By Steve Quinn
JUNEAU, Alaska, Jan 22 (Reuters) - A federal appeals courtruled Wednesday that the U.S. Interior Department wronglyawarded offshore oil leases in the Chukchi Sea near Alaska in2008 without considering the full range of environmental risksposed by drilling in the Arctic.
A three-judge panel of the 9th U.S. Circuit Court of Appealssent the on-going dispute - pitting environmental groups andNative Alaska tribes against the federal government and energycompanies - back to U.S. District in Anchorage, Alaska.
It was not immediately clear what the decision would meanfor the oil company Royal Dutch Shell Plc and itsplans, revealed in December, to resume exploratory drilling thiscoming summer in the Chukchi.
Shell is the major lease holder from the sale six years ago.Company spokeswoman Megan Baldino said in an email statement:"We are reviewing the opinion."
A spokeswoman for the Interior Department declined to comment, saying the agency does not discuss pending legalmatters.
But the plaintiffs' Juneau-based attorney, Mike LeVine,said, "It's unlikely that the government could authorizedrilling activities on leases the court says were improperlyawarded."
The 9th Circuit ruled that the Interior Department leases inquestion, opening nearly 30 million acres (12 million hectares)of the sea floor to energy drilling, were based on a flawedestimate of 1 billion barrels of economically recoverable oilfor the scope of production.
The appeals court called that estimate "arbitrary andcapricious," before sending it back to U.S. District Judge RalphBeistline for additional review.
The court ruled that under the National Environmental PolicyAct, the government must "base its analysis on the full range oflikely production if oil production were to occur. It did not doso here."
The last Chukchi lease sale by the government in 2008 drew arecord $2.66 billion in bids, with nearly $2 billion of thatfrom Shell. The balance was paid by ConocoPhillips andStatoil.
Environmental and tribal groups challenging the leasescontend they should never have been granted six years agobecause the federal government failed to consider the full scaleof the project and associated risks.
LeVine said Wednesday's decision supports that argument.
"This tells me that the time has come for the federalgovernment to stop trying to provide justification for a poordecision that was made in 2008," LeVine said.
Shell commenced preliminary drilling on one Chukchi well in2012 - marking only the sixth well ever drilled in the area -but after experiencing equipment failures and accidents, thecompany declined to drill there again last year.
In one high-profile mishap of January 2013, Shell's drillship Kulluck ran aground while being towed south aftercompleting its work off Alaska.
The company said in December that it was planning to deployan upgraded drilling vessel to the Chukchi, while keeping anewly contracted backup drill ship ready if needed. Exploratorydrilling operations were set to be carried out from July throughOctober of 2014.
U.S. Alaska Senator Mark Begich, a Democrat who backed Shellin its bid for drilling permits, said he believes the companywill still have a drilling season this year.
"The Arctic has already been and will continue to besubjected to unprecedented safety standards, and today'sannouncement does not delay the important progress we havemade," he said in a prepared statement.