Regulatory Hurdles Keeping a Lid on Arctic Exploration and Development

October 2, 2015 in Blog

If you ever had any doubt that government regulation can stop a good thing right in its tracks, you probably haven’t been watching the news this week.

While the Arctic contains vast oil and natural gas resources and represents significant opportunities to increase American energy security and create jobs, development will only be possible if there is an effective and predictable regulatory framework in place.  Unfortunately, the current regulatory environment has hamstrung exploration and poses a very real threat to any future development in the region.

Current regulation, shackled to uncertainty about further changes, has been cited by many observers as the main reason for Shell’s recent withdrawal from exploration in Alaska’s Chukchi Sea. How bad is it?  After an estimated investment of seven billion dollars and the drilling of only one exploratory well in an area the size of Texas, the company announced this week that it was abandoning its Arctic program.

What does all this mean?  Quite simply, maintaining the current layers of prescriptive red-tape and one-size-fits-all policies will only continue to discourage further Arctic investment.

Regulations

The development of any offshore lease takes significant time and resources and must go through a stringent regulatory process.  For example, even in the Gulf of Mexico, it can take up to 7-10 years to bring an offshore lease from leasing to production.  Federal permits are required for every stage of the process – from seismic exploration, to exploration wells to production wells.  As part of the permitting process, Environmental Impact Statements (EIS) must be completed and activities must comply with a host of environmental laws ranging from the National Environmental Policy Act (NEPA), Endangered Species Act (ESA), Marine Mammal Protection Act (MMPA) and the Clean Air Act.  Even for standard offshore operations in the Gulf of Mexico, it takes years to complete this process and get permits approved.

Operations in the Arctic must not only meet the same regulatory requirements as other offshore wells, but also overcome additional regulatory hurdles and challenges due to the uniqueness of region:

  • Length of Drilling Season. While other offshore drilling operations are able to occur year-around, drilling in the Arctic is limited to open water season – when the area is clear of ice. This open period is typically only 3-4 months long, but could be even shorter depending on the weather and other ground conditions.  For example, Shell’s permits for the 2015 season only allowed the company to drill between July 15 and September 28.[1]  The company had  to cease drilling operations at the end of September regardless of ice conditions.

It’s possible for regulations to potentially delay or temporarily stop operations during exploration, such as the need to accommodate wildlife in the area.  All of these hurdles make an already short timeframe to drill even shorter.  According to a study by the National Petroleum Council, the practical drilling season in the Arctic could be as little as 40-60 days per year.[2]  This reality will limit the number of completed exploratory wells in any given year.

  • Restrictions on Drilling Activities. Multiple layers of environmental laws and regulations limit the type and amount of actively that can take place in the Arctic.  For example, Shell sought permits to drill two exploratory wells during the 2015 season.  While the Administration gave conditional approval to Shell’s exploration plan (which included the two wells) it was later determined that the plan  violated a U.S. Fish and Wildlife Service regulation from 2013 regarding marine mammal disturbance.  The regulation requires a 15 mile buffer zone around active drilling rigs due to assumed impacts of noise; an assumption not corroborated by science.  Since Shell’s wells are nine miles apart, the wells could not be drilled simultaneously – creating additional restrictions and adding delay to their operations.[3]
  • Requirements for Additional Equipment. Regulations also require that an additional redundant rig be on site. This adds additional costs and resources, and also fails to take into account other containment strategies. Capping stacks, blowout preventers and relief domes could be better suited to address potential spill response in the shallow-waters of the Arctic.
  • Litigation. At seemingly every turn, energy exploration in the Arctic has faced an onslaught of lawsuits from activist groups.  In one instance in 2008, there was a legal challenge to the original lease sale and the federal court ruled that there needed to be a revised EIS.[4]  The Department submitted a supplemental EIS and the 2008 lease sale was officially reaffirmed in March 2015.[5]

Anti-energy activist groups continued to target the approval of Shell’s exploration plan in court.  They claimed that because the company was originally approved for two wells and now would only be drilling one (due to regulations concerning marine mammal disturbance) that the originally submitted plan was now invalid.[6]

Department of the Interior’s Proposed Arctic Rule

In February 2015, the Department of the Interior’s Bureau of Ocean Energy Management (BOEM) and Bureau of Safety and Environmental Enforcement (BSEE) released a proposed Arctic Rule[7] for future offshore drilling operations in the region.  Critics have said that the proposed rule will be extremely costly ($1.5 billion to implement) and that it fails to account for innovations in safety technology.  House Natural Resources Energy and Minerals Subcommittee Chairman Doug Lamborn called the rule “prescriptive in nature” and that it “could significantly slow exploration and development and possibly curtail industry interest in future offshore lease sales that are currently scheduled.”[8]  At the same hearing, Members also pointed out that the risk of a blowout is lower due to the low pressure in the Arctic Ocean.  Brian Salerno, Director of BSEE acknowledged this point stating “we do agree the risk is low.”[9]

National Petroleum Council Report on Arctic Potential

In contrast to the Interior Department’s proposed Arctic Rule, the National Petroleum Council released, in response to a request from U.S. Energy Secretary Earnest Moniz, a report in March 2015 on Arctic Potential.[10] The report found that Arctic resources can be developed today using existing, proven technologies and that additional steps should be taken to improve current regulations governing Arctic drilling:

“Current U.S. regulatory practices, adapted from other non-Arctic U.S. regions where activities can occur year-round, are limiting Arctic exploration activity. Realizing the promise of U.S. Arctic oil and gas resources requires public confidence that the opportunity can be safely pursued while ensuring environmental stewardship. Industry and government share the responsibility of securing and maintaining this public confidence. There have been significant recent technology advances in oil spill prevention and response. Application of these technologies in the U.S. Arctic could improve environmental stewardship and reduce cost, by safely extending the time available for exploration drilling.”[11]

The two specific areas the National Petroleum Council (NPC) recommended addressing were drilling season length and the length of leases.

