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Vol. 15, No. 14 Week of April 04, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

OCS decision out

DOI upholds 2008 Chukchi sale but defers further Arctic leasing to 2012

Alan Bailey

Petroleum News

On March 31, in a landmark U.S. energy policy statement, President Obama and Interior Secretary Ken Salazar announced continued support for U.S. oil and gas development alongside the Obama administration’s push towards the increased use of renewable energy sources.

Given the need to sustain economic growth, create jobs and maintain business competitiveness the United States will need to continue to harness traditional sources of fuel at the same time as the country ramps up new sources of domestic, renewable energy, Obama told military personnel at Andrews Air Force Base. Consequently, the U.S. Department of the Interior will expand the opportunities for offshore oil and gas exploration while also balancing energy development with environmental protection, he said.

Support for exploration

One immediate upshot of this policy position is continuing support for oil and gas exploration in federal oil and gas leases already issued on the outer continental shelf of the Chukchi and Beaufort seas, with that support perhaps already flagged by the U.S. Minerals Management Service’s relatively recent approval Shell’s plans for 2010 exploratory drilling in both of these seas.

And, within its 2007-12 OCS lease sale program, MMS will go ahead with a planned lease sale on the federal OCS in Alaska’s Cook Inlet, as well as scheduling new lease sales in the eastern Gulf of Mexico and off the coast of Virginia. In addition, the Department of the Interior plans to include the Gulf of Mexico, much of the Atlantic OCS, the Chukchi Sea and the Beaufort Sea within the potential scope of the next OCS lease sale program, slated for 2012-17.

On the other hand, DOI has removed the remaining planned Chukchi Sea and Beaufort Sea lease sales from the 2007-12 lease sale program, citing the need for time for more scientific research into environmental and oil spill response issues prior to embarking on another round of leasing in these areas. The president has withdrawn the Bristol Bay area from future oil and gas leasing, and MMS will not include the California OCS within the scope of lease sale programs in the foreseeable future.

Scientific basis

Obama said that the lease sale program proposals reflect a reliance on scientific evidence rather than political ideology in the balance between energy development needs and environmental protection.

“That’s why my administration will consider potential areas for development in the mid- and south-Atlantic and the Gulf of Mexico, while studying and protecting sensitive areas in the Arctic,” Obama said. “That’s why we’ll continue to support development of leased areas off the North Slope of Alaska while protecting Alaska’s Bristol Bay.”

“By responsibly expanding conventional energy development and exploration here at home we can strengthen our energy security, create jobs and help rebuild our economy,” said Salazar. “Our strategy calls for developing new areas offshore, exploring frontier areas and protecting places that are too special to drill. By providing order and certainty to offshore exploration and development and ensuring we are drilling in the right ways and the right places, we are opening a new chapter for balanced and responsible oil and gas development here at home.”

However, Interior will gather scientific information, conduct environmental reviews and hold public meetings before deciding on exactly which OCS areas to eventually include in the upcoming 2012-17 lease sale program.

“The scoping process for the 2012-2017 program will provide opportunities to hear from local communities who depend on tourism, tribes whose livelihoods depend on the sea and scientists who can tell us where the risks of development are simply too great and which areas are just too sensitive to drill,” Salazar said.

Itta relieved

Mayor Edward Itta of the North Slope Borough, whose call of “too much, too soon, too fast” in response to Shell’s initial fast-track approach to OCS exploration has for several years summed up some of the concerns of North Slope communities, expressed a sense of relief at the deferral of further Chukchi Sea and Beaufort Sea lease sales to at least 2012.

“I’m sensitive to our need as a state to develop our resources and I’m concerned that we get it right,” Itta said in a March 31 statement. “When Interior Secretary Salazar came to Alaska last year, he talked about the importance of balancing energy exploration and community concerns in the Arctic Ocean. When I met with him a month ago in Washington, we talked again about finding this balance. I think today’s announcement achieves that goal by allowing exploration of existing leases and also creating what amounts to a pause in new leasing until we have a better understanding of the impacts and the appropriate standards to use in that fragile habitat.”

But environmental organizations are a good deal less supportive of the Obama administration’s newly stated position.

Pacific Environmental, for example, accused the administration of double standards, saying that the administration’s actions do not match Secretary Salazar’s statements about now being the time for major changes in U.S. energy policy.

