In another blow to offshore oil drilling in the Alaska Arctic, a federal appeals court on Wednesday ruled in favor of environmental and Alaska Native groups and concluded the federal government failed to properly evaluate the scale of oil production that could result from a 2008 lease sale, throwing those leases into question.
Royal Dutch Shell, the biggest leaseholder offshore in Alaska and the only one that's drilled in the Arctic in recent years, said only, "We are reviewing the opinion." The Bureau of Ocean Energy Management, the Department of Interior agency that manages oil lease sales, declined to comment on "pending litigation."
A split three-judge panel of the 9th U.S. Circuit Court of Appeals issued the ruling against the Department of Interior and oil companies including Shell.
The decision likely will hinder efforts by Shell to drill this year in the Chukchi Sea, where its Burger prospect holds immense promise.
Shell hasn't decided whether to return this year after a troubled 2012 attempt. It recently warned investors that fourth-quarter profits were down significantly in part because of expensive exploration projects. Problems in 2012 included a grounded drilling rig, violations of air pollution limits, engine failures on a tow ship and an oil spill containment system damaged during testing.
The court challenge was based in part on an estimate by the Bureau of Ocean Energy Management, or BOEM, that 1 billion barrels of oil was "economically recoverable" from the Chukchi Sea leases. It based its environmental review of the lease sale on that number.
That estimate from a BOEM analyst was arbitrary and far too low, the appeals court panel found.
"In the case before us, BOEM was fully aware from the very beginning that if one billion barrels could be economically produced, many more barrels could also be economically produced," the opinion said.
Shell, two other Chukchi leaseholders -- ConocoPhillips and Statoil-- and the state of Alaska joined the lawsuit to defend the federal government's leases.
The appeals court sent the matter back to U.S. District Judge Ralph Beistline in Alaska to determine what should happen next. Environmental groups want the leases revoked but the judge could take a different course, including directing the federal government to redo environmental studies before drilling can resume.
As of January 2013, Shell had spent about $5 billion for its Alaska venture, counting lease costs and drilling rigs. The company didn't respond to a request for an updated figure Wednesday.
Groups that oppose drilling in the Arctic said Wednesday's decision is significant. The lawsuit challenging the leases was brought by a large contingent that includes the National Audubon Society, the Sierra Club and The Wilderness Society. The Native Village of Point Hope headlined the coalition. Earthjustice, an environmental law firm, represented them.
"Today's ruling is a victory for the Arctic Ocean," the groups said in a statement. "The government has no business offering oil companies leases in the Chukchi Sea. The area is home to iconic species such as polar bear, bowhead whales and walrus and to a vibrant indigenous subsistence culture. Drilling for oil puts at risk the region's wildlife and people, and it takes us off the path toward a clean energy future."
Michael LeVine, a Juneau-based lawyer for Oceana, said that the government has failed to justify the 2008 lease sale and "should stop trying."
"We have yet to be convinced that companies like Shell can actually successfully produce oil from the Chukchi Sea," LeVine said in an interview. "It's too expensive, too challenging. They don't have the right technology."
Gov. Sean Parnell and a number of other Alaska political leaders support offshore oil drilling in the Arctic. U.S. Sen. Mark Begich, who pushed the Obama administration to allow Shell to drill, said he doesn't think the court ruling will stop exploration this year.
"The Arctic has already been and will continue to be subjected to unprecedented safety standards and today's announcement does not delay the important progress we have made," Begich said in a written statement. "Alaskans know how to develop our resources and that is why I continue to be optimistic that we will see safe, responsible development in the Arctic this summer."
In 2008, the Bush administration offered nearly 30 million acres in the Chukchi Sea in leases for oil drilling. The environmental and Native coalition challenged the lease sale in court.
Judge Beistline in 2010 determined the lease sale violated environmental law for failing to address gaps in information about species in the Chukchi, and he required the federal government to reconsider the sale. The Obama administration in 2011 decided the leases could stand, and the environmental groups appealed.
BOEM based its estimate of 1 billion barrels on the amount of oil that could be produced from the first Chukchi field developed, not the whole lease area. BOEM analyst Jim Craig developed the number "off the top of (his) head" in an email exchange, the opinion says. There were doubts at BOEM that production would ever occur. But other BOEM employees and scientists in other federal agencies raised concerns about the estimate, the opinion says.
"BOEM emphasizes that because of the remoteness of the area and the risk of economic failure, any oil production activity is an unlikely result of the lease sale," the panel said. If anything, the estimate was generous, BOEM maintained.
The federal agency also argued that any weaknesses in the environmental study for the lease sale could be addressed in later site-specific environmental reviews during project development.
But the panel found that under the National Environmental Policy Act, BOEM was supposed to consider the full environmental impacts of the leases. Only at that stage could the agency assess the impacts of drilling throughout the leased area "including the overall risk of oil spills and the effects of the sale on climate change," the panel said. And that was the only time to assess which parcels should even be offered for lease.
Even if the first field did produce 1 billion barrels, other fields would follow, the panel said. A 2006 report from BOEM's predecessor found that if the price of oil were $80 a barrel, 12 billion barrels would be produced from the Chukchi Sea.
The opinion was written by Judge William Fletcher with concurrence of Judge Ferdinand Fernandez. Judge Johnnie Rawlinson dissented, saying that "we do not sit as a panel of super scientists to dissect the agency's analysis."
In November, Shell filed a 2014 exploration plan with BOEM, and the agency requested additional information, including whether Shell, one of the biggest oil companies in the world, has made changes to its management to ensure any operational deficiencies are quickly addressed.
Shell has said it isn't rushing into a decision and was taking a methodical approach to the 2014 season.
Reach Lisa Demer at email@example.com or 257-4390.