A Bureaucrat Says: “Market Argues Against Arctic Ocean Oil Development.” The Market Seems to Disagree.

Guest post by David Middleton

From Real Clear Energy:

407008MarketArctic

Really?

Firstly, how can reopening the Chukchi Sea and Beaufort Sea OCS areas to leasing be disrespectful to “market forces”?  Opening up an area to leasing doesn’t somehow impose an obligation on oil companies to bid on leases in those areas.

Secondly, Royal Dutch Shell and ConocoPhillips didn’t pull out of the U.S. Arctic OCS due to free “market forces.”  Shell pulled out for a combination of reasons: 1) operational challenges, 2) the disappointing results of their first wildcat in the Chukchi Sea and 3) regulatory malfeasance.  ConocoPhillips pulled out of the U.S. Arctic OCS for one reason: regulatory malfeasance.

Had market forces been the driving force, Shell would have drilled several exploratory wells years before the Obama administration grudgingly allowed them to drill one.

Thirdly, if the “market argues against Arctic Ocean oil development”, why is Eni forging ahead in the Beaufort Sea?

Trump Weighing Eni’s Arctic Drilling Bid in Post-Obama Pivot

by Jennifer A Dlouhy
March 16, 2017, 10:42 AM CDT

  • Company can target tracts 5.5 miles away from man-made island
  • Shell, Repsol are partners in Beaufort Sea exploration project

The Interior Department is weighing Eni SpA’s request to explore for oil in waters north of Alaska, giving the Trump administration a chance to reverse course from former President Barack Obama’s attempt to curtail Arctic drilling.

Eni’s exploration well would be in an area it previously leased from the federal government, and so it isn’t covered by the executive order Obama issued in December to block the sale of new drilling rights within huge swaths of the Chukchi and Beaufort seas. As the Trump administration considers ways it could reverse Obama’s directive, approving this plan could encourage more oil companies to consider Arctic exploration.

Although some oil companies have abandoned plans to launch expensive quests for crude off Alaska’s coast, recent discoveries have fanned interest in waters near the shoreline that can be drilled at a lower cost.

The Bureau of Ocean Energy Management is conducting an initial, 15-day review of the broad drilling blueprint filed by Italy’s Eni, which is aiming to sink a well in the federal waters of the Beaufort Sea before its leases expire at the end of the year.

If the bureau deems Eni’s broad exploration blueprint complete, it would publish the document online and subject it to public comment while scrutinizing the plan’s details in a 30-day review.

[…]

Bloomberg

Granted, Eni can drill their program from existing infrastructure.  However, market forces don’t seem to be arguing against them.

Fourthly, if the “market argues against Arctic Ocean oil development”, why did Shell, Statoil and ConocoPhillips request lease extensions in the Alaska OCS?  Dr. Kozloff seems to think that the answer is to impress shareholders:

Some oil companies want the Administration to open Arctic leasing so they can show their shareholders that they have access to these reserves, at least on paper.

Real Clear Energy

There are no “reserves.” There is only resource potential… And no oil company would expend millions of dollars on lease bonuses and rentals, simply to hold leases they never intended to exploit.

Furthermore, they wouldn’t even bid on the blocks without having spent a lot of money and time acquiring and interpreting seismic data.

Many leases are never drilled.  Sometimes this due to geological and/or geophysical condemnation after more detailed work is done or newer data is acquired.  Sometimes it’s due to changing price environments.  Sometimes it’s due to the fact that the prospects never rise high enough in a company’s portfolio to make it onto the drilling calendar before the leases expire.  But, no company would spend millions, possibly billions of dollars, on the evaluation and leasing of Alaska OCS blocks, if they had no intention of drilling anything.

Dr. Kozloff belies an ignorance of market forces, basic business principles and the definition of “reserves” in his diatribe about market forces arguing against Arctic Ocean oil development.  I’m going to take a wild @$$ guess (WAG) that he has an ulterior motive.  Most of the rest of his article babbles on about the Deepwater Horizon blowout/oil spill and he closes his essay with this:

The Trump Administration needs to stand up to them and conserve the Arctic, both its oil reserves and fragile ecosystems, for all Americans.

Dr. Keith Kozloff served as Senior Environmental Advisor at the U.S. Treasury Department, 2001-2011, where he evaluated impacts of oil development and other megaproject

Real Clear Energy

Market An Environmental Activist Bureaucrat Argues Against Arctic Ocean Oil Development

Now the title of Dr. Kozloff’s essay makes sense!

