U.S. to Open More of the Arctic Ocean to Exploration as Part of 5-Year Drilling Plan

By Kathrin Keil While Shell is preparing for the start of its drilling activities in the Alaskan Arctic in July 2012, US policymakers are already outlining plans for the post-2012 development of hydrocarbons in their Arctic waters. 

On 26 June 2012 
Ken Salazar announced the ‘Five Year Outer Continental Shelf Oil and Gas Leasing Program’, at the Norway Arctic Roundtable in Trondheim, Norway, which will open more of the Arctic Ocean to exploration. Chukchi Sea leases are scheduled to open in 2016, and Beaufort Sea leases one year later. Until then, the waiting period shall be used to “gather information from industry, Native Alaskan communities, the scientific community, and the public to identify specific high-resource, low-conflict areas that are best suited for exploration and development.” The leases are intended to be part of the “all of the above” energy strategy to expand US energy production that President Obama recently announced.

Mr. Salazar emphasized the novelty of the approach, from a "one-size-fits-all" to a "targeted leasing" approach, i.e. singling out the most promising hydrocarbon areas for development and excluding highly sensitive areas from drilling activities, instead of opening large areas of sea floor at once.

This approach is surely also a response to the difficulties Shell has had since it purchased its Chukchi and Beaufort Sea leases in 2005. Over the last seven years, Shell has spent more than US$ 4 billion to explore and exploit oil and natural gas resources in the Beaufort and Chukchi Seas. The company’s plans have been held up by lengthy US regulatory processes to obtain the necessary permits, a federal court ruling ordering the reassessment of the risks and the handling of a large oil spill for a 2008 Chukchi Sea lease sale, legal challenges brought forward from environmental groups and the native Alaskan population, and a Presidential moratorium that was issued after the 2010 Deepwater Horizon accident in the Gulf of Mexico.

The announced integrated or strategic leasing approach, i.e. taking into consideration environmental and social concerns especially of the indigenous people living in the Arctic before granting leases, and excluding certain areas completely from drilling, has been welcomed by some environmental advocate groups. The step-by-step approach of first gathering scientific data about the risks, challenges and demands of Arctic offshore development before granting leases, appears to meet a core demand of environmental advocates. But critical voices remain, who still believe the leases are being issued far too early against the background of limited knowledge and capabilities for large-scale Arctic development.

And indeed, in view of the report released by the National Commission on the BP Deepwater Horizon and Offshore Drilling, these concerns have a strong point. The report concluded that appropriate clean-up capabilities are nonexistent in the Alaskan Arctic and generally that more and more stringent precautionary measures, monitoring, containment and response plans have to be set up before moving on with Arctic oil and gas exploitation. The time until 2016 indeed seems remarkably short to address all the shortcomings listed in the Gulf spill report and then to also apply them to the harsh and special conditions of the Arctic.

On the other hand, the announced leasing plan is surely good news for the Alaskan economy. Alaskan politicians feel their calls for more development of Alaska’s shelf have finally been heard, given that according to the USGS the biggest share as of yet undiscovered Arctic oil is presumed to be in Alaska. According to the Alaska Oil and Gas Association, the petroleum industry supports one-third of all Alaskan jobs and oil and gas revenues continue to dominate Alaska’s economy, accounting for almost 90% of its unrestricted revenue in 2010. The biggest portion is provided by oil tax revenue, which has a significant effect on the state’s ability to provide services to Alaskans. Also, new supplies from increased development would keep the Trans-Alaska Pipeline running, which transports oil from the North Slope to the port at Valdez, but which is currently running far below its capacity.

The Prudhoe Bay oil field on Alaska’s North Slope is the highest yielding oil field in the US, and Alaska has long been the second-ranked oil-producing state after Texas. However, since its peak in 1988, when it was producing 738 million barrels or 25% of total US production, output of the field has declined by more than two-thirds. Due to this decrease, in March 2012, North Dakota overtook Alaska in terms of monthly oil production and became the second-highest yielding oil state.

While these numbers show the significant  value of the oil and gas industry for Alaska and thus a substantial interest in increased leasing of offshore areas, the northern state’s share of the whole US is rather limited. Texas is the most important oil and gas state, providing 20% of total direct US employment in the oil and gas industry, 39% of direct labour income, and 41% of direct value added. By comparison, Alaska provides 0.8% of direct employment, 1% of direct labour income, and 0.9% of direct value added. [1]

The Gulf of Mexico area is the most important region for US oil production. It provides half of liquid fuel production, 29% of total US crude production, and over 40% of the total US refining capacity is located along the Gulf coast. A dense pipeline system allows Texas petroleum products to reach major consumption markets. [2]

Additionally, new Alaskan oil is likely to face competition from other oil sources, especially Canada’s oil sands, production of which is expected to triple by 2035 constituting the majority of Canada’s oil output. [3]

While there is certainly potential, and infrastructure is in place for increased Alaskan oil production, the economic prospects for Alaskan gas are very meagre. The ongoing shale gas boom, which is produced predominantly in Texas and in eastern US states, continues to push gas prices down. This makes the exploitation of conventional hydrocarbons, particularly in such remote and challenging regions as the Arctic, less profitable and thus less likely. Taking these conditions into account and because of the limited gas transport infrastructure available in Alaska, Alaskan gas has no way of reaching consumption markets.

In summary, while the announced Five Year Outer Continental Shelf Oil and Gas Leasing Program is certainly good news for the Alaskan economy, the overall limited relevance of Alaskan hydrocarbons, especially gas, for the overall US hydrocarbon industry puts the applicability of this announcement into perspective. Furthermore, despite the novelty of US hydrocarbon development approaches, the lingering environmental concerns and the doubts about industry preparedness to address all safety and environmental concerns by 2016/17, have to be taken seriously. Shell’s drilling activities in Alaskan waters that are due to commence in July 2012, will be a crucial test case for Alaska’s further offshore development and may have substantial effects on the five year plan depending on the course of the 2012 drilling season.

[1] Price Waterhouse Coopers. (2009). The Economic Impacts of the Oil and Natural Gas Industry on the U.S. Economy: Employment, Labor Income and Value Added. Retrieved from http://www.api.org/newsroom/upload/industry_economic_contributions_report.pdf
[2] U.S. Energy Information Administration. (2010). Gulf of Mexico Fact Sheet. Washington, DC. Retrieved from http://www.eia.gov/special/gulf_of_mexico/data.cfm#petroleum_fuel_facts.
[3] National Energy Board. (2011). Canada’s Energy Future: Energy Supply and Demand Projections to 2035. Ottawa. Retrieved from http://www.neb-one.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/nrgyftr/2011/nrgsppldmndprjctn2035-eng.pdf.