Despite Industry Pleas, Obama Imposes Costly Arctic Drill Rules

(Bloomberg) -- Energy companies that hunt for crude in icy Arctic waters will have to stash extra equipment nearby and take other potentially costly steps meant to prevent oil spills in the fragile, remote region under regulations the Obama administration imposed Thursday.

The first-ever Arctic-specific rules for offshore drilling will govern any new oil exploration in the area as melting ice makes it easier for energy companies to plumb once-frozen waters at the top of the globe. Industry leaders, who lobbied against the regulations when they were proposed in 2015, said the mandates will discourage development in U.S. Arctic waters estimated to contain 24 billion barrels of oil.

“We believe there to be billions of barrels of oil there, and we are an economy that is going to need oil for decades to come,” Erik Milito, a group director at the American Petroleum Institute, said before the rules were released. For oil companies considering where to target exploration dollars, “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,” he said.

Persistently low oil prices, regulatory uncertainty, and the already high costs of prospecting in the harsh climate of the Arctic region have spurred energy companies to relinquish more than a million acres' worth of drilling rights.

Operational Challenges

Environmentalists say Arctic-specific drilling standards are essential for working in the remote, punishing environment, where thick ice covers the water most of the year, and the nearest Coast Guard station is more than 1,000 miles (1,600 kilometers) away.

“The unique Arctic environment raises substantial operational challenges,” said Abigail Ross Hopper, director of the Interior Department's Bureau of Ocean Energy Management. “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.”

$2 Billion

The Interior Department estimates the measure will cost as much as $2 billion over the next 10 years, with the bulk of that coming from a new requirement that energy companies have a backup rig nearby to bore a relief well in case of an emergency, at rental rates that can reach a million dollars a day. Those compliance costs could shrink if oil companies agree to pool resources and collaborate on emergency response, following a model that has been used in the Gulf of Mexico since the 2010 Deepwater Horizon disaster.

The rule, which applies to exploratory drilling operations from floating vessels in U.S. Arctic waters, codifies steps Royal Dutch Shell Plc took during its ill-fated oil drilling campaign last year, including by requiring companies to stop work before ice is expected to encroach on the area. Companies also must have the capability to predict and respond to weather conditions, including icebergs. And they are required to have specialized equipment on hand designed to trap oil spewing from an out-of-control well.

Arctic Council

The move dovetails with a joint pledge by President Barack Obama and Canadian Prime Minister Justin Trudeau to ensure commercial activities in the Arctic only occur when the highest environmental standards are met. The U.S. also has pressed for safeguards during its two-year chairmanship of the eight-member Arctic Council, which coordinates environmental and maritime policies for the region.

Environmentalists who argue there is no proven way to clean up oil spills in slushy waters or trapped under ice had pushed for even stronger protections.

“It continues to be true that companies are not ready to operate in the Arctic -- there is no proven response -- but these rules are a step in the right direction,” said Michael LeVine, Pacific senior counsel for the conservation group Oceana. 

The Obama administration is tentatively planning to sell oil and gas leases in the Beaufort and Chukchi seas beginning in 2020, while environmentalists are lobbying the White House to foreclose future drilling in the area altogether. Oil companies and lawmakers from Alaska, meanwhile, are trying to persuade the administration to retain the proposed Arctic auctions when it finalizes a five-year plan governing what new offshore drilling rights will be up for grabs from 2017 to 2022. 

Randall Luthi, head of the National Ocean Industries Association, said the release of the Arctic rule “provides a thread of hope for Alaska residents and U.S. consumers that an Arctic oil and gas program will move forward.”

To contact the reporter on this story: Jennifer A. Dlouhy in Washington at jdlouhy1@bloomberg.net. To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net, Ros Krasny