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In a major setback for Arctic drilling, the Obama administration cancels two oil lease sales

FILE: ShellNo flotilla participants float near the Polar Pioneer oil drilling rig during demonstrations against Royal Dutch Shell. (photo by David Ryder/Getty Images)
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This story has been updated.

Citing Shell’s decision to indefinitely cancel plans to explore for oil in the Chukchi Sea after drilling an initial, unsuccessful test well, the Interior Department late Friday announced it was canceling two Arctic ocean oil lease sales scheduled for 2016 and 2017. The agency also cited a lack industry nominations of specific areas of exploration interest as a reason for not going forward.

The sales canceled involved one lease in the Chukchi Sea and another in the Beaufort Sea, to the northwest and north of Alaska, respectively.

“In light of Shell’s announcement, the amount of acreage already under lease and current market conditions, it does not make sense to prepare for lease sales in the Arctic in the next year and a half,” said Secretary of the Interior Sally Jewell in a statement. The move represented a second major setback to Arctic oil drilling plans that as recently as a month ago had seemed to be moving forward smoothly.

Environmental organizations, which had widely protested Shell’s plans and lambasted the Obama administration for approving them, quickly applauded the news Friday.

“Following Shell’s recent decision to halt its Arctic Ocean drilling for the foreseeable future, the Department of the Interior made an entirely reasonable decision today to not hold new lease sales in 2016 and 2017 in the Chukchi and Beaufort seas, respectively. Because of Shell’s failure to find significant oil in the Chukchi Sea, new Arctic Ocean lease sales—which require extensive government preparation and costs—would likely be unsuccessful,” said Lois Epstein, Arctic program director at the Wilderness Society, in a statement.

The cancellation marked a reversal for those who had hoped oil companies would be able to discover large oil reserves that would help make the country less dependent on imported crude oil. Last year, the Bureau of Ocean Energy Management, which conducts the lease sales, quadrupled its assessment of how much oil might be available for exploitation from a 2008 lease sale in the Chukchi Sea, from 1 billion to 4.3 billion barrels of oil, or its natural gas equivalent.

One factor that has dampened interest in Arctic ocean drilling of late is the current, relatively low price of oil, which makes pricey remote exploration less attractive.

“This is part and parcel of what we’ve seen across the spectrum of the oil and gas industry, which is, companies are cutting back on investment,” says Pavel Molchanov, an oil analyst with Raymond James. “And when companies are cutting back on investment, with the degree of austerity that’s been taking place, the reality is, everything gets cut.”

But ultimately, Arctic ocean drilling may be a very long game, and one that companies could reconsider in the future. “Because Shell did not find an economical resource base, that doesn’t mean that we shut the door on it,” adds Fadel Gheit, an oil and gas analyst with Oppenheimer & Co. “Maybe we revisit it after a while. After all, we knew that there was shale oil 50 years ago but it was not economically viable to pursue.”