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Vol. 14, No. 38 Week of September 20, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Arctic Directory: Investing in the Arctic

Big resource, big opportunity, big challenge in Far North outrank many hot spots

Ray Tyson

For Petroleum News

The Arctic is said to outrank many of the globe’s current exploration hot spots, including Brazil and West Africa. But don’t expect companies to flock to the Far North anytime soon, especially at a time when the world economy is in the tank and oil and gas prices are well below their record highs of last summer.

Still, by just about anyone’s estimation, including the United States Geological Survey, the Arctic contains a huge resource cache, presenting an assortment of business opportunities for the hardy, long-term investor.

The Arctic, which can be defined as everything above the Arctic Circle (66 degrees 33 minutes north), has five countries on its border: United States (Alaska), Canada, Norway, Denmark (including Greenland) and Russia. Much of the Arctic is ice-covered ocean and treeless frozen tundra.

Recently the USGS dramatically increased its estimate of oil-equivalent Arctic reserves to upward of 160 billion barrels from 90 billion barrels, with 30 percent of the world’s undiscovered natural gas reserves and 13 percent of its undiscovered oil entombed beneath continental shelves and retreating ice caps, presumably because of global warming.

A 2006 joint study by energy research firms Wood Mackenzie and Fugro-Robertson, entitled “Future of the Arctic,” concluded that under the most optimistic scenario, production from the Arctic could contribute some 4.6 million barrels of oil per day and 9.7 million barrels of oil-equivalent (gas) per day at peak, considerably less than previous estimates. However, the Wood Mackenzie-Fugro-Robertson estimates were limited to accessible resources, primarily extensions from coastal areas.

Expensive, complicated resource

“Any study shows that there is a great resource there … but it’s an expensive and complicated resource and also a long-term one,” Alan Murray, product manager for Wood Mackenzie Exploration Service, explained in an interview with Petroleum News.

As for limiting the study’s research footprint, he added, “the more remote areas don’t make as much sense as the more near-shore areas which have plenty of resource and plenty of prospects. I think there are plenty of opportunities that are well within the existing reach.”

Geological basins with identified or potential reserves include the North Slope in Alaska, the Beaufort-Mackenzie area north of Canada and Alaska, the Barents Sea, East Siberia, Timan-Pechora, West Siberian basin, the Karia-Yumal basin, the North Kara Sea, the more offshore continental shelf areas of the Laptev Sea and East Siberian seas and the Chukchi Sea.

Murray and other authorities on the Arctic, including Peter Noble, chief naval architect of oil major ConocoPhillips, and Gary Mandel, executive vice president of oilfield services company Aker Solutions, took the spotlight at this year’s Offshore Technology Conference in Houston, Texas.

Arctic a leading target

At the early May conference Murray unveiled some of Wood Mackenzie’s latest findings, including results of an industry survey clearly showing that the Arctic has emerged as one of the world’s leading hydrocarbon targets over the next five to 10 years. The reason: resource potential.

“So I think this justifies all of our time and attention on looking at the Arctic as an area of great interest and also opportunity,” Murray told an OTC audience that came to listen to a panel discussion focused on doing business in the Arctic.

By way of electronic voting, OTC audience participants responded to a series of questions posed by Murray, including the following: what is the most attractive aspect of oil and gas exploration in the Arctic compared to other areas — fewer competitors, more cooperative government or resource potential? As might be expected, based on results from the industry survey, the vote was overwhelming for resource potential (96 percent) with the remaining two options each garnering just 2 percent of the vote.

Audience participants also were asked which of the following challenges would prove the greatest hurdle to opening new Arctic petroleum provinces: limited remaining resources (5 percent), lack of adequate technology (46 percent) or low oil and gas prices (50 percent).

“Perhaps, volatile oil and gas prices are the main hurdle to investment,” Murray said in response to the audience vote.

Asked which Arctic gas would be first to flow to the United States, audience members at OTC voted 42 percent from Canada, 32 percent from the Russian Barents Sea, and 26 percent from Alaska’s North Slope.

The audience also was asked where the most likely location would be for an undiscovered super giant field in the Arctic: more remote parts of Alaska (26 percent), offshore East Siberia (48 percent) or East Greenland (25 percent).

