ConocoPhillips puts Arctic drilling plans on hold

Hearst NewspapersApril 10, 2013 

WASHINGTON, D.C. -- ConocoPhillips on Wednesday said it would abandon its plans to begin drilling in Arctic waters north of Alaska because of regulatory uncertainties, underscoring the oil industry's growing reservations about developing the icy, remote region.

Following similar decisions by Shell and Statoil, the move amplifies questions about whether Arctic drilling is worth the financial costs and environmental risks as energy companies extract more crude on U.S. lands.

Shell paused its own Arctic oil hunt after experiencing several high-profile mishaps last year, including the grounding of one of its drilling rigs on New Year's Eve. Separately, Statoil delayed its planned exploration until at least 2015 and threatened to abandon its U.S. Arctic leases altogether.

ConocoPhillips Alaska President Trond-Erik Johansen insisted that the company's decision was designed to allow time for regulatory requirements to shake out, after an Interior Department report that scrutinized Shell's 2012 operations.

"While we are confident in our own expertise and ability to safely conduct offshore Arctic operations, we believe that more time is needed to ensure that all regulatory stakeholders are aligned," Johansen said in a statement.

ConocoPhillips had tentatively planned to use a jack-up rig -- a rig propped above the water using extendable legs that can be lowered to the sea floor -- to drill one or two wells next year in its Devil's Paw prospect about 80 miles off the Alaska coast.

But it is possible federal regulators would not allow a jack-up rig to operate that far from Alaska's shore. When Shell launched a new era of exploratory oil drilling in the Chukchi and Beaufort seas last year, the company relied on two floating rigs anchored to the seabed during work.

Regulators also have insisted they would demand any companies drilling in U.S. Arctic waters prove they can swiftly contain a runaway well. While Shell developed a unique containment system for such emergencies in the Arctic, Bureau of Ocean Energy Management director Tommy Beaudreau has stressed that the emphasis is on containment ability, not any specific equipment.

"Generally, we are going to look for the same things from ConocoPhillips that we looked for with respect to Shell's operation, which is a performance standard around the ability to address any loss of well control at the source," Beaudreau told a Senate subcommittee last month. "We don't prescribe a one-size-fits-all solution … but we will be very demanding on this issue."

Johansen said ConocoPhillips would work with the federal government and other companies with Arctic leases to further clarify drilling requirements.

"Once those requirements are understood, we will re-evaluate our Chukchi Sea drilling plans," Johansen said. "We believe this is a reasonable and responsible approach given the huge investments required to operate offshore in the Arctic."

Environmentalists said the delays create an opening for the Interior Department to draft new requirements specifically for the Arctic -- needed, they believe, because of the unique challenges and ecology of the region.

"We need new standards. We also need a regulatory process," said Michael LeVine, Pacific senior counsel for Oceana. "There now is a window to make that happen. How do we decide what we want the Arctic region to look like? What rules will govern those choices?"

Industry analysts suggested the move could signal growing skittishness among oil companies and investors when it comes to expensive, risky Arctic ventures.

For example, legal uncertainty still surrounds the 2008 government auction at which ConocoPhillips bought its Chukchi Sea leases. Conservationists have challenged the lease sale in court. If they prevail, a federal judge could order regulators to redo environmental studies or conduct other work before allowing further activity on the leases, possibly delaying work for several more years.

Sen. Lisa Murkowski, R-Alaska, said ConocoPhillips' decision was disappointing but understandable, given the massive investments required to launch Arctic oil exploration.

"Companies can't be expected to invest billions of dollars without some assurance that federal regulators are not going to change the rules on them almost continuously," Murkowski said. "The administration has created an unacceptable level of uncertainty when it comes to the rules for offshore exploration that must be fixed if we're going to end our dependence on oil from the Middle East."

Jack Gerard, the head of the American Petroleum Institute, said ConocoPhillips' decision is a reminder of the way oil companies assess regulatory uncertainty in planning investments.

"They have to look at political risk," Gerard said. "Political risk is high when there is regulatory uncertainty."

ConocoPhillips holds 98 leases to drill in the Chukchi Sea and has until 2019 to begin developing the tracts or else forfeit them to the federal government. Statoil is a minority partner in ConocoPhillips' Devil's Paw prospect.

Some oil executives have signaled they may seek to share Arctic drilling and emergency infrastructure in a bid to keep down costs while complying with federal mandates. Outgoing Interior Secretary Ken Salazar said in an interview last month that such infrastructure sharing makes sense in the region.

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