:48am
  • Business

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.

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 email. 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 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.

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 Gov. 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.

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 United States, 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.”

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

Simreet Dhaliwal speaks after winning during the 2024 Snohomish County Emerging Leaders Awards Presentation on Wednesday, April 17, 2024, in Everett, Washington. (Ryan Berry / The Herald)
Simreet Dhaliwal wins The Herald’s 2024 Emerging Leaders Award

Dhaliwal, an economic development and tourism specialist, was one of 12 finalists for the award celebrating young leaders in Snohomish County.

Lynnwood
New Jersey company acquires Lynnwood Land Rover dealership

Land Rover Seattle, now Land Rover Lynnwood, has been purchased by Holman, a 100-year-old company.

Szabella Psaztor is an Emerging Leader. (Olivia Vanni / The Herald)
Szabella Pasztor: Change begins at a grassroots level

As development director at Farmer Frog, Pasztor supports social justice, equity and community empowerment.

Owner and founder of Moe's Coffee in Arlington Kaitlyn Davis poses for a photo at the Everett Herald on March 22, 2024 in Everett, Washington. (Annie Barker / The Herald)
Kaitlyn Davis: Bringing economic vitality to Arlington

More than just coffee, Davis has created community gathering spaces where all can feel welcome.

Simreet Dhaliwal is an Emerging Leader. (Olivia Vanni / The Herald)
Simreet Dhaliwal: A deep-seated commitment to justice

The Snohomish County tourism and economic specialist is determined to steer change and make a meaningful impact.

Nathanael Engen, founder of Black Forest Mushrooms, an Everett gourmet mushroom growing operation is an Emerging Leader. (Olivia Vanni / The Herald)
Nathanael Engen: Growing and sharing gourmet mushrooms

More than just providing nutritious food, the owner of Black Forest Mushrooms aims to uplift and educate the community.

Emerging Leader John Michael Graves. (Ryan Berry / The Herald)
John Michael Graves: Champion for diversity and inclusion

Graves leads training sessions on Israel, Jewish history and the Holocaust and identifying antisemitic hate crimes.

Gracelynn Shibayama, the events coordinator at the Edmonds Center for the Arts, is an Emerging Leader. (Olivia Vanni / The Herald)
Gracelynn Shibayama: Connecting people through the arts and culture

The Edmonds Center for the Arts coordinator strives to create a more connected and empathetic community.

Eric Jimenez, a supervisor at Cocoon House, is an Emerging Leader. (Olivia Vanni / The Herald)
Eric Jimenez: Team player and advocate for youth

As an advocate for the Latino community, sharing and preserving its traditions is central to Jimenez’ identity.

Molbak's Garden + Home in Woodinville, Washington closed on Jan. 28 2024. (Photo courtesy of Molbak's)
Molbak’s, former Woodinville garden store, hopes for a comeback

Molbak’s wants to create a “hub” for retailers and community groups at its former Woodinville store. But first it must raise $2.5 million.

DJ Lockwood, a Unit Director at the Arlington Boys & Girls Club, is an Emerging Leader. (Olivia Vanni / The Herald)
DJ Lockwood: Helping the community care for its kids

As director of the Arlington Boys & Girls Club, Lockwood has extended the club’s programs to more locations and more kids.

Alex Tadio, the admissions director at WSU Everett, is an Emerging Leader. (Olivia Vanni / The Herald)
Alex Tadio: A passion for education and equality

As admissions director at WSU Everett, he hopes to give more local students the chance to attend college.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.