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As the Arctic gets warmer, oil and gas producers see the chance for a big expansion. But plenty of technological hurdles remain.

February 11, 2008; Page R12

Above the Arctic Circle, frigid temperatures can turn metal brittle enough to crack a hull, freeze ballast tanks solid and clog engine vents with ice. And that’s just in summer.

Despite grueling conditions, interest in oil and gas reserves in the far north is heating up. Virtually every major producer is looking to the Arctic sea floor as the next — some say last — great resource play. One study, by U.K. consultants Wood Mackenzie and Fugro Robertson Ltd., puts reserves there at roughly 400 billion barrels, or 30% of the world’s remaining supply.

But so far, thanks to weather-related challenges that baffle even the most experienced engineers, exploration has been limited to a brief window in summer.

The Arctic summers have grown longer, raising concerns among scientists and environmentalists that the polar ice cap is melting and that carbon emissions from oil and other fossil fuels are to blame. But for players in the energy industry, the longer summers and the retreat of the permanent ice cover are opening up new possibilities.

Seasonal Work

Energy companies already are seeing a “dramatic difference” in the amount of time they can work in the far north, says Mike Watts, exploration director at Cairn Energy PLC, an Edinburgh, Scotland-based company. On Jan. 9 it acquired licenses to explore off the west coast of Greenland, which is a self-governed province of Denmark. Greenland is also considering a sale of east-coast rights in 2012. For the moment, those waters remain choked with ice year-round, but four years from now “that might have changed,” says Mr. Watts.

Much of the Arctic’s potential won’t be unlocked until the middle of the next decade at the earliest. Diplomats from five nations still have to work out who owns the Arctic resources. Then there are the technological challenges, led by a shortage of Arctic-ready rigs and the inability to maximize potential by working year-round.

It would require some completely new techniques, and I don’t see clearly what you would need to do to drill year-round,” says Wim Janse, managing director at GustoMSC, a Dutch ship designer that recently completed a design for an Arctic-ready drillship, the Bully No. 1, for a joint venture between Royal Dutch Shell PLC and a subsidiary of Norway’s Frontier Drilling ASA.

Efforts by GustoMSC and other offshore-drilling experts represent the first significant research push into Arctic drilling technology in 20 years. At present, only around five rigs are capable of drilling in Arctic waters more than 300 feet deep, where energy companies are increasingly turning their focus, and even those tend to operate in 2,000 feet of water or less. Rigs now under construction will be able to search for oil in waters up to 12,000 feet. But Bob Long, chief executive at Transocean Inc., the world’s largest offshore driller, estimates it will be 15 years before the supply of deep-water Arctic rigs catches up with demand.

Most offshore rigs operate in tropical and subtropical climates like the Gulf of Mexico and Brazil. To work in cold temperatures and rough, ice-clogged seas, these rigs — even many that operate just outside the Arctic Circle in the North Sea — would need an overhaul to their hulls, heating systems and engines, among other changes. Existing rigs could be adapted, but with demand surging for deep-sea oil projects in warmer climates as well as cold, drillers and producers are primarily commissioning new rigs for the Arctic.

Apply Heat

To create Bully No. 1, GustoMSC took the standard design for its latest generation drillship — which looks like an oil tanker with a derrick on top — and set about winterizing it. The Bully will feature the bow of an icebreaker and be constructed from an ultra-flexible grade of steel to protect the hull from shattering in extreme cold. Heating systems will be installed along every inch of piping. Special heating units will also protect ballast tanks, which use seawater to stabilize the rig and can freeze in extreme cold. Engine vents will be widened and warmed to keep ice from building up.

The end product is a bit bulkier than the original drillship, says Jaap-Harm Westhuis, the lead engineer on the Bully project. “What you lose is a bit of the simplicity of the design, the elegance,” he says.
The Bully is being built in Shanghai for delivery in 2010. A similar ship was just completed in November by Samsung Heavy Industries Co., a member of South Korea’s Samsung Group, for Stena Drilling in Aberdeen, Scotland, a unit of Sweden’s Stena AB. That ship cost $600 million, Stena says. Mr. Westhuis, meanwhile, declines to say what the Bully’s final price tag would be. But he says GustoMSC’s rig is smaller than other drillships under construction, and should therefore be “substantially less expensive.”

