The U.S. 9th Circuit Court of Appeals in San Francisco ruled Wednesday that the U.S. Interior Department did not properly evaluate the scale of oil production that could result in the Chukchi Sea when it sold more than $2.6 billion in development leases in the environmentally sensitive area in 2008.
Shell has devoted about $5 billion and more than eight years of work for its Arctic oil exploration off Alaska's coast in the Chukchi and Beaufort seas.
Shell's preliminary drilling in the Arctic in 2012 was overshadowed with problems, including a grounded drilling rig, violations of air pollution limits, engine failures on a tow ship and an oil spill containment system damaged during testing, the Anchorage Daily News reports.
In November, Shell filed plans with the federal government to resume drilling in the Chukchi Sea this year.
Shortly before that, Shell Chief Financial Officer Simon Henry referred to Alaska as "the largest single exploration prospect in the Shell group" and "the most attractive single opportunity for the future."
But critics of Arctic drilling have raised concerns about the risks of oil spills in the remote region. Chukchi is about 1,000 miles from the nearest major port, Dutch Harbor, Alaska.
The federal appeals court ruling stems from a lawsuit challenging the leases filed by a coalition of environmental and Alaska Native groups.
The groups in a statement called the ruling "a victory" for the Arctic Ocean.
"The government has no business offering oil companies leases in the Chukchi Sea. The area is home to iconic species such as polar bear, bowhead whales and walrus and to a vibrant indigenous subsistence culture. Drilling for oil puts at risk the region's wildlife and people, and it takes us off the path toward a clean energy future," the statement said.
Shell is reviewing the appeals court ruling, a company spokesman told the Houston Chronicle.
The ruling follows Shell's announcement last week that it expected fourth-quarter financial earnings of $2.2 billion, down about 70 percent from a year earlier.
Despite the ruling, Sen. Mark Begich (D-Alaska) expressed optimism that drilling in Arctic waters will proceed.
"I remain confident that we will see continued safe exploration in the Arctic this summer," Begich was quoted as saying by the Chronicle. "The Arctic has already been and will continue to be subjected to unprecedented safety standards and (this) announcement does not delay the important progress we have made."