Obama Administration Issues Final Arctic Drilling Regulation — Update

By Amy Harder 
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WASHINGTON — The U.S. Interior Department on Thursday issued final regulations governing future oil and natural-gas drilling in the Arctic Ocean that will require extensive contingency plans to ensure companies could swiftly contain any potential oil spill.

The regulations for the frigid, isolated offshore region were first proposed in February 2015. No companies are currently trying to tap oil or gas in the area and, because of a protracted slump in oil prices around the world, none have any immediate plans to do so.

Last September, Royal Dutch Shell PLC abandoned its $7 billion plan to drill in the Chukchi and Beaufort Seas off Alaska’s northern coasts after finding just trace results of oil and gas in an exploratory well it drilled last summer. That venture was among the company’s largest, most high-profile and expensive exploration projects. ConocoPhillips and Statoil ASA also recently abandoned leases they had owned in the Arctic.

Energy industry executives have cited a mix of low oil prices and protracted regulatory processes as reasons for not pursuing Arctic drilling. Global crude oil prices have been hovering between $40 and $50 a barrel for the past couple months, after hitting a low around $30 a barrel earlier this year, according to federal data. Oil traded over $100 a barrel in 2013 and 2014.

The new Arctic regulation aims to put in place much of what Shell had already committed to doing when it drilled in the area last summer, including having an additional rig on hand that could drill a relief well in case the company lost control of its primary well and having the ability to construct a containment dome that could be used in case of a spill.

“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.”

If and when companies do pursue Arctic drilling, complying with the rule would probably be expensive. The government estimates the rule could cost the industry $2 billion over 10 years.

The new Arctic drilling regulation is the latest in a series of rules the Interior Department has pushed in the past several months as it tries to make drilling on federal lands and in federal waters safer and better for the environment.

In April, the department issued a final rule requiring new standards for well-control equipment. That regulation was prompted by the 2010 Deepwater Horizon rig explosion in the Gulf of Mexico, which killed 11 workers and caused the biggest offshore oil spill in U.S. history. Last year, the department issued stricter standards for hydraulic fracturing of wells on public land, though a federal court in June struck them down, saying the administration didn’t have the authority to issue such rules.

In a departure from other rule-making, Interior officials didn’t offer a specific monetary benefit to the Arctic rule, saying instead that it is aimed at avoiding a low-probability but high-risk occurrence of a catastrophic oil spill.

“We did not quantify the benefits of the rule specifically because of the difficulty in doing that,” said Janice Schneider, assistant secretary for land and minerals management.

The Deepwater Horizon explosion and spill “demonstrated that even such a low probability events can have devastating human, economic and environmental results if they occur,” the rule states.

Industry groups criticized the rule, though with less stridency than they have other regulations that have a more immediate and direct impact on energy companies’ bottom lines.

“This is an unfortunate turn by this administration and will continue to stifle offshore oil and natural gas production,” said Erik Milito, a director with the American Petroleum Institute, the industry’s main lobbying group. “We remain concerned about various regulatory activities related to offshore energy development including today’s proposals for Arctic operations.”

Environmental groups praised the rule but also called on the Obama administration to stop forthcoming oil-lease sales planned for the Arctic Ocean between 2017 and 2022. The Interior Department in March issued a new offshore leasing plan which withdrew a planned lease-sale for the Atlantic Ocean but retained the option to offer three Arctic lease sales.

“The new rules should help lead to better choices by the government and companies in the future,” said Michael LeVine, senior counsel at Oceana, an environmental protection group.

Write to Amy Harder at amy.harder[a]wsj.com

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