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Highlights

Commercial interest severely limited

Trump administration focused on boosting Alaska output

Industry focus is on expanding drilling in Gulf of Mexico

Washington DC — The US Department of Interior said Thursday it was preparing an environmental impact statement for a 2019 lease sale that would open as much as 65 million acres of federal Arctic waters to oil and natural gas drilling.

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While it remains uncertain whether the sale will even take place, commercial interest in US Arctic waters appears extremely limited, according to S&P Global Platts Analytics analyst Rene Santos.

"I am sure there will be some interest from some companies to bid on the leases, but not from many," Santos said Thursday.

Santos said that harsh Arctic conditions that will increase drilling costs, coupled with opposition from environmental groups, will likely deter much commercial interest in the Arctic. In addition, uncertainty around federal regulations, particularly if President Donald Trump is not re-elected in 2020, has made Arctic drilling unpredictable.

"At this time, we do not forecast any new Arctic offshore production since we believe that even if a discovery is made, it will take very long to place it on production due to costs and environmental issues and it would be beyond our forecast period, which ends in 2040," Santos said.

In a Federal Register notice Thursday, Interior's Bureau of Ocean Energy Management said it intended to prepare an environmental impact statement for the proposed 2019 lease sale in the Beaufort Sea. The review "will focus on the potential effects of leasing, exploration, development, and production of oil and natural gas in the proposed lease sale area," and also consider not holding the lease sale and other alternatives, according to the notice.

These alternatives include a plan to exclude leasing in deepwater areas and offering leases in areas only with the highest known resource potential, according to the notice.

The proposed lease sale area includes nearly 11,900 whole and partial lease blocks covering about 65 million acres, Interior said.

In December 2017, BOEM increased its estimate for mean undiscovered technically recoverable oil in the Beaufort Sea to 8.9 billion barrels, up 700 million barrels from a 2016 assessment.

On January 4, Interior unveiled a draft proposed lease sale program that called for 47 separate sales in nearly all federal program areas between 2019 and 2024, including 19 proposed sales in offshore Alaska waters.

The plan, which is expected to be released in its formal proposed version by early next year and finalized later in the year, calls for three sales of acreage in the Beaufort Sea, three of acreage in the Chukchi Sea and two for the Cook Inlet.

The 2019 Beaufort Sea plan would be the first of the 47 sales in the draft plan. The current 2017-2022 offshore lease sale schedule, finalized during the Obama administration, comprises 11 offshore lease sales, including one in Cook Inlet and 10 in the Gulf of Mexico.

But as the expanded offshore plan is being developed, analysts have told Platts that the industry is largely unconcerned about expanding drilling into any federal waters outside the Gulf of Mexico.

"The eastern Gulf is really 99% of what all the operators care about," Christopher Guith, a senior vice president for policy at the US Chamber of Commerce's Global Energy Institute, told Platts in October. "It's really all that matters."

Still, the move to expand drilling in the Beaufort comes as the Trump administration looks to boost Alaskan crude output, both onshore and off. The tax reform bill signed into law by President Trump in December included a provision to allow drilling in the Arctic National Wildlife Refuge within a 1.5 million-acre coastal plain known as the 1002 Area. An ANWR sale is expected to take place next year.

In October, Interior gave conditional approval to Hilcorp Alaska's plan to build a nine-acre artificial gravel island in the Beaufort Sea, in what would be first oil and gas production facility in federal waters offshore Alaska.

The plan, known as the Liberty Project, would be built roughly five miles off Alaska and about 20 miles east of Prudhoe Bay, Interior said. It is expected to produce 60,000 b/d of conventional light oil when operations are scheduled begin in 2023, David Wilkins, Hilcorp's senior vice president for Alaska, said in September.

Hilcorp already has four artificial islands in Alaskan state waters producing oil and gas.

--Brian Scheid, brian.scheid@spglobal.com

--Edited by Keiron Greenhalgh, newsdesk@spglobal.com