Arctic Presents Major Opportunity for Oil Companies – and Challenges

A trip to Greenland* in August brought home to me the enormous opportunity and challenges faced by oil explorers in the Arctic.

Oil has long been produced in the region.  The first onshore wells were drilled in Canada in the Mackenzie River valley in 1920 and since then over 400 oil and gas fields have been discovered in the Arctic.

But the high costs and risks associated with operations has meant that development of Arctic fields has been slow.  The only big offshore Arctic field that is in production is Statoil’s Snohvit gas field in the Norwegian Barents Sea, which had first gas 2007.

The potential offered in the region is huge and this has attracted many investors.  A 2008 study by the US Geological Survey states that the Arctic may hold 90 billion barrels of oil and 1,669 trillion cubic feet of natural gas, representing 13% and 30% of the world’s estimated undiscovered resources of oil and gas respectively.

Most of the resource potential is thought to be offshore, with the continental shelves of the United States, Canada and Greenland likely to yield oil and Russia’s and Norway’s gas.  Alaska itself may hold 20% of the resources.

Players in the region include many of the world’s largest oil companies.  Shell has been active in Alaska, paying $2.2 billion for offshore exploration licences in 2005 and 2007, and Greenland.  So far Shell has spent over $4 billion in the Arctic region without drilling a single well.

Meanwhile, ExxonMobil completed a deal with Russia’s Rosneft in April to explore the Arctic.  And earlier in 2012 Rosneft and Italy’s Eni announced an agreement to explore the Kara Sea.  Statoil and Total have an agreement with Gazprom to invest up to $40 billion in developing the massive Shtokman gas field in the eastern Barents Sea.

ConocoPhillips and Statoil are also looking to drill in offshore Alaska and ExxonMobil, Chevron and Cairn Energy have won licences in Greenland with Cairn recently finding traces of oil in Disko Bay.

The strategy for these companies is clear.  They find that access to easy oil, such as fields in the Middle East, is increasingly restricted.  Much of this oil is controlled by national oil companies (state-owned firms) that rely less on investment by western international oil companies.  This has left the majors seeking alternatives that play to their competitive advantages of technological capabilities, deep pockets and their ability to manage large and complex projects.

The technical challenges are severe with extreme weather, seasonal ice cover and enormous ice bergs that scrape the sea bed.  In the post Macondo world there is also the concern that cleaning up oil spills in ice may be difficult or even impossible.  Such concerns have attracted Greenpeace and other NGO activity.

Meanwhile in Greenland geologists have identified the maturity of the source rock as the main risk and are grappling with a layer of basalt that covers possible oil bearing structures making it difficult to “see” what is below with seismic surveys.

These high costs and risks mean that explorers will be seeking discoveries with reserves of at least several hundred million barrels to justify the development of large and complex projects.

Therefore investment in the Arctic region is also a vote of confidence in sustained high oil prices; with the International Energy Agency estimating that Arctic oil requires an oil price of up to $100 per barrel to make it an attractive investment.

But some are not convinced.  Recently Christophe de Margerie, chief executive of Total, was reported to have said that the risk of an oil spill in the Arctic Ocean was simply too high and that the region is not a priority for Total – for now.

 

* My trip to Nuuk, Greenland, was hosted by Nunaoil, Greenland’s national oil company.  I delivered the “3 Day MBA in Oil and Gas” to representatives of Nunaoil, government officials and industry representatives.

Comments

  1. I still don’t get it. There are huge challenges and costs associated with Artic oil, not least of which is a public backlash against exploration. The US government is responding to environmental concerns and is set against it. Yet Shell continues to spend the majority of their $5 billion annual exploration budget on Artic exploration. Meanwhile it is losing the public relations battle and risking their reputation. Is the prize such a big one that it is worth pursuing at any price? Worse still, Shell is persisting even in this low oil price environment… What do they know that we don’t? I don’t get the sense from your article that there is any certainty about the 90 billion barrels of oil and 1,669 trillion cubic feet of natural gas. If it was me I would prefer to spend money on acquiring known reserves in this counter cyclical environment and not wasting over $4 billion without even drilling a well!!! How can they justify this to their shareholders?

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