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Pushing upstream boundaries in the Arctic

The Arctic’s potential has long been a lure for explorers. But while some sectors of the region have become proved petroleum provinces other plays are proving harder to tap

The Arctic's potential has long been a lure for explorers. But while some sectors of the region have become proved petroleum provinces – Alaska’s North Slope and Russia’s Sakhalin Island, for example – other Arctic plays are proving harder to tap.

While a UN decision on subsea borders will ease the way for future licensing rounds in the region, it will not take away the risk inherent to frontier exploration. Cairn Energy’s experience in Greenland is a case in point. While the US Geological Survey estimates Greenlandic waters could hold as much as 52 billion barrels of oil equivalent, these reserves have, so far, proved elusive. UK-based Cairn entered Greenland in 2007. It now holds stakes in 11 offshore blocks, mostly in the Disko West and Baffin Bay areas, which are analogous to Canada’s east coast offshore and believed to be highly prospective. But in the past two years alone, Cairn has spent an estimated $1.2 billion on eight wells – and not one has flowed commercial hydrocarbons.

Despite its lack of success off Greenland– and the operational headaches caused by Greenpeace’s Beyond Oil campaign, which aims to halt Arctic exploration – Cairn remains optimistic about its long-term chances.

Chief executive Simon Thomson recently reaffirmed the firm’s commitment to Greenland. He said its exploration programme so far had encountered oil and gas shows across multiple basins, as well as reservoir-quality sands in Baffin Bay’s Atammik Block. He added: "Whilst we have yet to make a commercial discovery, we remain encouraged that all the ingredients for success are evident."

Statoil’s recent decision to farm into Cairn’s Pitu Block adds weight to this bullish stance. The Norwegian company, which has other interests off Greenland, has significant experience operating in remote, harsh environments and is keen to expand its Arctic portfolio.

Over more than 30 years of exploration work in the northern Norwegian Sea and the Barents Sea, Statoil has developed a deep understanding of the geology in its Arctic operating area. Of the 92 wells drilled in the Norwegian sector of the Barents since 1980, Statoil has been involved in 88.

While Statoil has been involved in a number of Arctic gas discoveries, notably Snøhvit, until recently it had not struck oil. But last year’s Skrugard discovery appears to have considerable upside oil potential, with estimated recoverable reserves of 250 million barrels of oil equivalent (boe). And in January, Statoil made a second large Barents find: Havis, southwest of Skrugard, holds estimated recoverable reserves of about 300 million boe.

Both discoveries are about 100 km north of Snøhvit and optimists hope the finds – the Skrugard and Havis reservoirs are not connected – will open up a potentially prolific province. In last year’s 21st licensing round, Norway had 51 Barents Sea blocks on offer, while the 22nd, which formally opens later this year, is also expected to have a heavy focus on the Arctic. Some 181 areas in the Barents have been put forward for consideration for the round.

And Norway is looking even further north, announcing a 20-year plan to unlock a new play offshore the Jan Mayen archipelago and Svalbard, in the high Arctic. A licensing round is some way off, as impact assessment studies must first be carried out. But such work is the first formal step towards opening the region to exploration, a process that can take several years. Preliminary studies have been carried out at Jan Mayen, and the Norwegian Petroleum Directorate said these revealed the presence of good-quality sandstones, similar to those offshore Greenland, which could act as hydrocarbon reservoirs.

Iceland has also attempted to lure exploration dollars to its frontier waters. In 2008, it opened its debut licensing round, offering 14 half- and full blocks in the Dreki area, which runs from the northwest coast towards the southern tip of Jan Mayen. Only two companies were awarded acreage and both relinquished the blocks without carrying out significant exploration work. Iceland recently announced its second round, offering the same blocks as before. Applications are due in April, with awards due in November.

The muted interest in Iceland’s first round underlines the risk involved in Arctic exploration. The region requires harsh-environment rigs, which command premium day rates, significantly pushing up costs. Firms are also restricted to operating within a tight weather window and, post-Macondo, must comply with stringent offshore safety regulations.

Many Arctic operators, such as Cairn and Shell, which is pushing ahead with plans to drill in the US sector of the Chukchi Sea, now charter two drilling units per well. One rig drills the well itself; the second is on call to drill a relief well in the event of a blowout. Both drilling units require offshore vessel support, further increasing costs. Cairn’s exploration programme carries an average well cost in the region of $150 million.

Arctic plays have little or no infrastructure, either. In short, to justify exploration and development costs, a discovery must be substantial.

Much of Iceland’s optimism at the launch of the 2008 round was based on Iceland’s geological analogues with Greenland and the Norwegian Continental Shelf, more than 1,000 km away. While the analogues may, eventually, translate into working hydrocarbon systems, the risk may be far too great for experienced Arctic explorers to take.

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