Obama OCS Plan on Alaska a Non-Starter

Obama OCS Plan on Alaska a Non-Starter

The Bureau of Ocean Energy Management released its 2017-2022 Outer Continental Shelf (OCS) lease plan which included three possible lease sales for Alaska.  The Proposed Program represents the third major step in a multi-year five step process forming the national OCS 5 year plans.  The release of the plan starts a 90 day public comment period ending June 16.  After review of these comments the BOEM will release the final OCS lease program to be approved by Congress and the President. The new 2017 five year plan will take effect August 27, 2017.

Alaska’s OCS areas included in the plan are potential sales in the Chukchi Sea in 2022, in Cook Inlet in 2021, and in the Beaufort Sea in 2020.  The scheduling of the sales late in the 5 year term was excused by the BOEM to allow sufficient study on the impact of operations as well as analysis of prior operations.  This is an odd excuse given the years of study conducted by numerous agencies and the industry to comply with the current lease Proposed Program.  Governor Walker of Alaska has asked the agency to consider expediting the Beaufort sale to 2019 which is now officially an option the agency has offered.  All lease program proposals have two official options: to hold the sale offering lease areas based on BOEM analysis of potential discovery, industry bids and response, environmental consideration, and social and economic impact; or to have “no sale”, again based on BOEM analysis and public response during comment period.  As an example of the “no sale” option the Secretary of Interior has cancelled lease sales in Alaska for 2016 and 2017 despite inclusion in the current 5 year plan by BOEM.

Alaska and the Obama Administration have had an extremely contentious relationship over oil and gas production and exploration within the state both onshore and off.  Within the realm of OCS only the Chukchi, Beaufort and Cook Inlet areas representing less than a third of all Alaskan waters are offered for exploration.  Within those areas large swaths have been set off limits by the BOEM for debatable environmental reasons.  Further the windows allowed for operations during the year have, in the arctic, been reduced to less than two months and factored on ice conditions further limiting potential operations time.  In the Chukchi and Beaufort areas limitations of 15 miles between rigs are in place making exploration highly limited.  All of these BOEM induced restrictions coupled with the uncertainties of actually even holding a sale have proved too much for the industry majors. 

In the end all operators have pulled up stakes.  Current five year plan Arctic lease holders ConocoPhillips, Stat Oil, and Shell stated their decisions to not develop existing leases were primarily due to regulatory uncertainty and overbearing restrictions.  Despite the millions and billions spent by each company for their leases only Shell ever went ahead with development and was only able to complete a single well. 

The amount of money needed to complete any OCS operation is measured in billions of dollars and decades of time with no success guaranteed.  For any company this sort of financial risk must be offset by government certainty of set regulations and assurances of sales definitely taking place.  The Obama administration has systematically provided neither.  A history of changing regulation over the last 10 years with more and more expensive operational requirements have increased the cost of operations and shortened the exploration windows down to uneconomic and operationally impossible limits.  The simple fact that the lead time needed to build equipment, or to complete studies required by new regulations has meant operational windows simply could not be met by the industry.

Perhaps the ultimate slap in the face has come with cancelation of lease sales outright.  Companies spend millions analyzing and planning for lease bids over years, only to have sales canceled with no warning.  As an example the Secretary of Interior announced at the 2017 Proposed Program reveal that the entire East Coast of America would no longer be included in the 5 year plan after two years of stating that it would. For any company that had studied the area for the past five years, their expense, thus, was for naught.

The new 5 year OCS Proposed Program for Alaska may indeed be the beginning of the end for the state.  Given the cost of completing operations far offshore it is unlikely any smaller “independent” oil producers would be able to afford OCS arctic operations.  This coupled with the abandonment by Shell, Connoco and Stat Oil of the current five year plan, means it is likely few will show interest in 2017-2022. For Alaska this may be its death knell. The Trans Alaska Pipeline System (TAPS), the lifeblood of the State of Alaska providing 92% of its operating budget, is 1/4 full and falling.  The State had high hopes the majors could produce from the arctic OCS in the current 5 year plan to fill the pipe and stem the decline.  With little new onshore production and the high prospective OCS areas being left fallow TAPS throughput may come dangerously close to shutdown.  With decade long lead times for such major production projects as any in the arctic OCS would be, the realism and consequence of TAPS shutdown becomes apparent. 

What should be done? 

The BOEM needs to offer a final set of economically and practically realistic regulations and requirements for companies to follow for exploration.  Current regulations are too restrictive in time, operation and equipment to allow practical, or economic exploration.  The BOEM needs to offer assurances those regulations wont change during the time of a lease.  The Secretary of Interior must assure that lease sales will take place as planned and that no unnecessary restrictions are put on areas of operation.   The EIS process needs to be reformed and litigation restricted.  Current EIS studies have far too broad study requirements requiring even study in areas hundreds of miles away from development.  Their complexity requires too long and expensive study that is often unnecessary and the target of frivolous environmental litigation.   Environmental regulation on operations restricting disturbance and distances of operation from wildlife are too extreme and often in place at times when animals are not present.  These should be changed.  Sadly it can be said that in comparison to Lower 48 rules on operation much current Alaskan environmental regulation has been forced on the state by agenda based environmentalist controlled Administration officials put in place solely to hinder operations and show no actual impact on wildlife wellbeing.  Lastly litigation against both the administration and the industry must be limited by law as lawsuits are used by environmental groups purely to stymie both the Administration and industry from completely their work in a timely  manor.