The price of drilling in the U.S. Arctic, an environmental sensitive area with a unique set of risks and challenges, just got more expensive.
The U.S. Interior Department on July 7 unveiled final regulations that could cost operators drilling in the region up to about $2 billion over the next 10 years, according to federal estimates. The rules, which build on existing regulations governing the U.S. Outer Continental Shelf (OCS), applies only to exploratory drilling operations from floaters in the Beaufort and Chukchi seas.
Under the new rules, oil and gas companies’ exploration programs must be designed and conducted with arctic conditions in mind, meaning plans must take into account risks that could be posed by shifting sea ice and remoteness, which could present logistical and infrastructure challenges, for example.
“The Arctic Rule will raise the bar for safety and environmental protection for any future exploration of Arctic OCS oil and gas resources, protecting the marine, coastal and human environments and Alaska natives’ cultural traditions and access to subsistence resources,” Janice Schneider, assistant secretary for Land and Minerals Management, said during a media call July 7.
“A practice of requiring operators to meet unique requirements to operate in the Arctic OCS is not new. It has been standard practice to do so,” Schneider added. “Until now many of these requirements were applied conditions for approval of exploration plans.”
Industry groups denounced the rules.
The American Petroleum Institute said the rules could stifle oil and gas production in an area that is already extensively regulated and pointed to the industry’s efforts—including working with the federal government—and investment to improve offshore safety.
“This is an unfortunate turn by this administration and will continue to stifle offshore oil and natural gas production,” said Erik Milito, upstream and industry operations director for the American Petroleum Institute. “We remain concerned about various regulatory activities related to offshore energy development including today’s proposals for Arctic operations.”
The new regulations arrive as the oil and gas industry continues to cope with a downturn marked by lower commodity prices, the result of plentiful supplies and insufficient demand. Oil and gas activity in the U.S. Arctic, an expensive spot to search and produce oil, is low as many cash-strapped companies have halted drilling plans for the region.
About six months after getting permission to drill, Royal Dutch Shell Plc (NYSE: RDS: A) abandoned drilling plans in the region last year, citing as reasons results from the Burger J exploratory well, high costs and an unpredictable federal regulatory environment. The company had spent $7 billion exploring offshore Alaska, Reuters reported.
“The Arctic is a costly place to do business because of this remoteness and because of the weather conditions there,” Schneider said. When looking at the benefits of the rule, primarily to reduce the potential for a spill and reduce the severity and duration of a spill, she added, “We do believe the benefits here far outweigh the costs.”
Currently, there are 43 leases held in the U.S. Arctic, three of which are under production.
The new rules also require operators to:
- Have access to a separate relief rig to be able to timely drill a relief well under conditions expected at the site;
- Be capable of predicting, tracking, reporting and responding to ice conditions and other adverse weather conditions;
- Have access to and be able to quickly deploy source control and containment equipment while drilling or working below the surface casing;
- Develop and implement oil spill response plans that account for the arctic conditions, giving information on the availability of equipment, training and oil spill response personnel; and
- Devise an integrated operations plan (IOP) that addresses all phases of an Arctic OCS exploration program. The plan must be given to the Bureau of Ocean Energy Management (BOEM) at least 90 days before an exploration plan is filed, according to the rules.
In addition, operators must “effectively manage and oversee contractors.” The regulations, which federal officials say is an effort to ensure operations are conducted in a safe and environmentally responsible manner, are among those outlined in a 348-page document.
“Despite taking years to write, the rule does not accurately reflect current industry capabilities and includes unnecessary requirements, such as same season relief wells, which may not be needed due to the availability of new response and containment equipment,” said National Ocean Industries Association President Randall Luthi. “Prescriptive requirements in the rule could thwart industry innovation and development of new technology, and may not actually increase operational safety.”
According to the federal government, there are an estimated 24 billion barrels and 104 trillion cubic feet of technically recoverable oil and gas in the Beaufort and Chukchi seas.
The rules were jointly developed by BOEM and Bureau of Safety and Environmental Enforcement (BSEE).
Velda Addison can be reached at firstname.lastname@example.org.
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