Shell Seeks to Preserve U.S. Drilling Rights in Arctic Ocean

Updated on
  • Oil company files appeal challenging rejection by Interior
  • Clock now ticking on oil and gas leases expiring in 2020

Royal Dutch Shell Plc is fighting to preserve U.S. drilling rights in Arctic waters three months after halting exploration indefinitely there because it failed to find meaningful oil or natural gas deposits.

Europe’s largest oil company filed a notice of appeal Tuesday challenging the U.S. Interior Department’s Oct. 29 rejection of the company’s requests to stop the clock on Arctic oil and gas leases that otherwise expire between 2017 and 2020. The dispute is expected to undergo an administrative review by the Interior Board of Land Appeals, possibly delaying a final judgment until after a new U.S. president takes office.

“We believe suspensions are warranted for reasons outlined in our original request,” Shell spokesman Curtis Smith said. “The appeal does not affect our recent decision to stop exploration offshore Alaska for the foreseeable future.”

Shell’s request comes as other companies have abandoned Arctic oil exploration that is bitterly opposed by Greenpeace, Oceana, Sierra Club and other environmental groups that say the drilling risks damaging a fragile ecosystem. The Obama administration also has backed away from selling new leases and canceled two planned auctions, citing low industry interest.

Shell said in October it was considering options “to protect the remaining value of our assets and leases" in the Chukchi and Beaufort seas north of Alaska. Chief Executive Officer Ben van Beurden told reporters that Shell has other prospects in the region, though disappointing results at a critical test well condemned the company’s Burger project, a Chukchi Sea site where it drilled for oil last summer.

Statoil, ConocoPhillips

Norwegian oil company Statoil ASA last month said it would abandon 16 solely held leases in the U.S. Arctic and relinquish its stake in 50 others it held in partnership with ConocoPhillips.

ConocoPhillips, meanwhile, has asked the Interior Board of Land Appeals to consider suspending its own leases-- and effectively extend their life -- after the agency’s Bureau of Safety and Environmental Enforcement rejected the request. That appeal is stayed while settlement talks are under way.

In general, leases expire at the end of their terms unless operators are "conducting operations" such as drilling, reworking wells or producing oil and gas. Federal law does not give the Interior Department authority to issue blanket extensions and requires companies to lay out a specific plan for drilling and developing leased acreage in order to get more time.

Rules & Regulations

Shell argued in its 2014 request that "circumstances beyond its control" prevented exploratory drilling on its leases, citing regulations that restrict operations, the limited availability of Arctic-viable rigs and uncertainty about new federal rules for drilling in the region. In denying Shell’s request for more time, the safety bureau said the company should have anticipated "the rigorous regulatory environment" governing exploratory oil drilling in the Arctic.

"Shell bought their leases under certain conditions, and they knew they had 10 years," said Susan Murray, a deputy vice president of the conservation group Oceana. "For them to try to change that mid-game is not fair play."

Holding on to the territory is not without costs. Companies pay escalating annual rents for their offshore oil and gas leases. An analysis by Oceana suggests ConocoPhillips would have to pay an estimated $9.6 million between now and May 1, 2020, to hold on to its 61 leases in the Chukchi Sea. For Shell, which has 275 Chukchi Sea leases, the tab would be about $43 million. The estimates do not account for small variations tied to different effective dates for some leases.

‘Limited Places’

By holding on to its leases and fighting to extend them, Shell is seeking to preserve its options for the future in an area estimated to hold 27 billion barrels of oil and 132 trillion cubic feet of natural gas.

"There are limited numbers of places in the world left to drill, and as those get smaller and smaller, companies are going to try to jump on the paces that have the potential," Murray said. "That an oil company would want to retain the option to pursue that is not unheard of."

With Statoil’s exit, seven companies now hold drilling rights in the Chukchi Sea, including Eni Petroleum Co., Iona Energy Co., OOGC America LLC and Repsol SA. Shell is the only one to have actively explored its holdings there, by drilling the initial part of a well in 2012 and boring another well last summer.

Shell’s recent Arctic exploration used floating rigs 70 miles off the coast of Alaska in the Chukchi Sea. The company’s holdings also include tracts in the neighboring Beaufort Sea, where energy companies have relied mostly on man-made islands to hunt for oil and gas reserves and produce them. Hilcorp Alaska LLC is asking federal regulators for permission to build a 23-acre gravel island in the Beaufort Sea and use it to support drilling five or more wells.

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