Why the Next Arctic-Drilling Fight Might Be Over Before it Begins

As President Obama heads for Alaska, doubts swirl around plans to auction new Arctic-drilling rights next year.

On paper, the Obama administration is slated to sell new drilling leases in Arctic waters next year, giving big energy companies new opportunities to seek oil and natural gas that may lie beneath the icy seas. And on paper, the auction would surely inflame the longstanding left-right fight between Arctic development and conservation, putting the Obama administration between energy companies and environmentalists one more time before the president leaves office.

But off paper, and in the real world, there's reason to believe this one isn't actually going to happen—at least not before President Obama leaves office.

Instead, several signals suggest the Obama administration will push back or cancel the 2016 sale, leaving the question of new Arctic leases to the next occupant of the White House. And, if that happens to be Hillary Clinton, it would likely mean slim pickings for the energy industry, given the Democratic front-runner's freshly stated opposition to allowing drilling off Alaska's northern coast.

As written, the Interior Department's 2012-2017 offshore leasing plan calls for an auction next year of drilling blocs in the Chukchi Sea, which is estimated to hold 15 billion barrels of recoverable oil. But here's a big reason to believe that won't happen: Interior has not even begun work on a huge piece of the labor-intensive, detailed bureaucratic spadework that must occur first. That is, the preparation of the formal "Environmental Impact Statement" for the 2016 sale. Those complex reports that Interior must prepare ahead of lease sales have generally taken around two years to complete for past auctions.

The Chukchi is where oil giant Royal Dutch Shell, after recently winning the Obama administration's green-light for a limited effort, has begun drilling a well on tracts it bought when George W. Bush was still president.

Environmentalists strongly oppose Shell's project to develop leases obtained under Bush. But in a separate and somewhat lower-profile fight, for years activists have been urging the administration not to sell oil companies any new leases in the region, either.

The Obama administration has a track record of reluctance to sell new drilling rights in the environmentally sensitive Arctic region. In 2010, a set of major Interior Department revisions to the 2007-2012 leasing plan crafted under Bush scuttled sales in the adjoining Beaufort and Chukchi Seas.

And the second-term version of Obama has been more aggressive on climate change and confronting fossil-fuel interests. He may have even endorsed a call by campus activists for big investors to dump shares in coal and oil companies.

Sources in both the oil industry and the environmental movement expressed skepticism about whether a new auction is really in the offing next year.

The Interior Department, asked about the planned 2016 lease sale, said only that it is still on the current 2012-2017 schedule and has not been canceled. A White House spokesman referred an inquiry to Interior.

But Brian Deese, a top energy and climate aide to Obama, hardly offered a strong endorsement of Arctic offshore development when he briefed reporters ahead of Obama's three-day visit to Alaska next week.

The White House, ahead of Obama's visit that's slated to focus heavily on climate change, has faced strong criticism from activists for allowing Shell to proceed this summer. Deese, however, pushed back against a reporter's claims about the administration "opening up" the Arctic.

"Shell is operating off of a lease that was left by the prior administration, and what you've seen by this administration consistently over the course of several years is setting unprecedented high levels of safety standards for Shell or any other company to meet, and that has resulted in a process where Shell's planned activities have been delayed and narrowed quite substantially," Deese said Monday.

"And even in the context of the activities that are happening in the current season, we're talking about an application for a permit to drill for a single well that is in process right now. And so I think that I would caution against a characterization that you used about opening up the Arctic for drilling and the huge consequences there, and look at what actually is happening on the ground," he said.

Athan Manuel, a Sierra Club lobbyist and veteran of Arctic-drilling battles, saw hopeful signs in the comments. "We'd rather have them step in and stop Shell, but at a minimum, we hope Mr. Deese was tipping their hand they would cancel the proposed lease sales for 2016 and 2017," Manuel said, referring to next year's Chukchi sale and a separate auction slated for 2017 in the adjoining Beaufort Sea.

Environmentalists strongly oppose Arctic drilling, calling it a risk to polar bears, whales, and other inhabitants of the region's ecosystem, and they also say that tapping huge new hydrocarbon reservoirs is at odds with stemming carbon emissions.

The industry says development can proceed safely, and that new sources are vital to ensuring that oil companies can provide supplies to keep pace with future world energy demand.

Scuttling the 2016 sale would likely bring criticism from the oil industry. But it's also unclear whether companies have an appetite for bidding large sums for leases, given the question marks in the Arctic.

Industry sources and analysts say companies want to see how Shell fares with leases that it spent more than $2 billion to acquire in 2008 and billions more dollars in its long, troubled attempt to develop.

Another big question mark: The outcome of the 2016 presidential election. Clinton, the Democratic front-runner, last week came out against allowing Arctic drilling from existing or future leases.

"I believe the companies are confident that there's a very substantial resource there, but they are being very cautious to see if purchasing a lease means they actually get to develop it," said industry lobbyist McKie Campbell of BlueWater Strategies, whose clients include ConocoPhillips, one of the companies that holds Arctic leases.

Guy Caruso, a senior analyst with the Center for Strategic and International Studies, said the industry's interest in buying new leases depends on Shell's experience with regulators and the Arctic conditions. "As of now, I would [expect] low interest for 2016, but that could change if things go well for Shell from now on," said Caruso, who led the federal Energy Information Administration under George W. Bush.

And the collapse in oil prices is weighing on companies' willingness to shell out cash even in the Gulf of Mexico, where there's already major development and familiarity with the conditions and resources. A lease sale last week for tracts in the western Gulf drew just $22.7 million in winning bids, which is low by historical standards.

Amy Myers Jaffe, a prominent energy analyst with the University of California, Davis, said the industry still has an appetite for the Arctic, given the large amount of hydrocarbons believed to be there. But she doesn't think it's a good time to offer new leases.

"The latest tender for Gulf of Mexico acreage was a dud, and that should be a warning, since Gulf of Mexico is still a highly profitable place to drill, more so than Alaska because the costs are lower," said Jaffe.

"I do think it seems ill-advised for Interior to be leasing in the Arctic, if for no other reason than this might be the worst time to try to attract new investment, given budget cuts, low oil prices, and pressure from shareholders and activists that far-flung Arctic exploration may be unprofitable," she said.

But there's always next time. A draft five-year plan for offshore lease sales in 2017-2022 that Interior floated in January includes Arctic auctions in 2020 and 2022.