Analysis: On May 25, the Ninth Circuit Court of Appeals upheld the Bureau of Ocean Energy Management's (BOEM) August 2011 decision to permit Shell to drill in the Beaufort and Chukchi seas off Alaska's north shore.
The Native Village of Point Hope and the Inupiat Community of the North Slope had challenged the decision in court, as did nonprofit activist organizations such as Greenpeace, the Center for Biological Diversity, and the Sierra Club. This is the third time the government has had to defend its approval of Shell's offshore drilling plans in court.
The indigenous groups and NGOs sued the BOEM -- the agency that regulates offshore oil drilling in federal waters -- for approving Shell's exploration plan, claiming that BOEM "failed to discharge its obligations under the Outer Continental Shelf Lands Act (OCSLA) (PDF here) in approving Shell Offshore Inc.'s plan for exploratory oil drilling in the Beaufort Sea."
OCSLA authorizes the U.S. Interior Secretary to lease portions of the Outer Continental Shelf (the land and waters three miles or more from the coastline) to companies for oil and gas exploration, provided that the firms receive a multitude of permits from various agencies. If exploration is successful, another round of permitting must take place before a company can undertake development and oil and gas production.
The long road
In 2002, the government began selling federal offshore leases in Alaska, and Shell purchased blocks in 2005 and 2007. The Minerals Management Service -- which formerly housed BOEM, the Bureau of Safety and Environmental Enforcement (BSEE) and the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) as one entity -- reviewed Shell's exploration plans and also considered its oil-spill response plan in accordance with the Clean Water Act.
Shell submitted its exploration plan for its Beaufort Sea leasing areas in November 2006. MMS approved the proposal in February 2007.
But the North Slope Borough and the Alaska Eskimo Whaling Commission challenged the approval in court. The Ninth Circuit Court of Appeals denied MMS's approval, claiming that offshore oil regulator's analysis of potential environmental impacts was insufficient. This halted exploration in the summers of 2007 and 2008, ultimately forcing Shell to create a new exploration plan. The MMS approved it, and in a second court case, the Ninth Circuit upheld the agency's decision.
In late spring 2010, however, an obstacle Shell could not have foreseen arose in the Gulf of Mexico: the Deepwater Horizon oil spill.
Soon afterwards, Interior Secretary Ken Salazar issued a moratorium on offshore Arctic drilling, which was not lifted until yet another summer had passed. Shell created a new exploration plan, which it submitted to BOEM and BSEE in May 2011. Both bureaus eventually issued approvals to Shell, but some indigenous groups and environmental NGOs still found reason to sue again, this time for two main reasons: First, they claimed Shell's exploration plan inadequately informed BOEM about its oil-spill response plan. Second, they alleged that the oil well-capping stack and containment system, which Shell proposed to use in response to spills, was not adequately described.
But the court did not side with the petitioners as it had in 2007. The three-judge panel did not find that either bureau "acted arbitrarily or capriciously" in issuing approval. They also wrote that "BOEM's conclusion that well-capping technology is now feasible in the Arctic is supported by substantial evidence in the record."
In fact, this is the very technology that BP deployed to contain Deepwater Horizon. Well-capping has not been used in the Arctic before, but as the panel found, it is up to BOEM to decide with its scientific expertise whether a certain technology is appropriate -- not the courts.
The petitioners had also argued that Shell was inconsistent in stating that while it would take 44 and 34 days, respectively, to drill at its Torpedo and Sivulliq sites (MAP -- check out the locations), it would take only 25 and 20 days to drill relief wells in the same locations if something went wrong. But the court ruled that BOEM is not required to state on the record how it reconciles the differing time estimates.
Thus, BOEM's and BSEE's approvals of Shell's plans were upheld, and only a few more court battles remain. (Read the full text of the decision in Native Village of Point Hope v. Ken Salazar.)
Shell spokesman Curtis Smith stated, "There are other appeals still pending, such as those of our air quality permits, but the favorable ruling on the exploration plan is a substantial boost for us."
The EPA granted Shell 10 air-quality permits in September 2011 to allow the Noble Discoverer drillship, the Kulluk drillship, and a support fleet of icebreakers, oil-spill response vessels, and supply ships to explore for crude in the Beaufort and Chukchi seas, part of the Arctic Ocean, for up to 120 days each year.
As Shell is hopeful for its prospects this summer, both the Noble Discoverer and Kulluk are being outfitted and "winterized" in a Seattle shipyard in preparation to sail to Dutch Harbor in mid-June.
Some might be surprised that Shell will, in all likelihood, finally be able to begin drilling exploratory wells in the Arctic under President Barack Obama's watch. But Obama may have calculated that in an election year; allowing Shell to begin drilling would illustrate a moderate environmental stance to conservatives, especially after he postponed making a decision on the proposed Keystone pipeline project.
The New York Times reports that during a briefing on the Deepwater Horizon oil spill, Obama asked, "Where are you coming out on the offshore Arctic?" He continued, "It's not deepwater, right?"
Indeed, the oil Shell is going after sits only about 150 feet below sea level -- not more than 5,000 feet, as is the case with much of the crude in the Gulf of Mexico. Yet, ice, frigid temperatures and snowstorms pose hazards not encountered farther south.
How much oil is sitting offshore?
The MMS estimated that the Beaufort Sea holds 2 billion to 7 billion barrels of economically recoverable oil and 3 trillion to 20 trillion cubic feet of economically recoverable natural gas, while the Chukchi Sea could hold up to 12 billion barrels of oil and up to 54 trillion cubic feet of natural gas.
Even if the maximum amount of both resources was found and extracted, the oil and gas would be able to meet all of U.S. demand for only a little more than two years. To illustrate, the U.S. consumed nearly 7 billion barrels of oil in 2010 and 24.4 trillion cubic feet of natural gas.
For Alaska, Shell's prospect of producing offshore oil could help maintain an infrastructural necessity for the state's oil patch -- the 800-mile trans-Alaska pipeline. Known as TAPS, the line in the coming years may not have enough of the black stuff flowing through it to keep the pipe from clogging and freezing. That's because oil produced on state lands, including the mega oil fields Kuparuk and Prudhoe Bay, is on the decline after peaking at more than 2 million barrels a day in the late 1980s.
Shell explored in Alaska's Arctic three decades ago
Now that the price of oil sits over $100, it is economically profitable for Shell to extract it in the Chukchi and Beaufort seas.
The company's break-even point is unknown, though analysts estimate it could be as low as $30 a barrel, or as high as $80. Either way, Shell seems positioned to profit if it finds oil.
This was not the case in the mid-1980s, when oil prices tanked, sending Alaska's economy into a deep recession. Shell, in turn, abandoned its attempts to drill in the same seas it hopes to explore for oil in this summer.
Natures last stand?
It looks like this summer, after seven years of back and forth, the drillship will triumph over the umiak (whale boat).
The only real obstacle that still stands in the way of Shell's designs, provided that the appeals over the air-quality permits are rejected, is nature itself. With the accumulation of some of the most multiyear sea ice the Alaska Arctic has experienced in decades, the waters around Shell's lease sites might not be completely ice-free until August, shortening the drilling season. Shell already agreed to conclude drilling in the Beaufort Sea by Oct. 31 and by Sept. 24 in the Chukchi Sea to avoid the possibility of drilling in waters where ice is beginning to form, so it might have less than two months to operate in the latter area.
But for Shell, the very fact that it could begin drilling this summer is a dream come true -- and a nightmare to those opposed to oil development in the Arctic.