“While postponing some lease sales in the Arctic is a step in the right direction, allowing high-risk drilling plans and the illegal transfer of millions of acres of public resources to stand is an affront to ecological common sense in a rapidly melting Arctic and an insult to the traditional subsistence communities of Alaska,” said Carole Holley, Pacific Environmental’s Alaska program director.

“We look forward to working with the Department of Interior to ensure that the Inupiat people’s subsistence way of life is protected and that no drilling will occur until proven technology exists to clean up oil spills in the Arctic’s harsh and icy conditions,” said Cindy Shogan, executive director of the Alaska Wilderness League. “… For the same reasons that it makes sense for Obama and Salazar to commit to sound science in the Arctic before any potential new leasing, as they appear ready to do today, we believe it makes sense to hold off drilling on these Chukchi leases. We will rely on our existing litigation for that result.”

Point Hope opposition

And the Native tribe for the Chukchi Sea coastal village of Point Hope expressed its continued opposition to Chukchi Sea oil and gas development.

“The proposed oil and gas activities affect the very foundations of who we are as individuals and as a people” said Caroline Cannon, president of the Native Village of Point Hope. “We have a right to life, to physical integrity, to security and the right to enjoy the benefits of our culture. … The industry should not have greater rights than we do just because they worked with the Bush administration to manipulate the process and paid money for leases in the Chukchi Sea.”

But Rep. Don Young, Alaska’s sole member in the U.S. House of Representatives, expressed a diametrically different perspective, slamming the Obama administration’s unwillingness to move ahead rapidly with oil and gas leasing in areas such as the California OCS.

“While I appreciate the president’s seeming departure from his extreme environmental left supporters, all I’m seeing in this exploration ‘plan’ is smoke and mirrors,” Young said. “The president is saying all of the right things but actions speak much louder than words, and this new ‘plan’ is just a continuation of this administration’s inaction on making the United States energy independent. … This plan closes more than it opens, and is a complete farce. There is no question that this ‘Obama moratorium’ will have dire impacts on the economic future of our country.”

Alaska’s two U.S. senators were more supportive in their comments.

“I appreciate the department’s decision to allow valid existing rights to explore Alaska’s huge offshore oil and gas reserves to go ahead,” said Sen. Lisa Murkowski. “I will work with the administration on proceeding with important future lease sales off Alaska’s coast, as well as along the Atlantic coast and the eastern Gulf of Mexico.”

“Alaska’s energy companies should be pleased with the green light from the Obama administration to proceed towards oil and gas development in the Chukchi and Beaufort Seas under the current lease schedule,” said Sen. Mark Begich. “As the site of the world’s largest salmon fishery, the president’s proposal to curtail oil and gas development in Bristol Bay makes sense. I commend the Obama administration, and especially Interior Secretary Ken Salazar, for reaching out to Alaskans and incorporating our recommendations in today’s decision.”

Gov. Sean Parnell expressed concern about how the Obama administration’s strategy might work out in Alaska.

“Although the plan calls for expanded leasing in the Lower 48 offshore areas, uncertainty remains about the future of OCS leasing in Alaska, particularly in the Chukchi and Beaufort Seas during the 2012-17 leasing period,” Parnell said. “Few areas of the United States possess the potential of Alaska’s northern OCS areas: an estimated 25 billion barrels of oil and 120 trillion cubic feet of natural gas.”

Shell appreciates support

Shell, the company that has been spearheading industry efforts to open the Beaufort and Chukchi Seas for oil and gas development, expressed its appreciation for the administration’s support for the company’s OCS drilling plans. The Obama administration’s continuing effort to deal with the nation’s energy situation acknowledges that oil and gas needs to play an important role along with other energy sources, Peter Slaiby, Shell’s Alaska general manager, told Petroleum News March 31.

“It’s a good day for us. … We’ve got a lot invested in this,” Slaiby said, referring to the years of effort and massive financial investment that Shell has already plowed into its Alaska OCS venture.

On the one hand it is important to move forward with offshore drilling, to find and develop commercial quantities of hydrocarbons, while on the other hand baseline environmental studies will continue, augmenting the hundreds of millions of dollars that government and industry have already spent gaining a better understanding of the Arctic OCS, he said.

“The other thing is we’re going to have to go out there and deliver now and we’re going to have to deliver a program that’s really going to get people confident that we can have this type of opportunity and that we can deliver safely as we’ve done in the past,” Slaiby said. “… We’re confident we’re going to go out there and do the right thing.”

ConocoPhillips, another major Chukchi Sea leaseholder, has placed the Chukchi Sea at the top of its Alaska exploration priority list.

