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October 23, 2015

Obama Cedes Arctic Leadership to Russia

October 23, 2015
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Last Friday, President Obama’s Interior Department announced it was canceling plans for offshore oil and natural-gas lease sales in the Arctic it had scheduled to hold in 2016 and 2017, and denied requests from two oil companies (Royal Dutch Shell and Statoil) to retain their drilling rights there, which begin to expire in 2017.[i] In making its decision, the Interior Department cited low oil prices and a lack of company interest, despite the phenomenal amount ($2.1 billion) that Shell paid for its lease in 2008 and the $7-plus billion it has invested in the area.[ii]

Shell has faced lawsuits from environmental organizations and obstacles from the Obama Administration including a shortened drilling season and restrictions to drill only one well at a time[iii], making exploration in the Arctic so expensive that it caused the company to withdraw from the project.

With no other prospect for oil exploration on oil-rich federal lands in Alaska allowed by the Obama administration, the fate of the Trans Alaska Pipeline System is in jeopardy, with oil production from the state-owned North Slope in decline.

The U.S.’ stance on oil exploration in the Arctic is in sharp contrast to that of Russia and China. Russia began producing offshore oil at the Prirazlomnaya field in the Pechora Sea in 2014, producing about 2.2 million barrels and the country expects to double oil production there this year.

While not yet producing in the Arctic, China has bought a number of international oil assets, including projects in the Arctic, which it plans to develop in the future. It is making significant investments in Arctic research, infrastructure and natural-resource development, and is building modern icebreakers to support its activity in the polar regions.[iv]

While President Obama visited Alaska in August to talk about global warming and make a guest appearance on reality TV show, Vladimir Putin has been increasingly visiting Arctic areas in his country and has embarked upon establishing military facilities throughout the critical region.[v] The difference between the U.S. and Russia’s approaches in the Arctic could not be more stark.[vi]

U.S. Cancels Lease Sales

In keeping with its typical late Friday afternoon announcements of controversial policies, the Obama administration waited until journalists were at happy hour to declare that it was cancelling its two lease sales in the Arctic for 2016 and 2017. The Interior Department’s current 5-year leasing plan had these lease sales scheduled for 2016 and 2017 in the Chukchi and Beaufort Seas, respectively. According to Interior Department data, federal waters in these two seas hold 22 billion barrels of technically recoverable oil and 93 trillion cubic feet of natural gas.

The current five-year lease plan ends in 2017. The department’s next 5-year plan—from mid-2017 to mid-2022—which it proposed in January, includes three potential lease sales in the Arctic Ocean beginning in 2020, lease sales in the Gulf of Mexico and one lease sale along the Eastern Seaboard in the Atlantic Ocean. That lease plan will not be final until next year, at which point the Obama Administration could opt out of the lease sales it had conditionally included in its proposal. Thus, no lease sale is likely for the Arctic for at least several years, unless a new president quickly reverses the Obama administration’s plan.

Unfortunately, this is very bad news for the state of Alaska, where declining oil production on state lands is causing serious problems for the Trans Alaska Pipeline System (TAPS), an 800 mile long energy transportation system that is one of the most important energy assets in the world. Production in the Alaskan North Slope has been declining since 1988 when oil production peaked at 2.0 million barrels per day. To remain operational, TAPS needs to maintain throughput above a minimum threshold level.  Low flow rates on crude oil pipelines can cause operational issues, particularly in the frigid Arctic. As the types and severity of problems multiply, the investment required to mitigate the problems is expected to increase significantly. Considerable investment may be required to keep the pipeline operational below 350,000 barrels per day because of the number and diversity of operational problems expected at this level. In 2014, Alaskan oil production averaged 497,000 barrels per day—a decline of 3.5 percent from 2013 average levels.

There are long lead times from formulating lease plans, to oil company exploration, drilling and production. It is likely to take 10 to 15 years for oil and gas production from the outer continental shelf of Alaska to come online. In 10 to 15 years, the United States may be in need of oil if production from shale formations and from offshore areas in the Gulf of Mexico were to begin to decline. The U.S. Energy Information Administration expects that decline to occur between 2025 and 2030.[vii]

Further, the Obama Administration has refused to grant extensions of existing Arctic leases to Shell, Statoil and ConocoPhillips, a relatively routine matter in which lessees continue to pay the government for leases they have won in areas where they have interests. Without extensions, Beaufort Sea leases expire in 2017 and Chukchi Sea leases expire in 2020. Challenges can be made before an Interior Department appeals board, although they typically parrot the Administration’s viewpoints on such matters.

