Shell Asks for Extension on Arctic Leases

Shell Asks for Extension on Arctic Leases

Royal Dutch Shell Petroleum has requested the Bureau of Ocean Energy Management (BOEM) to extend its Arctic offshore leases through a “suspension of operations” order. The oil giant is near the end of some of its ten years leases of ocean tracts in the Alaskan Beaufort and Chukchi Seas initially leased in 2008. The company has requested the five year extension stating the inability to drill for oil over the past 6 years was due to reasons beyond its control. One of the biggest uncertainties being a ruling this year by the courts that the BOEM had not completed a proper environmental assessment when announcing the original lease sale. The lease sale itself becomes in jeopardy of legality and any operations become possibly subject to suspension. The BOEM along with its sister Bureau of Safety and Environmental Enforcement that have the authority to grant or influence extensions to leases. Added time would allow Shell to weather the leasing time delay caused by the BOEM lawsuit. Lease time lost by lawsuits between the BOEM and environmental groups should not be the fault nor a time cost to Shell.

To date Shell has spent $2.2bn on the initial lease sale followed by $4bn over the past 6 years in preparing to drill on its leases. In 2012 Shell was only allowed to drill two top-hole wells down to 1000’ deliberately shallow of any oil bearing rock. Regulatory uncertainty, environmental lawsuits, construction time to build required ships to go to the Arctic, and an extremely regulated and restricted drilling window of just over two months a year has hampered the efforts of Shell to drill. No other oil company is currently exploring in the Arctic seas yet oil majors Statoil and ConocoPhillips both have leases there.

Leasers of federal or state land whether for oil and gas extraction, mining, or timber harvesting have obligations to attempt to produce natural resources from their leases. Leases can be extended or even repealed due to external situations such as lawsuit delays, study delays, and political ideology of the governing administration. The process to work a lease is by itself very long winded. It entails conducting multiyear environmental impact studies, conducting preliminary seismic shoots, and construction feasibility studies to submit as development plans to multiple federal agencies. Federal administrative offices must then review the plans and often conduct their own studies to allow the lease development to take place. This process takes years and costs millions of dollars in administrative staff time both privately and publically. Construction and leasing of regulation grade equipment begins next and this all must adhere to regulated seasonal operational windows. Throughout the entire federal and state permitting and preparation process development companies and agencies issuing permits are subject to lawsuits by environmental groups that potentially completely derail project timelines and delay production beyond lease timelines. Since the 2008 Lease Sale 198 Shell has been subject to all of the above; delayed by needs to construct new equipment due to changing regulation, awaiting lawsuits both to itself and the BOEM, and ice delays reducing its operations window on the one year they did manage to drill. Shell, to date, has not been permitted to drill down to oil bearing rock.

Shell has already applied to drill in the 2015 season (August-October 2015) and has secured the operation of two offshore rigs required by law. It constructed a containment barge and emergency bell cover for its wells and will begin the administrative process of leasing and marshalling its production flotilla for initial move to the Aleutian Islands town of Dutch Harbor mid next year. This doesn’t guarantee activity though as the drilling window allowed from August to October is subject to ice free water.