Caelus Energy recently announced a 2-4 billion barrel discovery in Alaska State waters adjacent to the Beaufort Sea OCS.

smith_bay_caelus

Despite the best market force environmental activist bureaucrat’s arguments, Caelus is determined to develop this discovery.

While Beaufort Sea OCS tracts just east of Smith Bay are still available for leasing, all of the rest of the Beaufort and all of the Chukchi Sea OCS tracts have been withdrawn from leasing due to market forces environmental activism.

ArcticOCS

If the Chukchi Sea and Beaufort Sea OCS areas are not economically or operationally viable, open them back up to leasing and actually allow market forces to work.

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22 thoughts on “A Bureaucrat Says: “Market Argues Against Arctic Ocean Oil Development.” The Market Seems to Disagree.

  1. Whether they are economically or financially viable or not, just open them for exploration and possible drilling. Then market forces will be able to work, free from government interference.

  2. Oh, it is market force but the price of dealing with enviro psychos is the key. Everything has a price. How much did the French spend to sink the Rainbow Warrior? It wasn’t much afaik.

  3. As president Trump gets his administration in place, he will likely discover a host of agency positions and perhaps entire agencies which are no longer needed. In my opinion, Keith Kozlov’s former position with Treasury is a prime candidate for the coming RIF.

    • Also from Real Clear Energy…

      Recapturing America’s Competitive Advantage on the Outer Continental Shelf
      By Robert Dillon
      March 21, 2017

      After eight years of retreat, it’s time for America to charge back into the energy rich waters of the outer continental shelf and secure once and for all its rightful place as an energy superpower.

      With his ambition to return America to its glory days and reassert the nation’s influence on the world stage, President Donald Trump would do well to start with energy security and a bottoms-up review of the energy policies put in place by his predecessor.

      To do that, the president needs a full team of experienced and knowledgeable staff at the U.S. Department of the Interior and its agencies.

      The Senate’s confirmation of Secretary Ryan Zinke to head Interior earlier this month was an excellent start, but hundreds of positions remain unfilled, many critical to restoring access to our nation’s vast offshore wealth.

      Responsible development of our offshore resources has long been a major contributor to the economic health and security of our country. Taxes, royalties, and rents from offshore production are the treasury’s second highest source of revenue – right after the annual contributions of the millions of Americans who pay income taxes.

      Revenue from offshore production took a nosedive under the Obama administration, though. The U.S. government made just $2.8 billion from offshore leases in 2016 – a fraction of the $18 billion earned in the final year of President George W. Bush’s time in the White House.

      The U.S. offshore holds an estimated 90 billion barrels of oil and 327 cubic feet of natural gas. Of the nation’s 1.7 billion offshore acres, though, less than 1 percent – or 17 million acres – are currently under lease.

      That small portion still delivers nearly one-fifth of all of the oil produced in the country. The vast majority of which – 99 percent – is produced in the Gulf of Mexico off the coasts of just four states: Alabama, Louisiana, Texas, and Mississippi.

      California and Alaska are the only other states with offshore production – and the entirety of California’s federal waters have been off limits to new leasing for decades.

      Soon after coming into office, President Barack Obama began to reverse progress made during the Bush administration, including reducing the frequency and number of lease sales, blocking exploration along the Atlantic and Pacific coasts, and curtailing lease terms.

      Nearly 8 million acres of federal waters were leased in 2008. That number dropped below 3 million acres in 2009, and has stayed below that level ever since.

      By the time Obama left the White House in January, he’d succeeded in barring oil and gas activity in almost every corner of the OCS, including nearly all waters off the coast of Alaska. Today, roughly 90 percent of federal offshore areas are off limits.

      […]

      http://www.realclearenergy.org/articles/2017/03/21/recapturing_americas_competitive_advantage_on_the_outer_continental_shelf_110203.html

  4. Well, there is a perfectly valid political reason for exploiting those regions, and it works from equally valid market forces: increased oil and natural gas supplies, or the possibility of such increases, holds down the market price of oil and natural gas, and that’s not good for economies like Iran’s and Russia’s, who need high priced oil and natural gas to fund their various government programs.

