Arctic // Analysis

11 april 2012

Outlook for foreign energy companies in the Arctic region

Sergei Afontsev Doctor of Economics, Head of Department, IMEМО RAS, Professor of MGIMO University
Photo:
REUTERS / Scanpix Scanpix
An offshore gas processing plant
built by Norwegian energy group Statoil
is seen on Melkoya Island

With the global economy’s growing demand for energy resources and competition getting tougher, hydrocarbon markets dictate the increase of the world’s leading global oil-and-gas companies’ interest in the development of the Arctic region natural resources potential. Until recently the offshore deposits surveys have been done slowly. Will the top energy companies manage to discover substantial commercial hydrocarbon crude reserves in the Arctic and make it into the worlds’ high-profile oil and gas production?

Arctic oil and gas reserves: stakes

In 2008 US Geological Survey published its first assessment of the regional undiscovered oil and gas resources. According to these estimates, approximately 134 billion barrels of oil and natural gas liquids (NGL), and 47.2 trillion cubic m of natural gas may be deposited to the north of the Arctic Circle [1]. In case these reserves are confirmed, the proved world-wide oil reserves will grow up by 9.7 %, natural gas - by 25.3 % [2]. The largest share of the expected hydrocarbon crude is concentrated in Russia’s Arctic while Russia’s natural gas share reaches up to 70% ( Table 1).

Table1.Arctic’s undiscovered hydrocarbon crude by country shares (%)

Country Oil Natural gas
Russia 41 70
US (Alaska) 28 14
Denmark (Greenland) 18 8
Canada 9 4
Norway 4 4

Source: Lindholt L., Glomsrød S. The Role of the Arctic in Future Global Petroleum Supply // Statistics Norway, Research Department. Discussion Papers № 645. February 2011.

It is assumed that the major undiscovered hydrocarbon reserves in the Arctic (including 90% of natural gas reserves in the Russia-controlled area) are concentrated on the continental shelf [3]. However, up to date the actual exploration of offshore fields by the leading oil-and-gas companies has been carried out at a slow pace and confined to the Alaska coastline (USA), the Beaufort Sea in the area of the Mackenzie River Delta, the Sverdrup basin (Canada) and the Norwegian and Russian zones of the Barents Sea, [4].

The shelf expansion

Royal Dutch Shell’s project of the Arctic shelf oil and gas exploration is supposed to be one of the major events in 2012. The project is aimed at discovering hydrocarbon commercial reserves in both the Beaufort and Chukchi Seas in the Alaska’s northern coast.

Since 2010 the revitalization of exploration has been observed on the Arctic shelf, but practical prospects remain to be questionable. The UK-based Cairn Energy was the pioneer in investing about £637 million (US$1bn.) into the program of drilling eight wells nearby Greenland’s shoreline (2010–2011). The program considered until now as one of the most large-scale projects of oil and gas exploration in the Arctic region, has ended in failure: hydrocarbon reserves presenting any commercial development interest have not been discovered in any of the wells [5]. The failure of the program calls into question further projects of the Greenland shelf exploration, licenses for which were granted to such companies as ExxonMobile, Shevron, Royal Dutch Shell and Statoil.

On the other hand, exploration works in the Barents Sea are visibly successful. In 2011 Norway-based Statoil announced the discovery the bunch of fields (Skrugard and Skrugard-Havis) with the total estimated reserves estimated of around 600 million barrels of oil equivalents. The deposits in question are expected to be developed by Statoil jointly with ENI Norge AS (a unit of ENI, the major Italian oil company), the main partner to Skrugard project.

Despite a number of ambitious initiatives in recent years the planned development of hydrocarbon resources in the Arctic carried out by major oil-and-gas companies will still continue to be medium- and -long term projects.

