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Page added on May 10, 2016
Big Oil Abandons $2.5 Billion in U.S. Arctic Drilling Rights
After plunking down more than $2.5 billion for drilling rights in U.S. Arctic waters, Royal Dutch Shell, 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 slash 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 dozens 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.
Stopping Appeals
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 lease 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 rash of relinquishments means “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.
Next Auction
It could be years — if ever — before oil companies get another chance to buy drilling rights in the region. The United States 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.”
Even beyond the United States, 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.
16 Comments on "Big Oil Abandons $2.5 Billion in U.S. Arctic Drilling Rights"
rockman on Tue, 10th May 2016 7:24 am
FYI – President Obama cannot prevent future lease sales in the Arctic or anywhere else. All he can do is cancel those currently planned. A future POTUS can reschedule them anytime he chooses.
Will there be future Arctic lease sales? One might hope but can’t predict. But future high oil prices/supply disruptions will greatly increase the potential.
makati1 on Tue, 10th May 2016 7:30 am
$RO$I … High prices will kill the economies of the world so high oil prices will not last as long as it take to post them. Definitely not long enough to develop any new sources.
Oily engineers should cash in and buy farm land while they still can. It is definitely NOT a career field to be starting out in.
PracticalMaina on Tue, 10th May 2016 8:43 am
I hope Exxon-Mobil lost money on it. After all, they wont invest in renewables because they are not in the business of losing money. jackasses
Kenz300 on Tue, 10th May 2016 9:10 am
The oil companies and the auto companies need to get their collective heads out of the sand and realize that the world is changing with or without them. Climate Change is real….. it will impact all of us…
It is time to move away from fossil fuels and embrace alternative energy sources like wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste. They need to change their business models and move from being OIL companies to ENERGY companies. The auto industry needs to move from just building compliance vehicles to embracing electric vehicles and start putting development and advertising behind them..
The world is moving to embrace alternative energy sources…….. the fossil fuel companies can transform themselves into “energy” companies or they can die a slow death. As Climate Change impacts more people there will be a bigger backlash against fossil fuels.
Kenz300 on Tue, 10th May 2016 9:13 am
New Documents Show Oil Industry Even More Evil Than We Thought
http://www.huffingtonpost.com/entry/oil-cover-up-climate_us_570e98bbe4b0ffa5937df6ce
Climate Change is real….. we will all be impacted by it.
Oil Giants Spend $115 Million A Year To Oppose Climate Policy
http://www.huffingtonpost.com/entry/oil-companies-climate-policy_us_570bb841e4b0142232496d97
shortonoil on Tue, 10th May 2016 11:34 am
$2.5 billion? How do you say stranded capital?
Only $49 trillion to go!
They’ll take out 39 over the next decade.
markisha on Tue, 10th May 2016 11:42 am
the beginning of the end
rockman on Tue, 10th May 2016 12:10 pm
m – The beginning of the end started when Col. Drake drilled that first oil well over 100 years. We’ve always been heading in that direction. The only uncertainty was how long it was going to take us to get there. LOL.
dave thompson on Tue, 10th May 2016 12:20 pm
Arctic drilling exploration and exploitation foiled by nature. This is only the beginning of the realities of the laws of physics.
Anonymous on Tue, 10th May 2016 12:53 pm
Whatever ‘losses’ the criminal uS oil corps took, the uS gov will re-imburse them fully. Either through a tax-write off, a direct cash xfer, or some other dodgy administrative paper shuffling. Either way, big uSoil wont suffer a dime in losses. At worst, they took a loss on *potential* future cash flow.
Davy on Tue, 10th May 2016 1:12 pm
“These Are The 8 Triggers For A New Financial Crisis”
http://www.zerohedge.com/news/2016-05-09/these-are-8-triggers-new-financial-crisis
“The second potential trigger may be debt markets. Heavily indebted energy companies and emerging market borrowers face increased risk of financial distress.
According to the Bank of International Settlements, total borrowing by the global oil and gas industry reached US$2.5 trillion in 2014, up 250 percent from US$1 trillion in 2008.
The initial stress will be focused in the US shale oil and gas industry which is highly levered with borrowings that are over three times gross operating profits. Many firms were cash flow negative even when prices were high, needing to constantly raise capital to sink new wells to maintain production. If the firms have difficulty meeting existing commitments, then decreased available funding and higher costs will create a toxic negative spiral.
A number of large emerging market borrowers, such as Brazil’s Petrobras, Mexico’s Pemex and Russia’s Gazprom and Rosneft, are also vulnerable. These companies increased leverage in recent years, in part due to low interest rates to finance significant operational expansion on the assumption of high oil prices.
These borrowers have, in recent years, used capital markets rather than bank loans to raise funds, cashing in on demand from yield hungry investors. Since 2009, Petrobras, Pemex and Gazprom (along with its eponymous bank) have issued US$140 billion in debt. Petrobras alone has US$170 billion in outstanding debt. Russian companies such as Gazprom, Rosneft and major banks have sold US$244 billion of bonds. The risk of contagion is high as institutional and retail bond investors worldwide are expose.”
“A sixth potential trigger may be weakness in global economic activity. One factor will be the weaker energy sector. The belief that lower oil prices will lead to an increase in growth may be misplaced, with the problems of producers offsetting the benefits for consumers. Approximately US$1 trillion of new investment may be uneconomic at lower oil prices, especially if they continue for an extended period of time. When combined with the reduction in planned investment in other resource sectors as a result of lower prices, the effect on economies will be significant.
There are also increasing problems in emerging markets. Growth is slowing as a result of slower export demand from developed markets, unsustainable debt and unaddressed structural weaknesses. For commodity producing nations, lower revenues will weaken economic performance triggering a rerating. The problems will spread across emerging markets.”
Roger on Tue, 10th May 2016 6:30 pm
Pray they restart exploration soon. Peak (conventional) oil is long passed (around 2006 per EIA). Demand is increasing…and the shale boom is done (not to be repeated, quite so dramatically ever again). Our only hope is the electric car…but, I’d rather bet on Shell than Tesla; much better track record.
makati1 on Tue, 10th May 2016 6:38 pm
Roger, what planet do you live on? Or is this sarcasm? I know it is not the one we call “Earth”.
Truth Has A Liberal Bias on Tue, 10th May 2016 7:36 pm
@Roger- Tesla? It seems to me you think that being able to drive around in a vehicle will solve all your problems. Your future problems will be bigger than not being able to drive around in a vehicle. It seems odd to me that most people seem to think that alternate transportation arrangements will prevent the collapse of industrial civilization once the energy well starts drying up. I for one think Saudi Arabia is doomed. Are you suggesting that if we send them a bunch of EVs they’ll manage to get by? Hell, let’s send a bunch of EVs to Syria and maybe they’ll all stop fighting eh Roger?
Kenz300 on Wed, 11th May 2016 10:55 am
The world is in transition away from fossil fuels…….
It has no choice……..the effects of Climate Change will impact all of us…………..
Kenz300 on Wed, 11th May 2016 10:55 am
Electric cars, bikes and mass transit are the future…..fossil fuel ICE cars are the past…………..
Think teen agers vs your grand father…………………. cell phones vs land lines…….
NO EMISSIONS……..climate change is real………
Save money……no stopping at gas stations…..no oil changes……..less overall maintenance……