NPC notes in the report that “there are technologies available to substantially extend the useful annual drilling season while maintaining operational safety and enhancing environmental protection.” Using advanced well control and oil spill response systems, coupled with the ability to operate in ice, could safely extend the available drilling time to 147-161 days.[12]

Regarding lease length, the report notes that under the Outer Continental Shelf Lands Act, the terms of any offshore lease are limited to 10 years.  The lease must be proven to be commercially developable within this time or be relinquished.  However, this fails to account for the increased time it takes to drill in the Arctic under the current regulatory regime. The report concludes “the current 10-year lease term is inadequate to support developing Alaska’s OCS potential.”[13]

Consequences

Clearly, the vast layers of regulatory red-tape disincentives companies from investing in the Arctic as they view development of these resources to not be economically feasible.  This could also negatively impact future lease sales in the Arctic, scheduled for 2016 and 2017 in the current five-year plan and proposed for 2020, 2021 and 2022 in the draft 2017-2022 five-year plan.[14]

Failing to support responsible development of U.S. Arctic resources will cost the U.S. jobs, harm the economies of local communities throughout Alaska, and significantly threaten the future of the Trans-Alaskan Pipeline System (TAPS).  TAPS is one of the most important energy infrastructures in the country and is a vital artery for delivering oil from Alaska to the lower 48 states.  While the pipeline can accommodate over 2 million barrels of oil, throughput has declined to just over 500,000 barrels last year.[15]  Developing Arctic resources is crucial to ensuring that TAPS stays full and operational.

In 2013, the Obama Administration released a National Strategy for the Arctic Region[16], noting that the “Arctic region’s energy resources factor into a core component of our national security strategy: energy security.”  Yet the regulations imposed by the Administration, coupled with the perpetual litigation, have stymied the prospects for Arctic energy, and thus have not allowed for the White House’s stated goals for the Arctic to be realized.

An updated regulatory framework, one that is performance-based and takes into account the availability of new technology and the need for flexibility in the Arctic region, is needed in order for future development of Arctic resources to be successful.

[1] Jennifer A. Dlouhy, “Obama administration OKs Arctic drilling, but imposes big constraints on Shell,” Fuel Fix, July 22, 2015, http://fuelfix.com/blog/2015/07/22/obama-administration-oks-shell-drilling-but-imposes-big-constraints/#34370101=0

[2] National Petroleum Council, “Artic Potential: Realizing the Promise of Arctic Oil and Gas Resources,” March 2015, page 29, http://npcarcticpotentialreport.org/pdf/AR-Executive_Summary-Final.pdf

[3] Jennifer A. Dlouhy, “Shell can’t drill two wells at once in Arctic,” Houston Chronicle, June 30, 2015, http://www.houstonchronicle.com/business/energy/article/Shell-can-t-drill-two-wells-at-once-in-Arctic-6359306.php

[4] Yereth Rosen, “Judge orders new review for 2008 Chukchi Sea lease sale,” Alaska Dispatch News, April 24, 2014, http://www.adn.com/article/20140424/judge-orders-new-review-2008-chukchi-sea-lease-sale

[5] Department of the Interior Press Release, “Department of the Interior Affirms 2008 Chukchi Sea Lease Sale,” March 31, 2015, http://www.doi.gov/news/pressreleases/department-of-the-interior-affirms-2008-chukchi-sea-lease-sale.cfm

[6] Jennifer A. Dlouhy, “Environmentalists: Feds should shelve Shell’s Arctic plans because of walrus rule,” Fuel Fix, July 7, 2015, http://fuelfix.com/blog/2015/07/07/environmentalists-feds-should-shelve-shells-arctic-plans-because-of-walrus-rules/#28442101=0

[7] Department of the Interior, ““Oil and Gas and Sulphur Operations on the Outer Continental Shelf—Requirements for Exploratory Drilling on the Arctic Outer Continental Shelf,” February 24, 2015, http://www.regulations.gov/#!documentDetail;D=BSEE-2013-0011-0031

[8] Timothy Cama, “Obama takes heat from both parties on Arctic drilling regulations,” The Hill, June 16, 2015, http://thehill.com/policy/energy-environment/245125-gop-dems-blast-obama-on-arctic-drilling

[9] Ibid

[10] National Petroleum Council, “Artic Potential: Realizing the Promise of Arctic Oil and Gas Resources,” March 2015, http://npcarcticpotentialreport.org/pdf/AR-Executive_Summary-Final.pdf

[11] Ibid, introduction letter

[12] Ibid, page 30

[13] Ibid, page 31

[14] Bureau of Ocean Energy Management, http://www.boem.gov/Alaska-Leasing/

[15] Alyeska Pipeline, http://www.alyeska-pipe.com/TAPS/PipelineOperations/Throughput

[16] White House, National Strategy for the Arctic Region, May 2013, https://www.whitehouse.gov/sites/default/files/docs/nat_arctic_strategy.pdf