President Obama's $2.7 Trillion Lease Ban Has Big Oil Fuming

By Matthew DiLallo Markets Fool.com

Image source: Getty Images.

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While outer space is humanity's final frontier, the Arctic is the final frontier for oil and gas drilling. According to the U.S. Geological Survey, 22% of the Earth's undiscovered oil and gas resources lie underneath the Arctic's layers of ice. It is a prize of potentially epic proportions. The U.S. Geological Survey estimates that as many as 412 billion barrels of oil equivalent resources lie north of the Arctic circle. At current oil prices of around $55 per barrel, that is a mind-blowing $22.7 trillion in energy potential.

However, a vast swath of this resource potential is now off-limits after the Obama administration permanently barred future lease sales in the Arctic waters off Alaska. It is a decision that has big oil fuming because an estimated 27 billion barrels of oil and 132 trillion cubic feet of natural gas resources lie underneath these waters. At current oil prices, that $2.7 trillion prize is no longer up for grabs.

Drilling down into the leasing ban

Just before Christmas, President Barack Obama invoked a provision in a 1953 law that states that"the president of the United States may, from time to time, withdraw from disposition any of the unleased lands of the outer Continental Shelf." He used this provision toindefinitely block the sale of new leases in the Chuckchi and Beaufort seas north of Alaska and 31 underwater canyons in the Atlantic. Furthermore, in conjunction with this decision, Canadian Prime Minister Justin Trudeau also placed a five-year moratorium on new oil and gas leases in its Arctic waters.

The actions effectively put more than 125 million acres in U.S. offshore waters off-limits to future leasing. That means oil companies might never have the chance to bid for exploration rights in these areas. The decision to bar future lease sales in the Chukchi Sea is particularly noteworthy because it is thought to hold more oil and gas resource potential than any other undeveloped region in the U.S. and might be the largest untapped resourcebasin in the entire world.

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Image source: Getty Images.

The great escape

It is worth noting that the president's actions do not block future drilling on previously awarded leases. However, most oil companies have already relinquished their rights to these leases because of the high cost of drilling in the Arctic, intense opposition from environmentalists, and an unclear regulatory framework -- not to mention the fact that oil companies have not had success in unearthing the region's buried hydrocarbon treasures.

Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B), for example, spent $7 billion to acquire leases and start exploratory drilling in the Alaskan Arctic over the past several years. However, all it ended up with was one very expensive dry hole after its Burger J well came up dry. Because of this, the company has since relinquished all but one of its more than 274 leases in the Chukchi Sea. While Royal Dutch Shell will hold on to the lease covering the Burger J well, that is because the company values the data collected in its exploration efforts more than the lease's resource potential.

Meanwhile, ConocoPhillips (NYSE: COP) also abandoned its leases in the Chukchi Sea earlier this year. It paid $506 million for the 98 leases off Alaska's northern coast in 2008 and had plans to drill its first exploratory well in 2014 but dropped those ambitions due to regulatory uncertainty. It has also since decided to exit deepwater exploration altogether after drilling a string of dry holes in the Gulf of Mexico, offshore Angola, and the Canadian Atlantic, Instead, ConocoPhillips plans to focus its future development efforts on lower-risk onshore shale development.

Overall, the industry has relinquished nearly all the leases covering the 2.8 million acres of Alaskan Arctic drilling rights purchased in 2008 for $2.6 billion. In addition, most of the few leases that remain outstanding are set to expire in 2017. While some of the companies holding these contracts are seeking extensions, there are currently no plans for new exploration wells in the Alaskan Arctic due to low oil prices.

Image source: ConocoPhillips.

Not giving up without a fight

While the industry does not plan on drilling in the frigid waters of Alaska anytime soon, it would still like the option to explore this region in the future given the resource potential. That is why industry groups have widely panned the current administration's move to ban large swaths of America's coastal waters to future drilling. The Independent Petroleum Association of America said in a statement that it was "extremely disappointed in President Obama's eleventh-hour decision to shut down economic development and lock away America's true energy potential for communities that need it most." Meanwhile, other industry trade groups have vowed to fight the decision. The American Petroleum Institute said that "there's no such thing as a permanent ban."

That said, President Obama's decision to use a provision in the 1953 law to ban future leasing in these areas means that the incoming Trump administration cannot simply overturn the decision. That is because there is no provision in that law to allow for future presidents to reverse the decision of their predecessors. As such, Congress would likely need to enact new legislation, which probably will not be a top priority of the new Congress. Not only are oil prices too low at the moment to incentivize drillers to explore in the Arctic, but the nation currently has vast onshore shale resources to develop. Meanwhile, any attempts by the Trump administration to circumvent this decision will likely face intense opposition and court battles with environmental groups.

However, given the most recent energy outlook by the International Energy Agency -- which projects continued oil demand growth through 2040 -- at some point in the future, the nation could exhaust its currently available resources. While that future is likely decades away, there could come the point when America might need to rethink its decision to leave the Arctic's oil in the ground, especially if the country needs to become energy independent for security or economic reasons. In other words, while the Alaskan Arctic is off-limits at the moment, a rapid rise in oil prices in the future could cause the country to turn its attention back to the potential prize lying underneath these icy waters.

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Matt DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.