BY BEN LEFEBVRE AND TOM FOWLER
HOUSTON -- ConocoPhillips suspended plans to drill for oil in the waters off of Alaska's Northern Coast in 2014 until federal regulations for Arctic Ocean drilling become clearer, the company said Wednesday.
The announcement is another setback for the energy industry's plans to explore the U.S. Arctic ocean, thought to contain huge amounts of oil. Royal Dutch Shell called off its 2013 Alaskan drilling program after two of its Arctic Ocean rigs were damaged, one after running aground an island off the Alaskan coast earlier this year.
ConocoPhillips, which has spent $650 million on its Arctic drilling program through 2012, received 98 exploration lease tracts in the Chukchi Sea outer continental shelf in 2008. ConocoPhillips said it decided "it would not be prudent" to make the investment necessary to explore in the harsh Arctic environment until the U.S. government and energy industry hammered out an Arctic-specific regulatory model for offshore oil and gas exploration.
"Once those (regulatory) requirements are understood, we will re-evaluate our Chukchi Sea drilling plans," said Trond-Erik Johansen, president of ConocoPhillips Alaska.
Statoil ASA had also planned to start drilling in the U.S. Arctic Ocean in 2014 but last year said it would delay operations until 2015. At a conference in Houston last month Tim Dodson, executive vice president of global exploration for the Norwegian oil and gas firm, said his company would have no problem walking away completely from those drilling plans if they proved to be too risky.
Regulatory uncertainty may have played a part in ConocoPhillips' decision, but the problems Shell experienced in the frigid waters off of Alaska may have also inspired ConocoPhillips to review its own program, said Argus Research analyst Phil Weiss.
Extreme cold temperatures, rough seas and high winds makes offshore Alaskan drilling a large investment for energy companies, one that doesn't always lead to high returns. Shell has spent $5 billion in the past six years on its Arctic drilling program, only to have its 2012 plans hampered by a number of setbacks, including damage to key safety equipment that led the company to drill just two partial wells, instead of the six originally planned.
"Against that backdrop, caution is better than plowing ahead and having a problem that becomes a bigger setback for the industry," Mr. Weiss said.
The difficulties continued for Shell after the drilling season ended. On Jan. 1, 2013, the Kulluk, one of the two drilling rigs Shell was using, ran aground on an uninhabited island about 300 miles southwest of Anchorage after ships towing it to Seattle for the winter lost control of the rig during a storm. It was freed from the shore and remained afloat, but suffered damage to the hull and electrical systems.
The Noble Discoverer drilling rig, which Shell was leasing, had an engine fire in December when it was on its way to Seward, Alaska, prompting a U.S. Coast Guard inspection. It will need to have work done on its propulsion system in dry dock as well, according to the company.
A special review of the incidents and Shell's Arctic drilling plans by the Department of Interior called for Shell to maintain better oversight of its contractors, but didn't recommend a halt to operations.