Daily GPI / NGI The Weekly Gas Market Report

Shell Surrenders 'All But One' Lease in Alaska's Chukchi, Evaluates Beaufort

After spending billions and waging legal battles for years, Royal Dutch Shell plc is abandoning all but one leasehold in Alaska's Chukchi Sea and is evaluating its Beaufort Sea holdings, citing an "unpredictable" regulatory environment and poor initial drilling results. ConocoPhillips and two other operators also have dropped hundreds of leaseholds in the frigid waters.

The actions came as dozens of companies have been abandoning high cost plays on and offshore in a low oil and gas price environment. The dropping of the long term projects in Alaska and the Gulf of Mexico indicate producers’ belief that lower prices will prevail for some time.

Shell, ConocoPhillips, Italy's Eni SpA and Iona Energy Inc. decided before the May 1 federal deadline to relinquish an estimated 350 leases in the Chukchi Sea, which cover an estimated 2.2 million acres of drilling rights. Maintaining the leases would have required payments to the Department of Interior. All of the leasehold could be auctioned in the future.

"After extensive consideration and evaluation, Shell will relinquish all but one of its federal offshore leases in Alaska's Chukchi Sea," spokesman Curtis Smith told NGI.

"Separate evaluations are underway for our federal offshore leases in the Beaufort Sea. This action is consistent with our earlier decision not to explore offshore Alaska for the foreseeable future," following disappointing initial drilling results at the Burger J well last summer "and the high costs associated with the project," he added (see Daily GPI, Sept. 28, 2015).

"While we support regulations that enforce high safety and environmental standards, the unpredictable federal regulatory environment for the Alaska Outer Continental Shelf also made it difficult to operate efficiently," Smith said. Shell plans to remove the remaining equipment from the Alaska drilling sites this summer.

As to whether Shell may bid for the right to drill offshore Alaska in the future, he did not say.

"We continue to believe offshore Alaska and the broader Arctic have strong exploration potential and are areas that could ultimately be important sources of energy to the State of Alaska, the United States, and the world," Smith said.

According to environmental group Oceana, which initially revealed that the leases had been relinquished, about 80% of the abandoned acreage was part of the long disputed 2008 Interior auction, when Shell was the high bidder for most of the blocks offered (see Daily GPIFeb. 8, 2008). Following years of legal wrangling, that lease sale was upheld last year by the Obama administration, and Shell had said then it was poised for development (see Daily GPIMarch 31, 2015).

ConocoPhillips had scuttled its inaugural Chukchi exploration plans in 2013 and has not announced any other developments since (see Daily GPIApril 11, 2013).

"The documents show that Shell has relinquished more than 150 of its leases," Oceana noted. "Together, the four companies will give up more than 350 leases, encompassing more than two million acres." Statoil ASA, which acquired 16 leases in the 2008 auction, last year dropped the entire leasehold, citing Shell's poor drilling results (see Daily GPINov. 17, 2015). Total SA also has abandoned its Alaska offshore leases.

Last fall Interior canceled two Alaska offshore lease sales scheduled for 2016 and 2017 citing "low industry interest" (see Daily GPIOct. 19, 2015).

"In light of Shell's announcement, the amount of acreage already under lease and current market conditions, it does not make sense to prepare for lease sales in the Arctic in the next year and a half," Interior Secretary Sally Jewell said last October.

The decision by more producers to abandon drilling in Alaskan waters is "an important step closer to a sustainable future for the Arctic Ocean," Oceana Pacific senior counsel Michael LeVine said. "After spending more than a decade and billions of dollars, even Shell has had to recognize that offshore oil exploration in the Arctic is not worth the environmental or economic risks...

"The best way forward is for the government to remove the Chukchi and Beaufort seas from the 2017-2022 five-year program," LeVine said, citing Interior's proposed program.

As currently proposed, the five-year Outer Continental Shelf oil and gas leasing program would include 13 potential lease sales: 10 in the Gulf of Mexico and three in offshore Alaska -- one each in the Cook Inlet, the Beaufort and the Chukchi (see Daily GPIMarch 15).

The Alaska Department of Natural Resources said earlier this month no companies bid in the most recent auction for Cook Inlet or Alaska Peninsula leaseholds, marking the first time in state history that there were no bidders for the inlet (see Daily GPI, May 6).

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