Oil and Gas

Arctic drilling rights sale smashes record

ANCHORAGE, Alaska (Reuters) - A sale of oil and gas rights in U.S. waters of the Chukchi Sea, off the northwestern coast of Alaska, has brought in a record $2.66 billion despite protests over the opening the environmentally sensitive area to drilling.

A polar bear sow and two cubs are seen on the Beaufort Sea coast within the 1002 Area of the Arctic National Wildlife Refuge in this undated handout photograph provided by the U.S. Fish and Wildlife Service. A contentious sale of offshore oil and gas drilling rights in the Chukchi Sea off the northwestern coast of Alaska has been opposed by environmentalists who say too little is known about the possible impact of drilling on populations of polar bears and walruses in the area. REUTERS/U.S. Fish and Wildlife Service/Handout. EDITORIAL USE ONLY. NOT FOR SALE FOR MARKETING OR ADVERTISING CAMPAIGNS.

Oil company bidding for the acreage being offered by the federal government’s Minerals Management Service surpassed the previous record set in the early 1980s, underscoring how high oil prices have transformed undesirable high cost regions into exploration hotspots.

The federal government, in its latest budget, had estimated it would receive only $67 million for the acreage, said MMS Director Randall Luthi, who traveled from Washington to attend the sale.

“It is now worth the money to explore some of these areas that were so expensive and are still so expensive to get into,” Luthi told reporters after the bids were opened.

Royal Dutch Shell, which has targeted Alaska as a key area for exploration, was the most aggressive bidder and lodged the highest bid, offering $105.3 million for a single exploration block.

Shell was pleased to pick up the territory, which included areas that Shell had explored in about 25 years ago but relinquished as uneconomic, said Annell Bay, the company’s vice president for exploration in the Americas.

“I see it as a proven, prolific and undeveloped hydrocarbon basin,” Bay said. “This is an opportunity to develop a proven and prolific basin to supply energy security for North America.”

ConocoPhillips, Eni, StatoilHydro and Repsol YPF were also active bidders. Conoco offered several millions of dollars for many individual tracts, often in direct competition with Shell. ConocoPhillips’ highest bid for a single tract was $71.1 million, though Shell outbid it for that tract, according to preliminary results.

“I don’t think I was surprised because there has been a lot of interest in this area,” said Marilyn Crockett, executive director of the Alaska Oil and Gas Association. “The turnout today indicates there is a strong potential resource out there.”

The MMS believes up to 15 billion barrels of recoverable oil reserves and 77 trillion cubic feet of recoverable gas reserves lie beneath the Chukchi Sea.

Earlier exploratory activity confirmed the presence of oil but there was little interest in the area due to the high cost of producing oil in Arctic waters. The previous sale of oil and gas leases in the Chukchi in 1991 brought in only $7.4 million for 30 blocks.

The auction of 5,355 exploration blocks covering 29.7 million acres, 25 to 50 miles (40 to 80 km) offshore, has been opposed by environmentalists who say too little is known about the possible impact of drilling on populations of polar bears and walruses in the area.

Allegations that the U.S. Fish and Wildlife Service deliberately delayed its final decision on the possible listing of the polar bear as an endangered species to ensure the sale was able to proceed have added further controversy.

A small group of protesters, one dressed in a polar bear costume, braved temperatures of -24 degrees Celsius (-11 Fahrenheit) outside the public library in Anchorage where the lease sale was being held.

“I wish I could have money so I could bid myself to save my ocean,” Earl Kingik, an Inupiat subsistence hunter from the Chukchi Sea village of Point Hope, said during a break in the bid opening.

Kingik said he was dismayed at the intense interest in drilling the waters off his village.

“We consider the ocean our garden, and we want to keep our garden clean,” he said.

Alaska native groups and environmentalists are already fighting Shell’s plans to drill on acreage in the adjacent Beaufort Sea.

Shell had planned to drill four wells on its Sivulliq prospect during the summer of 2007 but was blocked by a court challenge to its environmental permits.

Oil production from the Chukchi Sea is at least a decade away, MMS officials said, citing the need for an undersea pipeline to connect the remote area with the Trans Alaska Pipeline.

Editing by Robert Campbell and Christian Wiessner