Designers of drillships and rigs for Arctic duty are likely to see demand well into the future. One of the last winterized rigs to be built before the latest wave, Transocean’s Polar Pioneer, built in 1985 specifically for working at moderate depths in the Arctic, is booked through March 2014, the longest contract for any rig in the company’s fleet. Meanwhile, Transocean has created a team to develop Arctic technology, its first such effort in at least two decades, according to the CEO, Mr. Long. The company, whose headquarters are in Houston, declined to speak in detail about its Arctic team.

Meet the Barents

StatoilHydro ASA, the Norwegian producer that hired the Polar Pioneer through 2014, has the most Arctic experience of any international energy company. The company, in which Norway has a 62.5% stake, launched production in 2006 at Snøhvit, the first field to start producing in the Barents Sea, off Norway’s northern coast. In October, StatoilHydro parlayed its technological expertise into a 24% stake in OAO Gazprom’s Shtokman gas project, a Barents Sea field in Russian waters that is thought to be one of the largest in the world.

“We have an ambition to operate anywhere in the Arctic by 2030,” says Halvor Engebretsen, vice president, head of Arctic projects at StatoilHydro. Work at Snøhvit and Shtokman could “serve as a catalyst for new technology” that would allow for future work in areas too icebound to explore today, he adds. In the meantime, he says, his company will gradually work its way across the Barents Sea using technology now available, including production facilities that are entirely underwater to avoid frigid air temperatures and storms.

Throughout the Arctic, activity will move at a glacial pace. Summers even now are only long enough to drill one or two wells, while as many as six appraisal wells are often needed for producers to give the go-ahead on major projects. Mr. Engebretsen also sees warming in the Arctic as less of a boon than Cairn Energy’s Mr. Watts does. Summers may grow longer, he says, but stormier and less predictable, too. And a few extra degrees won’t make work any easier in the winter.
Near and Far

In another area with promise, the Beaufort Sea north of Alaska and Canada, there may be oil 10,000 feet down, out past the continental shelf — a depth that calls for the new breed of drillship, like Shell’s Bully. Exploration by Shell closer to shore, meanwhile, has been halted due to a lawsuit by environmental groups and Inupiat whalers claiming that bowhead whales in the area will be threatened. The Ninth U.S. Circuit Court of Appeals in San Francisco heard oral arguments on Dec. 4.

The biggest Arctic reserves may lie beneath the permanently frozen waters off east Greenland, an area that one consultant says may hold more oil than Alaska’s North Slope, the most prolific oil field discovered yet in the U.S. “But it’s an absolute nightmare to even explore,” says Andrew Latham, a consultant with Wood Mackenzie in Edinburgh.

With technology that’s currently available, to drill in such a spot would require a fleet of icebreaker ships constantly circling a rig. Ice would also cut off waterborne supply routes, so rigs would likely need to carry huge amounts of fuel and other necessities.

Overcoming such obstacles could be decades away. But Mr. Janse, the GustoMSC engineer, doesn’t rule it out.

“They said it was impossible to drill in water depths deeper than 300 meters, and now we drill in 3,000 meters,” Mr. Janse says. “Nothing is impossible.”

As the summer ice cover dwindles in the arctic new areas are opening up for oil and gas exploration. Even compared to the lowest years on record, 2007 sea ice has visibly declined. See a short video from the National Snow and Ice Data Center showing (on the left) how the average extent of ice coverage changed from 1979 to 2006, compared with ice coverage in September 2007 (on the right).

–Elizabeth Cowley contributed to this article.

Write to Brian Baskin at [email protected]

ARCTIC EXPLORER The Bully No. 1 drillship (below), now being built in Shanghai, will start work in 2010.

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