    Eric Hines

    • Another significant benefit previously noted is revenue to the US Treasury which comes from the sale of the leases and the government royalties associated with production. Unfortunately Obama significantly killed off new leases for the most part. These treasury incomes are quite significant.
      https://power2switch.com/blog/is-oil-the-u-s-governments-sugar-daddy/
      Some Politicians would rather increase taxes than get $10 Billion or more into the treasury. Obama elected to reduce this income source to cater to the environmentalists.

  5. The Russians are moving ahead at light speed developing all their Arctic resources including off shore oil. So it can’t be only market forces that are driving US and Canadian off shore exploration. Rather it is activist politicians such as Obama and Trudeau who just imposed moratoriums on off shore exploration in the high arctic in late 2016.

    If industry could somehow show improved technology safeguards at the wellhead and demonstrate near 100% reliability without a major incident then the citizen population may be more inclined to give ‘social licence’. It is already a very high standard and if it were approved and one large incident like Horizon in the Arctic, then it would all be shut down anyway. But the hard core enviro’s will never change their minds on oil since they are still trying to obstruct any new safer pipelines & tankers that would carry such oil so this will be a never ending war. Getting drilling/shipping to near 100% track record from 99.8%+ is probably required if it is to permitted again in the high Arctic. And it and should be pursued so these resources are available when we will need them in the future. However, Russia doesn’t have much regulatory oversight and now works on a command approval process, so will be hard to compete with that and their lower safety margin.

    • Of the nearly 53,000 wells drilled in the US Federal waters of the Gulf of Mexico since 1947, there has been exactly one accident of the Deepawater Horizon’s magnitude and very few others that even come close.  That’s  570,446,881 measured depth feet of drilling, 108,039 miles.

      “From 1 January 1980 through 31 December 2012” there were 196 “blowouts/well releases” in the US Gulf of Mexico.  32,132 wells were drilled during that same time period.  That is a 0.6% well control incident rate.  99.4% of the wells were drilled without well control incidents.  

      Just prior to the Deepwater Horizon blowout, this used to be on the Minerals Management Service (MMS) website:

      Haven’t OCS operations historically spilled a great deal of oil?

      No. Since 1980, OCS operators have produced 4.7 billion barrels (bbl) of oil and spilled only 0.001 percent of this oil, or 1 bbl for every 81,000 bbl produced. In the last 15 years, there have been no spills greater than 1,000 bbl from an OCS platform or drilling rig. The spill risk related to a diesel spill from drilling operations is even less. During the 10-year period (1976-1985) in which data were collected, there were 80 reported diesel spills greater than one barrel associated with drilling activities, compared with 11,944 wells drilled, or a 0.7 percent probability of occurrence. For diesel spills greater than 50 bbls, only 15 spills have occurred, or a 0.1 percent probability.

      Natural seepage of oil in the Gulf of Mexico (unrelated to natural gas and oil industry operations) is far more extensive. Researchers have estimated a natural seepage rate of about 120,000 bbl per year from one area (23,000 square kilometers) offshore of Louisiana.

      Needless to say, this disappeared from the MMS (now BOEM) website shortly after the Deepwater Horizon blowout.

  6. “Eni can drill their program from existing infrastructure”

    In an interesting twist, the Eni infrastructure at Spy Island is in state waters, so they would be accessing their federal leases from state lands. A good stepping stone towards accessing federal leases from federal leases and a good test balloon for moving ahead with exploration in Arctic waters.

  7. You can’t even start up a pipeline these days without eco-terrorist activities of sabotage. It is the 1930s Germany.

  8. Well, you know, the Republicans are the 2nd Amendment group, so I am sure they are holding guns to the companies that BOUGHT the rights from those 2 outfits. Which is the only way the story would make sense. So the question to the authors is – where is the evidence of the guns to the head.

    All the rest is sophistry and hyperbole.

    Show us the guns. Period.

  9. Throughout my life I have known people who worked in the Alaska oil fields and on the TAP. I have also been to Prudhoe and hunted in ANWR. The days of wildcatters dumping crap all over are long gone. Add to that the advances in drilling technology/equipment and the legitimate opposition to exploiting oil and gas in the Arctic region is all political. Market forces will advance drilling and pipeline work once the political a$$wipes are driven into the floor. They have exercised their 1st Amendment rights now sit the f*ck down and let adults get the work done.

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