Big Oil Abandons $2.5 Billion in U.S. Arctic Drilling Rights

Why Big Oil Is Giving Up on the Arctic
  • Drillers forfeit millions of acres amid slump in oil prices
  • Royal Dutch Shell still holding on to one lease in Chukchi Sea

After plunking down more than $2.5 billion for drilling rights in U.S. Arctic waters, Royal Dutch Shell Plc, ConocoPhillips and other companies have quietly relinquished claims they once hoped would net the next big oil discovery.

The pullout comes as crude oil prices have plummeted to less than half their June 2014 levels, forcing oil companies to cut spending. For Shell and ConocoPhillips, the decision to abandon Arctic acreage was formalized just before a May 1 due date to pay the U.S. government millions of dollars in rent to keep holdings in the Chukchi Sea north of Alaska.

The U.S. Arctic is estimated to hold 27 billion barrels of oil and 132 trillion cubic feet of natural gas, but energy companies have struggled to tap resources buried below icy waters at the top of the globe.

Shell last year ended a nearly $8 billion, mishap-marred quest for Arctic crude after disappointing results from a test well in the Chukchi Sea. Shell decided the risk is not worth it for now, and other companies have likely come to the same conclusion, said Peter Kiernan, the lead energy analyst at The Economist Intelligence Unit.

"Arctic exploration has been put back several years, given the low oil price environment, the significant cost involved in exploration and the environmental risks that it entails," he said.

80 Percent

All told, companies have relinquished 2.2 million acres of drilling rights in the Chukchi Sea -- nearly 80 percent of the leases they bought from the U.S. government in a 2008 auction. Oil companies spent more than $2.6 billion snapping up 2.8 million acres in the Chukchi Sea during that sale, on top of previous purchases in the Beaufort Sea.

Shell relinquished 274 Chukchi leases and others in the neighboring Beaufort Sea. In doing so, the company forfeits what it paid the U.S government for the rights to drill in those tracts -- and the millions of dollars it spent on annual rent since then. 

"These actions are consistent with our earlier decision not to explore offshore Alaska for the foreseeable future," Shell spokesman Curtis Smith said by e-mail. The decision also reflects the high costs of operating off Alaska’s northern coast and evolving regulatory standards, Smith said.

Other energy companies have followed Shell out of the Arctic, according to Interior Department records obtained by the conservation group Oceana under a Freedom of Information Act request and reviewed by Bloomberg News.

QuickTake: Arctic Opportunity

ConocoPhillips formally relinquished its 61 Chukchi Sea leases on April 26, and spokeswoman Christina Kuhl said the company will end Interior Board of Land Appeals proceedings that aimed to extend their life.

Statoil dumped 16 Chukchi Sea leases and its working interest stakes in 50 others in the U.S. Arctic last November, conceding the portfolio was "no longer considered competitive."

Iona Energy Inc., a Canadian oil and gas company that began insolvency proceedings last November, ceded its one lease in the Chukchi Sea on March 31. Italy’s Eni SpA also gave up four leases in the Chukchi Sea on April 28.

Shell indefinitely halted oil exploration in the U.S. Arctic, but is seeking an extension of leases that begin to expire in 2017. That legal battle, playing out in the Interior Board of Land Appeals, will continue.

Final Lease

Shell is holding on to one parcel in the Chukchi Sea: the tract it drilled last year. Smith said Shell is maintaining that lone lease -- at a potential cost of $132,456 over the next four years -- because there is value in the data the company gathered during its 2015 exploratory drilling. Companies generally have to give the U.S. government the geological information they glean from oil and gas development in federal waters, but they can get an extra two to 10 years to turn over that data as long as they still hold the territory.

The relinquishments mean "we are an important step closer to a sustainable future for the Arctic Ocean," said Michael LeVine, Pacific senior counsel for Oceana, which opposed government decisions to authorize oil development in the area and wants science to guide industrial development there. "Hopefully, today marks the end of the risk, litigation and expense caused by the push to drill in the Arctic Ocean."

Now, only 535,586 acres remain locked up in the Chukchi Sea. Besides Shell’s one lease there, the tracts are in the hands of just one oil producer: Spain’s Repsol SA. Spokesmen for the company did not return requests for comment.

The news was a blow to political leaders in Alaska, which derives much of its revenue from oil development. The state’s governor, Bill Walker, an independent, said in a statement that it is "absolutely critical that we find safe and responsible opportunities to drill for more oil both onshore and offshore in Alaska."

Next Auction

It could be years -- if ever -- before oil companies get another chance to buy drilling rights in the region. The U.S. could turn around and resell the forfeited leases if any companies actually wanted to buy them, but the Interior Department canceled upcoming lease sales amid low industry interest last year.

The Interior Department is considering selling leases in the Beaufort Sea in 2020 and the Chukchi Sea two years later, but those auctions are far from certain, and environmentalists are pushing the Obama administration to rule them out entirely. Oceana’s LeVine said oil companies’ decision to forfeit Arctic drilling rights shows "there is no compelling reason to schedule new lease sales."

Cindy Shogan, executive director of the Alaska Wilderness League, said the lease forfeiture illustrates that "no oil company should drill in America’s Arctic Ocean" and should convince President Barack Obama to cancel potential sales there.

But he can go even further, said Representative Jared Huffman, a Democrat from California who has been leading congressional efforts against future Arctic drilling. To Huffman, the risk goes beyond oil spills to exacerbating climate change by locking in fossil fuel projects with decades-long production timelines. 

"This is really about aligning our energy decisions and policies with our climate change commitments and the imperative to take much bolder action to keep these fossil fuels in the ground," Huffman said.

Even beyond the U.S., there are strong headwinds discouraging oil companies from sending drill bits spinning below Arctic waters. Last month, Shell withdrew an application for a drilling license in Norway’s share of the Arctic Ocean.

The high costs of working in the area mean it is generally attractive only to large oil companies with big balance sheets. But evolving regulatory environments in the U.S. Arctic can discourage those businesses, said Richard Ranger, a senior policy analyst with the American Petroleum Institute.

"There are only so many companies that are going to be interested in the Arctic," he said by phone. "To the extent they are, they can look at other jurisdictions. With regulatory uncertainty and price uncertainty, you start looking at other opportunities -- and you re-rank what your longer term, more frontier prospects look like. That’s what’s happening."

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