The shutdown rule:
Major oil companies have abandoned hundreds of leases for offshore drilling rights in the United States's portion of the Arctic Ocean.
Federal government documents obtained by environmental group Oceana show that ConocoPhillips Co., Italy’s Eni and Iona Energy, Inc., abandoned all their leases in the Chukchi Sea, to the north and west of Alaska.
Royal Dutch Shell has abandoned numerous leases and said it plans to relinquish all but one.
Oil companies have, in total, abandoned 2.2 million acres of Arctic drilling rights, Oceana said, and 80 percent of all area in the American Arctic leased in a 2008 sale has been or will be abandoned.
For Shell and ConocoPhillips, the decisions came just before a May 1 deadline to pay millions of dollars to keep its leases active.
Shell spokesman Curtis Smith confirmed Oceana’s account, saying the decision came “after extensive consideration and evaluation.”
Shell spent about $2.5 billion over seven years in preparation to drill a single exploratory well last summer in the Chukchi following a disastrous attempt in 2012.
It concluded after drilling that the exploration was not worth the costs of drilling in the remote area, so it decided to abandon Arctic drilling for the foreseeable future.
via thehill.com
The email from the Hill added this:
Companies have blamed the low price of oil and heavy drilling costs as reasons for pulling out of the Arctic. Others have pointed the finger at tight federal regulations on drilling there.
When price falls below average variable cost firms are not able to cover some of their fixed costs (investment) and will decide to shut down production. That $2.5 billion over seven years is a sunk cost. This is money already spent in the past that can't be recovered. It is best to ignore these costs when making decisions. Fixed costs are different, this is money which must be spent in order to produce something. For example, monthly payments on a bank loan for a piece of equipment.
Environmental regulations can increase both types of cost that will contribute to the shutdown decision in the Arctic. Of course, environmental regulations are typically designed to protect the environment, which has economic value, so the shutdown decision may be efficient from private and social point of views.
