No U.S. Arctic Lease Sales for Five Years

The Shell Arctic drilling rig Kulluk in the Gulf of Alaska (courtesy USCG)

By MarEx 2016-11-18 20:50:35

On Friday, the U.S. Interior Department issued its five-year leasing program for American offshore drilling, and it does not include any lease blocks in the Arctic. 

"Given the unique and challenging Arctic environment and industry's declining interest in the area, foregoing lease sales in the Arctic is the right path forward," said Interior Secretary Sally Jewell.

The plan retains a high rate of leasing activity for the GoM, where the agency has been putting every available block up for auction (and receiving record low bids in an environment of low oil prices). 

However, an array of offshore industry and national security experts described the omission of Arctic leases as a serious mistake. 

“Today’s decision sets back our military and strategic interests in projecting presence in the region, making needed economic development and infrastructure less likely," said General Joseph Ralston, former vice chairman of the Joint Chiefs of Staff and Supreme Allied Commander for NATO militaries in Europe. "Rather than exhibiting U.S. leadership, today’s decision signals a strategic withdrawal.” 

The National Offshore Industries Association (NOIA) excoriated the Interior Department’s decision, describing it as "eye-rolling," "expedient," "short-sighted" and "a slap in the face." "The arrogance of the decision is unfathomable, but unfortunately not surprising," said NOIA president Randall Luthi in a statement.

Some suggested that the industry would petition a more drilling-friendly Trump administration to open up Arctic waters to exploration. 

“As a result of this decision, people across Alaska will be looking to the Trump Administration to quickly tear up the lease plan and implement an entirely new schedule," said Lucas Frances, a spokesman for the industry-backed Arctic Energy Center. The American Petroleum Institute (API) agreed: its president and CEO, Jack Gerard, said that API is "hopeful the incoming administration will reverse this decision." 

Even if the incoming administration rewrites the rules, some analysts are skeptical that Arctic offshore development makes financial sense in the current $45-per-barrel oil market. Oil majors have slashed E&P budgets for conventional offshore projects around the world, in deep and shallow water alike; industry experts suggest that the best breakeven possible for offshore oil is now in the range of $40-50. Costs are expected to be much higher in remote Arctic regions with brief drilling seasons. 

"There is no rush at all for the resources of the polar region. It's very sad that oil companies want to go there, when they haven't done anything with many of the resources they already have, which are much cheaper to extract," said Fred Olsen (of Fred. Olsen Energy), speaking to Arctic Business last year. Olsen suggested that the drive for the Arctic was more about securing acreage for future exploration than producing oil in the near term. 

Shell abandoned its offshore campaign in the Chukchi Sea last year, citing poor oil production potential in its first wells. The firm had spent $7 billion on exploration.

"Shell pulled out in 2015 not because of some regulatory problem, but simply because the economics of this drilling are not viable under current oil price conditions," said Pavel Molchanov, an equity research analyst at Raymond James & Associates, speaking to environmental news outlet Inside Climate News. "Right now it's a moot point."

In news that went relatively unnoticed amidst the debate over future lease auctions, the Native-owned Arctic Slope Regional Corporation (ASRC) has bought out Shell's existing Chukchi lease, along with the company's exploration data. “We all know how the Chukchi effort ended, yet we know there is still tremendous potential in Alaska’s offshore,” said Rex Rock, Sr., president and CEO of ASRC, speaking to Alaska Public Media. There are about three years remaining on Shell's lease.