Technology, high prices fuel oil rush in Arctic

By BRETT CLANTON, HOUSTON CHRONICLE

Updated 12:02 a.m., Monday, October 17, 2011

As the global hunt for oil gets tougher, the icy expanse of the Arctic – one of the last frontiers left for exploration – is looking more attractive to some producers.

Indeed, oil and gas activity in areas north of the Arctic Circle could grow considerably in coming years as several major oil companies aim to move forward with exploration plans and others weigh whether they should follow suit.

While it may be too early to call it a boom, there are clear signs of a building trend.

In August, Exxon Mobil Corp. and Russia’s Rosneft announced a sweeping deal to explore offshore oil fields in the Russian Arctic. Earlier this year, Norway’s Statoil made a major discovery in the Barents Sea, marking a turning point for the area. Meanwhile, Shell hopes to begin a controversial drilling program off the northern coast of Alaska by next summer, British firm Cairn Energy continues its so-far-unfruitful search off the coast of Greenland and others are eyeing portions of the Canadian Arctic.

“We’ll see more (Arctic) activity than we’ve seen in the past,” said David Hobbs, chief energy strategist with IHS-Cambridge Energy Research Associates. “But given that the past has been a pretty low baseline, that’s not as great a statement as it might sound.” Major discoveries, however, could accelerate activity, he said.

Oil companies are looking north as they struggle to replace production from declining fields and find new sources of oil to feed the world’s growing appetite for energy. High crude prices, along with advances in drilling and extraction, have also made Arctic projects more feasible.

But operating there comes with technical challenges and big costs. Environmentalists also contend expanded drilling could have a devastating impact on wildlife and air quality and say spills would be far harder to contain than BP’s disastrous oil spill in the Gulf of Mexico last year. What’s more, much of the area remains under the control of national oil companies. All of which helps explain why the Arctic, especially offshore, has not seen widespread oil and gas development.

90 billion barrels

The region’s potential as a major oil producer, however, is getting harder to ignore.

Nearly one quarter of the earth’s undiscovered hydrocarbons are trapped in the Arctic, according to the United States Geological Survey, which estimates as much as 90 billion barrels of oil and 1.7 trillion cubic feet of natural gas could be extracted using today’s technology.

“The extensive Arctic continental shelves may constitute the geographically largest unexplored prospective area for petroleum remaining on Earth,” USGS scientists said in 2008.

Exxon Mobil’s pact with Rosneft calls for spending $3.2 billion on joint exploration projects, including work in the Kara Sea. The partnership, though still largely conceptual at this point, was considered a coup for the Texas oil giant after BP failed to come to terms on a similar agreement. But the bigger value to Exxon, assuming it finalizes the deal, may be the prospect of future access to Russia’s oil-rich Arctic.

“Bluntly, Exxon doesn’t do a project unless it thinks it can make a return,” Hobbs said. “And they think very carefully before making a commitment.”

Company officials have said the first well under the partnership could be drilled in 2015.

In April, Statoil announced an estimated 250 million-barrel discovery called Skrugard in Norwegian waters of the Barents Sea. The find has brought new optimism to an area that has been explored since the early 1980s with only limited success. In addition, the recent resolution of a boundary dispute between Norway and Russia could open new areas of the Arctic to exploration.

Alaskan projects

Meanwhile, Cairn Energy continues its search for oil and gas off the coast of Greenland, despite so far striking out with six dry holes. And a handful of producers including BP, Exxon Mobil and Chevron have positions in the Canadian portion of the Beaufort Sea.

As those companies try to move forward, the energy world’s eyes will be on Shell. The U.S. arm of Europe’s Royal Dutch Shell is hoping to begin a long-delayed drilling program in Alaska’s Beaufort Sea and Chukchi Sea next summer.

Thought to hold roughly 25 billion barrels of oil, the offshore regions could “remake the energy picture in Alaska,” where production from fields on the North Slope is declining up to 7 percent a year, said Pete Slaiby, vice president of Shell’s Alaska business.

But while Shell recently received conditional approval from federal regulators to proceed with drilling in the Beaufort Sea next year, it still faces more regulatory and legal hurdles, and it continues to await clearance in the Chukchi Sea. Without the latter, Slaiby said, Shell will not go forward with its drilling program next summer. The company has said it will make a decision by the end of this month.

Many watching Shell

Shell’s program will be “quite key” in determining whether enough oil is beneath the Arctic to justify development for others or whether it has more natural gas than expected. If gas is predominant, it would likely deter investment, given current flush supplies, said Chirag Sabunani, a research analyst with UK-based Wood Mackenzie, who focuses on Alaska and Canada.

“Clearly, Shell’s activity is at the forefront,” he said, “and a lot hinges on Shell.”

Even if the company begins drilling next year, Wood Mackenzie doesn’t expect oil production from the Alaska project to start until at least 2020.

Hobbs, with IHS-CERA, agreed the prospect is “very small” that the Arctic as a whole will become a significant contributor to global oil supplies within the next decade.

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