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US Follows Royal Dutch Shell plc Backs Away From Arctic Drilling

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By: Micheal KaufmanOct 19, 2015

The US Interior Department announced on Friday that it will cancel the auction of 2016 and 2017 natural gas and offshore oil leases in the Arctic Ocean. The auction was scheduled under the Department’s current five-year Chukchi Sea leasing program for 2012–2017. The division cited low crude oil prices and lack of interest from oil companies as the main reason behind its decision.

This news comes a few weeks after Royal Dutch Shell plc (ADR) (NYSE:RDS.A) withdrew its Arctic drilling plan. The oil giant had spent $7 billion for the Arctic campaign. It said last month that it has dropped its exploration and production (E&P) activities in the Burger prospect of the Chukchi Sea, as it found few traces of oil and natural gas in the region. The company was not satisfied with the drilling results; it had initially expected huge amount of oil traces in the Ocean. Shell has dropped all future plans of Arctic drilling for the foreseeable future.

The Interior Department’s secretary Sally Jewell said in a press release that because of Shell’s decision last month, and current market conditions, it is in the nation’s best interest to cancel the sale of two potential leases: Lease sale 237 and Lease sale 242.

However, Ms. Jewell was satisfied with her department’s performance. She was also content by the work of Bureau of Safety and Environmental Enforcement, the US Coast Guard, and Bureau of Ocean Energy Management to ensure Shell’s operation in the Arctic Ocean were safe and in accordance with environmental regulations.

Apart from Shell’s announcement last month, the Interior Department cancelled its lease sale as only one unidentified oil company showed interest in the leasing program. As the lease awarding process requires a lot of effort, it would have been inefficient for the department to carry on the with the lease auction. The division’s next plan is to lease three offshore and natural gas sites in the Arctic Ocean and several other leases in Gulf of Mexico and Eastern Seaboard in 2020, as per The Wall Street Journal.

On Friday, the department has also rejected Shell and Statoil ASA’s (ADR) (NYSE:STO) request for “Suspension of Operation.” Statoil own leases in Chukchi Sea, while Shell has leased drilling rights in Beaufort Sea and Chukchi Sea, which would expire in 2017 and 2020, respectively. The companies demanded to extend their leases beyond the current set date. The Interior Department has declined to serve the companies’ request and stated that they did not submit the required “reasonable” schedule for E&P activities, under the leases.

In order to modify these types of leases, energy companies are required to prepare several work documents. The Interior Department said that both the oil giants have taken too long to do anything for leases renewal. Previously, the division has also rejected ConocoPhillips’ (NYSE:COP) request to suspend leasing rights.

Industry Experts and Environmentalists’ Reaction

On one hand, the industry experts criticize the Obama Administration as it doesn’t support the oil and gas industry. On the other side, this news is warmly welcomed by environmentalists.

The development of offshore sites in Arctic Ocean would have reduced the nation’s dependency on crude imports. The US Geological Society forecasts that around 90 billion barrels of recoverable oil are present in the Arctic Ocean. The drilling activities at the site would have helped the oil producers increase their long-term crude production.

That being said, Arctic Ocean drilling would have adversely affected the marine life and natural environment. From the start of Shell’s Arctic drilling, environmentalist groups have opposed the campaign. This cancellation of the lease auction has come as good news for them.

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