In many ways, the US appears to be in two minds about hydrocarbons exploration and production in the Arctic Ocean.
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On the one hand, US territorial waters in the Arctic region are estimated to contain 27 billion barrels of oil and 132 trillion cubic feet of natural gas, which represents a potential financial bonanza for the oil industry, a massive economic boost for the state of Alaska and a new resource frontier as the US – like many other countries – continues to work to safeguard its future energy security.
On the other, concerns over the environmental effects of oil and gas development in the Arctic has been widespread, and the Obama administration has taken these warnings on board as it attempts to chart a course that allows for an offshore exploration and production (E&P) programme to proceed without posing undue danger to a distinctive and vulnerable biome.
The Arctic drilling conundrum
Officially, the White House supports a policy allowing for the cautious exploration of US Arctic waters, and plans to hold new leasing rounds for offshore blocks in the Beaufort Sea in 2020 and the Chukchi Sea in 2022.
Given the complexity and expense of operating oil and gas projects in these frigid, isolated areas of the High North, the regulatory and policy environment presented by the US is going to be a key factor in the industry’s future investment in the region.
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By GlobalData“We believe there to be billions of barrels of oil [in the Arctic], and we are an economy that is going to need oil for decades to come,” American Petroleum Institute (API) upstream and industry operations director Erik Milito told Bloomberg in July. “It’s going to come down to whether or not investment in this region, which should be promoted, makes sense given the other opportunities that exist around the world.”
But the extreme conditions of the Arctic are coupled with a unique natural environment (both onshore and offshore) that represents one of the world’s last regions of pristine wilderness. The wildlife and natural resources of the Arctic are not only of enormous value to global biodiversity; they are also essential to the culture and economic wellbeing of the indigenous Alaska Natives, who rely on access to a rich but fragile ecosystem for the hunting, fishing and foraging that plays such an important role in the region’s local subsistence economy.
As such, the stakes are incredibly high for offshore exploration in the Arctic, and the oil and gas industry’s faltering early steps in the region over the last few years – during which time Shell, Statoil and many other major players suspended or abandoned their Arctic development plans – has given the US time to step back and re-evaluate the environmental cost of Arctic exploration.
As Michael LeVine, Pacific senior counsel at environmental group Oceana – one of the US’s most prominent voices against expanding offshore drilling activities – summarised in a recent statement: “There is no proven way to respond to a spill in icy Arctic waters and, as Shell unfortunately demonstrated in 2012 [when it suspended Arctic activities after several potentially dangerous incidents], companies simply are not ready to operate safely in the Arctic Ocean. Until and unless companies can operate safely and without harming the health of Arctic Ocean ecosystems, the government has no business selling leases or authorizing exploration in the region.”
US finalises strict Arctic drilling regulations
New US environmental and safety regulations governing oil and gas operations in the Arctic, which were developed over the last few years by the Bureau of Safety and Environmental Enforcement (BSEE) and the Bureau of Ocean Energy Management (BOEM) and finalised in July, reflect the Obama administration’s wary tightrope walk between energy development and environmental responsibility.
“The unique Arctic environment raises substantial operational challenges,” said BOEM director Abigail Ross Hopper after the finalised regulations were announced by the Department of the Interior (DOI). “These new regulations are carefully tailored to ensure that any future exploration activities will be conducted in a way that respects and protects this incredible ecosystem and the Alaska Native subsistence activities that depend on its preservation.”
The Arctic regulatory framework includes strict requirements to mitigate environmental risk from drilling operations. The major stipulations of the ‘Final Rule’ include a requirement for a separate relief rig located close enough to quickly drill a relief well in an emergency; the development of a comprehensive Integrated Operations Plan (IOP) that must be submitted to BOEM at least 90 days in advance of an Exploration Plan; the ability to track and respond to changing weather and ice conditions; and the ability to rapidly deploy source control and containment equipment while drilling below the surface casing.
The Final Rule acknowledges the extra expense that its requirements represent for the oil and gas industry, noting the new regulations could add up to $2.05bn to the industry’s compliance costs over 10 years. Of course, the DOI’s regulatory document suggests extra safeguards could end up saving companies billions by “preventing or reducing the severity or duration of catastrophic oil spills”, but such savings are conditional and almost impossible to quantify.
Ultimately, regulators considered that the extra cost requirements were justified without a clear payoff, because “the Deepwater Horizon oil spill demonstrated that even such low probability events can have devastating human, economic and environmental results if they occur”.
The industry responds
The US oil and gas industry was quick to respond to this extra regulatory burden, arguing that the requirements will serve to suppress investment in the Arctic.
“This is an unfortunate turn by this administration and will continue to stifle offshore oil and natural gas production,” said API director Milito in response to the Final Rule. “When combined with the vision put forward by the next five-year leasing program now being written by the Bureau of Ocean Energy Management, this administration has already fallen short of creating opportunities for new jobs, while also erasing millions in revenue to the government. Expanding offshore development is integral to the safe and responsible path for securing the domestic energy supplies future generations of Americans demand.”
While API’s immediate response to the new regulations has been primarily rooted in their economic implications, as a stakeholder in the process the oil and gas industry has had a long history of lobbying against the general direction of US Arctic regulation, not only on economic grounds but also in terms of technology and practical concerns.
In a 2015 report commissioned by US energy secretary Ernest Moniz, industry representative group and advisory committee the National Petroleum Council bemoaned the complexity of an Arctic regulatory system that “would require around 60 permit types through 10 federal agencies”, and argued that “Prescriptive regulation may inhibit the development of new, improved technologies by suppressing the potential opportunity that drives advancement.”
API senior policy advisor Richard Ranger wrote a letter on behalf of the organisation to BSEE last May, urging changes to a number of regulations. Objections included the requirement for a separate IOP on the grounds that much of the information required for submission would be “unobtainable based on the timeline the agencies proposed for submission of the document”, and that much of the data required for the IOP is already gathered as part of a company’s Exploration Plan, contesting that the Exploration Plan could be amended rather than introducing an entirely new requirement.
Ranger also argued for more flexibility and operator discretion in general, including leaving operational decision-making in the hands of operators and allowing a broader range of oil spill response strategies based on the circumstances of an individual spill. In terms of the separate relief rig requirement – which would likely form the greatest part of the compliance costs introduced by the Final Rule – capping stacks would be able to respond to a spill faster (“days instead of weeks”) than relief rigs, he argued, while increasing the frequency of blowout preventer (BOP) from 14 days to seven days would provide no proven benefits and potentially threaten the integrity of this safety equipment.
Lessons from the past
There may certainly be individual cases where objections from the industry could help streamline the rules and make them more practicable without threatening (or possibly even enhancing) their efficacy.
But, considering the industry’s struggles in the Arctic – which in the case of Shell in 2012 included the foundering of the drill barge Kulluk in the Gulf of Alaska after it was caught in a storm – it is understandable that the DOI and state regulatory agencies have set such a high bar in this sensitive region. The standard has been set and a great deal of regulatory uncertainty has been cleared up, even if this new certainty isn’t entirely to the industry’s liking.
With oil majors such as Shell, Statoil, ConocoPhillips and others abandoning around $2.5bn worth of Arctic drilling leases in recent years, there will likely be a quiet period as the US Government gears up for its proposed lease sales in the Beaufort and Chukchi Seas in 2020 and 2022, respectively.
That leaves plenty of time for squabbling over the finer details of Arctic regulation, but it might take higher oil prices before the industry is willing to accept the compliance costs inherent to Arctic exploration and production. Given the high environmental stakes involved and the challenging conditions of the region, it may well be that this is for the best.
