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Interior Unveils New Rule For Offshore Arctic Drilling Via Floating Vessel

The Department of Interior (DOI) said Royal Dutch Shell plc's misfortunes in the Arctic served at least part of the basis for a new final rule governing offshore oil and gas exploration by floating vessels in the Beaufort and Chukchi seas. But critics say the new rule will hamper development by making it even more expensive to drill there.

On Thursday, two DOI agencies -- the Bureau of Ocean Energy Management (BOEM) and the Bureau of Safety and Environmental Enforcement (BSEE) -- announced revisions and new requirements for exploratory drilling and related operations on the Outer Continental Shelf (OCS). The final rule focuses exclusively on the OCS within the federal planning areas in the Beaufort and Chukchi seas.

The final rule creates a new regulatory program covering floating drilling vessels and jack-up rigs. Operators would be required to design exploration plans specifically tailored to the unique conditions of the Arctic OCS, and would also be required to submit an integrated operations plan to BOEM at least 90 days before filing an exploration plan.

Vessel operators would be required to deploy a second, separate rig near their project so that a relief well could be drilled in the event of a blowout. Operators would also be required to predict, track, report and respond to floating ice and adverse weather conditions; manage and oversee any third-party contractors; and be able to promptly deploy equipment and personnel to contain an oil spill.

"Conducting safe and environmentally responsible Arctic exploratory drilling operations presents a variety of technical, logistical and operational challenges," said BSEE Director Brian Salerno. "This rulemaking seeks to ensure that operators prepare for and conduct these operations in a manner that drives down risks and protects both offshore personnel and the pristine Arctic environment."

The rule will become effective 60 days after its publication in the Federal Register.

Shell's misadventure

DOI said the final rule was developed in part after studying "all issues identified by previous DOI reports regarding Shell's 2012 exploration activities in the Arctic." The department also said it would mesh with the Well Control Rule it released last April (see Daily GPIApril 14Dec. 1, 2015).

Last May, Shell abandoned all but one of its leases in the Chukchi and said it was evaluating its holdings in the Beaufort, citing an "unpredictable" regulatory environment and poor initial drilling results (see Daily GPI,May 11). Shell spent billions in the Arctic, but ultimately decided to pull out of the region after disappointing results from an exploratory well in the Chukchi in September 2015 (see Daily GPISept. 28, 2015).

The final rule appears to be a response to the Kulluk, Shell's offshore drilling unit that ran aground off the coast of Sitkalidak Island, AK, at the end of 2012 (see Daily GPI, May 29, 2015; Jan. 3, 2013). In March 2013, the DOI blasted Shell for inadequate oversight of its Arctic program, and the company put its drilling plans on hold (see Daily GPI, March 18, 2013). It did so again in May 2014, shortly after the ascension of Ben van Beurden as CEO, but three months later he touted the Arctic as a big potential opportunity for the company (see Daily GPI, Aug 4, 2014; May 20, 2014).

Mixed reaction

In a statement Thursday, Alaska Gov. Bill Walker said his administration would look at the rule carefully to determine how it would impact companies interested in exploring the Arctic.

"One risk profile does not fit all projects," Walker said. "Flexibility is necessary to accommodate different types of programs. After the time the DOI has spent on this regulatory package, I hope the [Obama] administration moves to expedite Chukchi and Beaufort lease sales."

U.S. Sen. Lisa Murkowski (R-AK), who chairs the Senate Energy and Natural Resources Committee, said she was also reviewing the rule "to determine whether the DOI took into account the substantive comments it received from Alaskans, including comments that were intended to resolve real defects in the draft proposal.

"What we know already is that one company [Shell] invested nearly $8 billion to complete just one well while operating under guidelines that inspired this rule -- which means it is hardly a recipe for successful production in the Arctic."

But Murkowski added that while the rule claims to increase safety and environmental protections, it "appears more likely" that the rule would discourage investment and development of the Arctic.

"This rule should be a positive sign for the [Obama] administration's willingness to offer new leases in the offshore Arctic, but instead it continues to hint toward an even more uncertain future for the regulatory regime in this region," Murkowski said. "I am dismayed by the regulatory onslaught the administration is launching on American energy production in its final days."

Alaska Oil and Gas Association CEO Kara Moriarty said the new rules "will only make it more difficult to invest in Alaska's world-class offshore resources...

"Unfortunately, in creating these cumbersome regulations, the federal government will cause our country to lag behind other nations moving ahead with Arctic development. Ironically, these same regulations will not encourage investment or protect the environment. Instead, they will only make it more difficult to entice companies back to the Arctic when oil prices rebound."

Thomas Pyle, president of the Institute for Energy Research, concurred.

"The Obama administration issues rule after rule under the guise of environmental protection or safety, but in reality their objective is to keep our resources in the ground," Pyle said. "This rule is no different, as it's designed to make the cost of doing business so expensive that companies can't economically produce our Arctic energy resources."

Environmental groups voiced their continued opposition to Arctic oil and gas development.

"The Sierra Club thanks the DOI for putting forth the strongest standards we have seen to date," said Athan Manuel, director of the Sierra Club's lands protection program. "However, no amount of safeguards or standards can ever make drilling safe, which is why we will continue our efforts to ensure that the Arctic Ocean and the Gulf of Mexico, like the Atlantic Ocean, are protected from the dangers of offshore drilling."

According to BOEM, the Beaufort and Chukchi combined hold an estimated 23.6 billion bbl of crude oil and 104.4 Tcf of natural gas. Separately, the Beaufort is estimated to hold 8.2 billion bbl of oil and 27.64 Tcf of gas, while the Chukchi holds an estimated 15.38 billion bbl and 76.77 Tcf.

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