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Oil companies cooling on Arctic leases

Jennifer A. Dlouhy | Hearst Newspapers

WASHINGTON — Oil companies that had locked up more than 1.3 million acres of the Beaufort Sea for drilling in 2007 have since relinquished nearly half that territory, signaling the industry’s appetite for tapping those Arctic waters may be waning even as the Obama administration makes plans to auction off more of the area. 

Oil companies have since ceded the rights to drill on roughly 584,000 acres, despite paying tens of thousands — and sometimes much more — to buy individual leases, according to an analysis of government data by the conservation group Oceana reviewed by Hearst Newspapers. 

And now, all but seven of the 141 still-active oil and gas leases in the Beaufort Sea along Alaska’s northeast coast are partly or completely held by a single firm, Shell Oil Co. Those tracts, which generally span about 9 square miles, include territory the company began drilling in 2012. 

“Nearly half of the leases purchased in the 2003 to 2007 lease sales have been allowed to expire as company after company decides to forgo or delay activities in the U.S. Arctic Ocean,” said Susan Murray, Oceana’s Pacific deputy vice president. 

“Companies cannot operate safely and are walking away from the leases they bought,” said the group’s Pacific senior counsel, Michael LeVine. He said that means “there is no reason to offer additional leases in the Beaufort Sea.” 

But on Tuesday, the Obama administration took the first formal steps to do precisely that, inviting oil companies, environmentalists, Alaska residents and other stakeholders to weigh in on what parts of the U.S. Beaufort Sea should be up for grabs during a 2017 auction. 

U.S. Arctic waters are estimated to contain 27 billion barrels of oil and 132 trillion cubic feet of natural gas. But oil companies have struggled to tap the potential lurking under those remote and icy waters — vividly illustrated by the series of mishaps that befell Shell as it drilled exploratory wells in the Chukchi and Beaufort seas two years ago. A specialized, first-of-its-kind oil spill containment system was not ready on time; engines discharged more air pollution than authorities had permitted; and the company’s Kulluk drilling unit went aground on a rocky Alaska island on Dec. 31, 2012. 

Shell may seek to resume drilling in 2015. Other oil companies that hold Arctic leases, including Statoil and ConocoPhillips, have put their exploration plans there on hold. 

Environmentalists say Arctic drilling is too risky for marine life and the subsistence culture of Alaska Natives who live in the area. Cold, icy conditions also mean it could take far longer than in the much warmer Gulf for any spilled crude oil to naturally break up in the water. 

Interior Department officials have stressed they want to balance any future oil development in the Arctic with preservation of the area’s unique ecosystem and the needs of natives. 

Bureau spokesmen declined to comment this week on future lease sales in the region. And a Shell spokesman declined to speak about the company’s Arctic program or the overall drop in industry holdings in the Beaufort Sea, citing a second-quarter earnings report on Thursday. 

Many of the forfeited Beaufort Sea oil leases documented by Oceana may have simply been allowed to expire — the likely fate for 39 blocks sold for $9 million in a 2003 auction. Others may have been relinquished early. 

Richard Ranger, a senior policy analyst for the American Petroleum Institute, noted that companies may turn over leases or allow them to expire, even after paying big bonus bids and rental payments to the federal government, after further analysis about their potential or the costs involved in exploiting them. 

“On a case-by-case basis, some companies have made the decision to relinquish leases in the Beaufort and move somewhere else,” Ranger said in an interview. “Companies aren’t sitting around accumulating vast amounts of acreage on which they aren’t doing anything. ... At the end of the day, they’re interested in production and molecules running through pipelines.” 

Arctic oil exploration is an expensive proposition that may be tough for even well-capitalized companies to justify, especially amid an onshore drilling boom. 

Lois Epstein, director of The Wilderness Society’s Arctic Program, stressed that Arctic Ocean drilling “is always going to be among the riskiest and most costly” industry endeavors. “If you can get oil somewhere else at less risk and cheaper, there’s some advantage to that.” 

Legal challenges to the government’s Arctic leasing decisions and uncertainty about the requirements to operate in the region also have dissuaded some would-be drillers, API’s Ranger said. 

Currently, Shell has 100 percent ownership of 406,283 leased Beaufort Sea acres and 40 percent ownership in an additional 310,573 acres where leases are jointly held with ENI and Repsol. Outside of Shell and BP’s close-to-shore operations, ENI and Repsol are the only other companies holding active Beaufort Sea leases, about 23,861 acres’ worth. 

That’s a big contrast from 2007, when seven companies, including France’s Total, Canada’s EnCana Corp., and Armstrong Oil and Gas were leasing some 1.3 million acres in the Beaufort Sea. 

It’s not clear whether the ocean energy bureau will hold its planned 2016 sale of oil leases in the neighboring Chukchi Sea. 

The agency’s call for information to plan that Chukchi Sea auction was effectively boycotted by individual oil companies that objected to the bureau’s decision to limit available acreage to areas with fewer environmental risks and focused on tracts nominated by would-be bidders. 

So far, the ocean energy bureau is continuing to work on the Chukchi Sea sale, even though it did not receive a single specific industry nomination for territory that should be sold off. By contrast, the agency was flooded with maps and other data from local communities and conservation groups suggesting areas that should be off limits.