Preserving the leases can give the companies a chance to explore in U.S. Arctic waters for a few more years, providing time for a new administration to take a different regulatory approach to the Arctic. By providing the extension, the government would continue to get rental payments for the existing oil and gas leases. An analysis estimated those payments to equal $9.6 million between now and May 1, 2020 for ConocoPhillips to hold on to its 61 leases in the Chukchi Sea, $43 million for Shell to keep its 275 Chukchi Sea leases, and $10.4 for Statoil to keep its leases.[viii] Extensions are typically granted when conditions are particularly challenging in an area, or if temporary economics make it difficult to pursue investment through a particular period of time.

According to a report by the National Petroleum Council requested by Energy Secretary Moniz, the federal government needs to facilitate exploration in the offshore Alaskan Arctic now—since failure to act immediately risks a renewed reliance on imported oil and jeopardizes America’s global competitiveness, leadership and influence in the Arctic.[ix]

Russia Leads in the Arctic

Russia’s interest in the Arctic grew from an anticipated decline in oil production in its Siberian oil fields. Russia’s success in the Arctic shows the potential of the area. However, not only is Russia producing oil in the Arctic offshore, it has added a 6,000-soldier permanent military force, including radar and sensing networks, in the Arctic’s northwest Murmansk region. Russia also submitted an extended continental-shelf claim for the Arctic, which could give Russia rights to seabed resources beyond its 200 nautical-mile zone.

Conclusion

The Obama Administration announcement canceling its two Arctic lease sales is a major disappointment, and evidence that President Obama does not value the importance of the Arctic or oil and natural gas production as part of our national security and economic strength. While the president visited Alaska as a tourist, Vladimir Putin has embarked on a vast expansion of Russian economic and military interests, all surrounding serious energy exploration and development. While the president poses for reality TV and gives speeches about global warming, TAPS—the chief US economic asset in the region – is in serious decline. His decision to cut off access to new oil supplies in the federal Arctic region sends a signal that America’s Arctic energy assets are not important to the United States. Meanwhile, Vladimir Putin is working hard to develop necessary energy and military infrastructure throughout the region. The approaches to the geo-strategic and economically important Arctic by the two leaders could not be more different.

Similar to Russia’s undertaking, the United States should be looking for new avenues of oil exploration and production to remain a superpower and a leader in the field. OPEC is no longer the power it was just a few years ago because of U.S. domestic oil production. Now, the United States is missing out on an opportunity to take a leadership role in the Arctic, ensuring responsible energy exploration and production by bringing to bear America’s higher standards of operations and more-stringent safety standards. The Obama administration is threatening the future energy security of U.S. citizens by allowing this critical region to be developed by others. The president is also sending a very clear signal that he does not value the importance of America’s Arctic.


[i] Wall Street Journal, U.S. Cancels Sale of Two Arctic Oil and Gas Leases, October 16, 2015, http://www.wsj.com/articles/u-s-cancels-sale-of-two-arctic-oil-and-gas-leases-1445030047

[ii] Institute for Energy Research, https://www.instituteforenergyresearch.org/analysis/oil-exploration-in-the-arctic-is-the-obama-administration-really-interested/

[iii] Obama Administration Grants Shell Final Permits to Start Drilling in the Arctic Ocean, July 23, 2015, http://ecowatch.com/2015/07/23/obama-grants-shell-arctic-drilling/

[iv] Wall Street Journal, In the Race for Arctic Energy, the U.S. and Russia are Polar Opposites, August 25, 2015, http://www.wsj.com/articles/in-the-race-for-arctic-energy-the-u-s-and-russia-are-polar-opposites-1440542608

[v] Investors, Russia’s Surprise Arctic Gambit is About the Military and Oil, October 21, 2015, http://news.investors.com/ibd-editorials/102115-776769-moscows-new-arctic-base-part-of-global-naval-strategy.htm?p=full

[vi] Newsweek, Putin Makes His First Move in the Race to Control the Arctic, January 6, 2015, http://www.newsweek.com/2015/01/16/putin-makes-his-first-move-race-control-arctic-296594.html

[vii] Energy Information Administration. Annual Energy Outlook 2015, April 14, 2015, http://www.eia.gov/forecasts/aeo/pdf/tbla14.pdf

[viii] Fuel Flex, Obama administration closes off two avenues for new Arctic drilling, October 16, 2015, http://fuelfix.com/blog/2015/10/16/obama-administration-closes-off-two-avenues-for-new-arctic-drilling/

[ix] National Petroleum Council, Arctic Potential: Realizing the Promise of U.S. Arctic Oil and Gas Resources, March 27, 2015, http://www.npcarcticpotentialreport.org/

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