Royal Dutch Shell’s project of the Arctic shelf oil and gas exploration is supposed to be one of the major events in 2012. The project is aimed at discovering hydrocarbon commercial reserves in both the Beaufort and Chukchi Seas in the Alaska’s northern coast. Shell has already invested $4bn. in the project in early March 2012. Exploratory drilling is expected to begin in July 2012 and result in discovery of deposits which will allow the production of about 500.000 barrels a day [6]. Shell plans to fit out the fleet of two floating drilling platforms (Kulluk and Discoverer), 10 supporting vessels and 8 drill ships responsible for oil spill. The unprecedented scope of the fleet reflects the scale of the planned work as well as the unrelenting pressure to U.S. government and environmental groups in order to prevent environmental disasters, comparable to Exxon Valdez oil-tanker incident near the coastline of Alaska (1989), Prudhoe Bay oil spill at BP’s rig in Alaska (2006) and Deepwater Horizon rig explosion in the Gulf of Mexico resulting in the worst oil spill in history (2010). The success of Royal Dutch Shell in obtaining the Obama Administration permit to launch offshore drilling after Deeper Horizon oil spill is considered by experts the biggest lobbing groups’ victories of the US which opens up a new era in the development of the Arctic offshore deposits.

In the coming years ExxonMobil may become another leader in the Arctic offshore fields’ development. In August 2011 the company substituted British BP in the capacity of the Russian state-owned company Rosneft’s strategic partner [7]. The development of the oil fields in the Kara Sea is among the priorities of the partnership with ExxonMobil. According to the statement made by Rosneft’s Management in early March 2012, joint projects in the Kara Sea scheduled for 2015 can be started as early as 2014 [8]. According to experts’ assessment, the risk of the conflict of interest between ExxonMobil and Rosneft may take place at the same time if the latter insists on forceful offshore oil technologies transfer [9]. French company Total and Norway’s Statoil – foreign partners of Gazprom can face the same problems in Shtokman gas condensate deposit development in the Russian part of the Barents Sea shelf. The investment decision on the project of this deposit development has been postponed several times due to the drop in natural gas demand in the wake of the global financial crisis; in foreign partners’ opinion the project in such conditions will be unprofitable without extra tax exemptions.

Problems and risks

The expansion at an ever increasing rate of the leading oil and gas producing companies in the Arctic should be expected in 2012-2015. The main intrigue is whether the companies will discover significant commercial hydrocarbon reserves in Arctic shelf or not.

Despite a number of ambitious initiatives in recent years the planned development of hydrocarbon resources in the Arctic carried out by major oil-and-gas companies will still continue to be medium- and -long term projects. Among the factors, taking off the investment project attractiveness in Arctic, the most significant are as follows.

1. High costs of deposits’ development associated with the use (and often working out) of the techniques in the cold-weather conditions with either composite soil or complicated sea bottom topography, lack of the required infrastructure (especially transportation) and higher “northern” wages of workers. Oil and gas fields’ development expenses on the Alaska continental shelf incurred by the US companies are 1.5–2 times higher than those of the comparable projects in Texas [10]. Therefore, even when the results of exploration are positive, high expenses put off the beginning of active field development. This circumstance, in particular, has led to dragging on the Alaska oil and gas fields’ development; according to the most recent estimates the field has the reserves of 2 billion barrels of oil and 2.3 trillion cubic m of natural gas [11]. About two-thirds of the reserves are deposited around the Prudhoe Bay which is operated by BP jointly with ExxonMobil and ConocoPhillips Alaska.

2. High eco-risks are associated with the various problems of liquidation possible accident consequences due to territorial remoteness and abnormal weather conditions. This is of particular importance in the offshore fields development (with due account of the Arctic ice pollution and widespread contamination happening during storms). The above exploration projects of Cairn Energy and Royal Dutch Shell have been already faced with active environmentalist groups’ protests and were forced to allocate additional capital for eco-safety. In some cases the subsurface patches can be excluded due to environmental impacts. For example, in March 2011 under WWF (World Wildlife Fund) pressure the Norway’s government extended the ban on the Arctic shelf oil production until 2013 in the area of Lofoten and Vesteralen islands, which set limits on Statoil investment plans.