“Our understanding is that the president’s announcement means exploration and development of existing Chukchi leases can proceed,” ConocoPhillips spokesman Charlie Rowton told Petroleum News April 1. “ConocoPhillips along with other Chukchi Sea leaseholders has also invested tens of millions of dollars on pre-drill and environmental studies, working with universities, research institutions and local stakeholders on a multi-year program collecting biological, oceanographic and air quality data in the Chukchi Sea. We are taking a measured and responsible approach to prepare for our initial exploration well in the Chukchi Sea, which is now planned for summer of 2012.”

Remaining uncertainty

But the March 31 announcement by President Obama and Secretary Salazar does not entirely remove the uncertainty surrounding the Chukchi Sea leases in which Shell and ConocoPhillips plan to drill. In April 2009 the United States Court of Appeals for the District of Columbia upheld an appeal against the MMS 2007-12 lease sale program that included the 2008 Chukchi Sea lease sale in which Shell and ConocoPhillips purchased their leases. The court subsequently required MMS to rework its environmental analysis for the Alaska OCS.

MMS has now completed that environmental rework and, in parallel with the March 31 OCS lease sale strategy announcement, the Department of the Interior filed with the D.C. court a revised version of the lease sale program, affirming the 2008 Chukchi Sea lease sale. The revised program now needs to go through a 30-day public review period before a final DOI decision on the program, at which point the agency will presumably ask the D.C. court to reconsider its 2009 ruling.

There is also a separate appeal in the U.S. District Court for the District of Alaska against the 2008 Chukchi Sea lease sale and the judge in that case has yet to hear oral arguments. And in the U.S. Court of Appeals for the 9th Circuit the Native Village of Point Hope and several environmental organizations have appealed the MMS approval of Shell’s Chukchi Sea exploration plan for 2010, while in the same court environmental organizations have appealed the approval of Shell’s Beaufort Sea exploration plan.

And Shell has been waiting for some remaining government approvals that it needs before deploying its drilling fleet for the 2010 open water season. On April 1 the U.S. Environmental Protection Agency issued the air quality permit for Shell’s Chukchi Sea drilling but the company still needs the air quality permit for its Beaufort Sea operation.

The company has been working toward mobilizing for its planned 2010 drilling, while keeping an eye on some milestone dates for mobilization, Slaiby said.

“As it sits right now we are planning on mobilizing for 2010,” he said.

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Key Alaska changes in lease sale program

On March 31, in parallel with a major statement by President Obama and Interior Secretary Ken Salazar on the Obama administration’s strategy for outer continental shelf oil and gas leasing, the Department of the Interior filed a preliminary revised U.S. Minerals Management Service 2007-12 outer continental shelf lease sale program with the United States Court of Appeals for the District of Columbia. Proposed changes in that program represent Interior’s response to an April 2009 court ruling that the assessment of environmental sensitivities in the original program was inadequate.

And the new program underpins several components of the Obama administration’s newly announced strategy for OCS leasing.

The revised lease sale program contains a substantially altered assessment of the environmental sensitivity and marine productivity of the lease sale areas. And some key points relating to Alaska in the revised program are:

• A finding that although the Gulf of Mexico is the primary OCS area for the development of new U.S. oil and gas resources, exploration in frontier areas such as the Arctic OCS is needed to meet U.S. oil and gas demand. Consequently, exploration should proceed in leases issued in the 2008 Chukchi Sea lease sale. This Chukchi Sea exploration, together with planned exploration in existing Beaufort Sea OCS leases, will provide valuable data to inform decision making for future Arctic activities.

• A finding that industry already holds many leases for oil and gas exploration in the Chukchi and Beaufort seas. So, with these areas especially susceptible to the effects of climate change and with studies in progress into how to respond more quickly to offshore oil spills, further lease sales in these areas should be removed from the 2007-12 lease sale program, thus allowing time for an informed decision regarding the potential inclusion of these areas in the upcoming 2012-17 program.

• The removal of the North Aleutian basin (Bristol Bay) area from the lease sale program, primarily because of important fisheries in the area and also because of the proximity of several national monuments and preserves (President Obama also issued a March 31 memorandum formally withdrawing the Bristol Bay area from any future oil and gas leasing).

The preliminary revised 2007-12 OCS lease sale program will now go through a 30-day public review period before DOI makes a final decision on the program and submits its final version of the program to the court.

—Alan Bailey