Companies now more cautious

Murray told Petroleum News that since the 2006 Wood Mackenzie-Furgo Robertson survey, conducted during a period of strong commodity prices, companies now appear to be more cautious about investing in financially risky areas of the world due to the relatively low commodity prices environment.

“They’re obviously in a stage where they are reassessing their options in a number of parts of the world, not just the Arctic,” Murray said. “Our view is that they would perhaps be more prudent in some of these areas, and perhaps focus more on research rather than pushing ahead to drilling in some of these areas. But our view is that it (Arctic) is a long-term opportunity, so those companies that are interested are in for the long term.”

However, Murray agreed that because the Arctic is believed to be gas prone, it’s doubtful this region would ever replace oil reserves from large fields located in southerly latitudes, many of which have been in decline for years.

“I don’t think we see this (oil) as being a significant new resource,” he said. “It’s not going to bring on millions of barrels of supply in the near term, or in the mid-term.”

Distance to transport an issue

Nonetheless, “smaller opportunities” for new oil are available to the “niche” player in Arctic regions, such as Alaska and Greenland, Murray said, noting that the “breakeven” oil price for projects in these areas ranges from $24 to $60 per barrel, depending on distance from transportation systems. For example, he said, the $24 threshold “reflects opportunities close to the pipelines in Alaska … and some of the favorable tax rates.”

“For this we see a lot of acreage being captured in some of these more remote frontier areas,” he added, “in the more remote parts of Alaska and Greenland that have been picked up in the last year or so.”

In regard to these opportunistic frontier plays, Murray asked the OTC audience to vote on the following question: which of these is the biggest hurdle to making niche investments in Arctic basins — corporate “materiality” or fiscal thresholds (38 percent), large scale Arctic facilities (31 percent) or seasonal activity limits (31 percent).

Murray generally agreed with this vote, saying, “It’s probably materiality thresholds that will hold these back. I think smaller companies that have invested in the Arctic may struggle to take on full-scale development on their own, so look to bringing in more experienced or major companies for development.”

Natural gas the major play

Experts generally agree that natural gas, in contrast to oil, likely will be the major play and largest business opportunity in many regions of the Arctic. Russia, with the largest position of any nation on the Arctic Circle, is believed to harbor the majority of untapped gas reserves, with Alaska and Greenland being roughly of similar resource density.

Moreover, companies best positioned for expansion into the Arctic frontier are those that already operate in the Far North: Gazprom in Russia, BP and ConocoPhillips in Alaska, StatoilHydro in the Barents Sea and ExxonMobil and Shell on Sakhalin Island, which is technically below the Arctic Circle but has similar weather and ocean ice conditions as the Arctic.

“The largest oil companies have the capability to make big investments and to develop their own solutions,” Murray said.

Actually, companies have spent decades exploring and developing onshore and offshore oil and gas fields in the Arctic, with production beginning as early as the 1920s. By the 1960s large reserves had been discovered on Alaska’s North Slope, in the Mackenzie Delta, Canada, and the Yamalo-Nenets Autonomous Okrug and Nenets Autonomous Okrug in Russia. Perhaps the most notable of these is Alaska’s Prudhoe Bay field, discovered in the late 1960s and brought onstream in 1977, as the largest discovery in North America. At peak in the late 1980s, Prudhoe Bay and other fields on the North Slope produced 2.1 million barrels of oil per day. Today daily production is down to around 700,000 barrels per day.

Long-term affair

Exploration and development in the Arctic is a long-term affair, largely because it takes years just to put together a plan that takes into account the many obstacles that await the explorer, including an ice-clogged ocean during much of the year. In fact, ConocoPhillips’ Noble told OTC that contrary to popular belief, an ice-free Arctic Ocean is not likely to occur anytime soon, noting that the aerial extent of the winter polar ice cap has changed little since the late 1970s.

“Ice thickness is not the same but the winter ice is there and it’s challenging,” Noble explained. “So the idea of an ice-free Arctic may happen. There’s certainly less ice in the summertime …but ice is going to be a major factor that we have to deal with, if we are going to operate in the Arctic.”

Aker’s Mandel told OTC that oilfield services companies have learned a great deal about operating in the Arctic over the past four decades.

“As you can see, there are tremendous opportunities for monetizing oil and gas assets in cold climates such as the Arctic,” he said. “But it requires tailor-made solutions for different cold climates and harsh environments.”

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