The US Environmental Protection Agency’s appeals board has essentially canceled permits that would have allowed Royal Dutch Shell plc (NYSE: RDS-A) to operate a drillship in the Chukchi and Beaufort seas off Alaska’s North Slope. The EPA had issued the clean-air permits last year, but conservationists and a Native American group asked for the review.

Shell also got a bit of good news today. The European Commission has approved the $12 billion joint venture between Shell and Brazil’s Cosan Ltd. (NYSE: CZZ) to make and sell cane ethanol and other biofuels.  The still-unnamed joint venture will join Archer Daniels Midland Co. (NYSE: ADM) and Valero Energy Corp. (NYSE: VLO) as one of the world’s largest ethanol producers.

But the news from Alaska is worse than the news from Brussels is good. Shell had expected to receive approval for exploration drilling offshore of Alaska. The company had spent $250 million to retrofit the drillship with the latest emissions-controlling technology, according to The Wall Street Journal.  The EPA appeals board found that the permits were issued without taking into consideration the latest emissions requirements for nitrogen dioxide and another procedural error. Neither of the issues appears to be a deficiency on the part of Shell, but rather are regional EPA office mistakes.

Alaska’s North Slope crude supply has been dwindling for years, and the major producers have been looking both offshore and in protected areas onshore. ConocoPhillips Corp. (NYSE: COP) averaged about 215,000 barrels/day of production in its third fiscal quarter of 2010, down from 229,000 barrels/day from the same period a year ago. BP plc (NYSE: BP) operates the once-massive field at Prudhoe Bay which used to fill the Alaska pipeline. Now the pipeline runs at just a third of capacity. ExxonMobil Corp. (NYSE: XOM) is another big player in Alaska’s oil fields, where production declined by 7% in 2010. Chevron Corp. (NYSE: CVX) has said it will sell its assets in the Cook Inlet, from which Chevron gets about 4,000 barrels/day of oil and 90 million cubic feet of natural gas.

Production from North Dakota is expected to reach 700,000 barrels/day in four to seven years, surpassing the estimated 650,000 barrels/day from Alaska in 2010, and the expected 610,000 barrels/day in 2011. Alaskan production could fall to as low as 500,000 barrels/day in three or four years.

Naturally, Alaska’s politicians want to increase production, but that will have to come from offshore wells and perhaps even drilling in the Alaska National Wildlife Refuge. Alaska’s legislature is considering reducing its royalty requirements, which rise as the price of oil rises. The state can take up to 80% of the price of a barrel.

Shell has been investing heavily in Canada’s oil sands, and this exploratory move in Alaska may induce the company to sell its leases and go elsewhere. But probably not. There are an estimated 25 billion barrels of oil in the seas of Alaska’s North Slope, and every drop is still there. That’s too rich a prize to give up for just a couple of technical glitches and a few hundred million dollars.

Paul Ausick

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