3. International legal uncertainty around the Arctic fields’ development has been substantially reduced due to the ratification of the Norway - Russia Treaty on Maritime Delimitation and Cooperation in the Barents Sea and the Arctic Ocean. Until now the only unresolved territorial issue in Arctic is still the Beaufort Sea border dispute between the U.S. and Canada. However, escalation of conflicts around the development of oil and gas outside internationally-recognized shelf zones of the Arctic Ocean coastal states (in particular, Russia’s maritime ambitions to expand offshore boundaries are strongly criticized), prospects of new players on the Arctic arena (including China’s participation in Greenland’s mineral production development potential) contributes to the new geopolitical uncertainty.

Despite the afore-mentioned circumstances, the expansion at an ever increasing rate of the leading oil and gas producing companies in the Arctic should be expected in 2012-2015. The main intrigue is whether the companies will discover significant commercial hydrocarbon reserves in Arctic shelf or not. If it happens by 2025 the Arctic would be the world-leading oil and gas exploration region. If Cairn Energy’s bad experience is be not an exception, but a rule, the keen interest in the Arctic resources could die away until at least 2020.

1. Circum-Arctic Resource Appraisal: Estimates of Undiscovered Oil and Gas North of the Arctic Circle, 2008 // U.S. Geological Survey Fact Sheet 2008-3049. As results from calculations 22% of the worlds undiscovered hydrocarbon reserves, including 30% of the undiscovered natural gas, 20% - NGL and 13% - crude oil is concentrated in the Arctic region (Budzik P. Arctic Oil and Natural Gas Potential. U.S. Energy Information Administration. Office of Integrated Analysis and Forecasting. Oil and Gas Division. October, 2009).

2. Calculated on the basis of data on proved oil reserves (incl. NGL) and natural gas as of the end of 2010: BP Statistical Review of World Energy. July 2011. P. 6, 20.

3. Gautier D.L. et al. Assessment of Undiscovered Oil and Gas in the Arctic // Science Magazine, 29.05.2009. V. 324. P. 1175–1179; Lindholt L., Glomsrød S. The Role of the Arctic in Future Global Petroleum Supply // Statistics Norway, Research Department. Discussion Papers № 645. February 2011. p.8.

4. Gautier D.L. et al. Assessment of Undiscovered Oil and Gas in the Arctic // Science Magazine, 29.05.2009. V. 324. p.1176.

5. Cairn Sinks after Greenland Drilling Failure // The Telegraph, 30.11.2011; Cairn Energy Counts Cost of Greenland Drilling // BBC News Scotland Business, 20.10.2011.

6. Shell Oil Rig Set for Landmark Alaska Journey // Los Angeles Times, 03.03.2012.

7. In 2011 May BP abandoned the partnership because TNK-BP Russian stockholders considered that, Rosneft-BP deal infringed the rights of ТNK-BP where BP and Russian stockholders (AAR Consortium) are on a parity basis.

8. Interfax, 04.03.2011.

9. Company of Week: «Rosneft» // Vedomosti, 01.09.2011.

10. Arctic Oil and Natural Gas Potential // This Week in Petroleum. US Energy Information Administration. December 21, 2011.

11. Budzik P. Arctic Oil and Natural Gas Potential. U.S. Energy Information Administration. Office of Integrated Analysis and Forecasting. Oil and Gas Division. October, 2009. P. 3; Assessment of Potential Oil and Gas Resources in Source Rocks of the Alaska North Slope, 2012 // U.S. Geological Survey Fact Sheet 2012-2013. February 2012.

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Sergei Afontsev, “Outlook for foreign energy companies in the Arctic region,” Russian International Affairs Council, 11 April 2012, http://russiancouncil.ru/en/inner/?id_4=304

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