Production on ice in the Arctic
Projects are moving glacially, if at all
DRILLING in the Arctic was always a tough sell on environmental grounds, even when the economics looked like they could stack up with oil above $100 a barrel. Now, at less than half that price, who really wants to plough billions into an Arctic frontier drilling campaign, even if they are allowed to?
That’s not to say that governments or companies are ruling it out once and for all. The Obama administration cancelled several US Arctic leases last October but said in March 2016 that two of them, one each in the Beaufort and Chukchi seas, north of Alaska, could be auctioned in the future as part of its five-year offshore plan.
Explorers won’t be holding their breath. The White House has abandoned plans to hand out drilling rights for swathes of its Atlantic offshore acreage due, in part, to environmental opposition. Meanwhile, new Canadian prime minister Justin Trudeau and President Obama made a joint declaration earlier in March that they would follow “science-based standards” when deciding on whether Arctic drilling should take place – not exactly a clarion call to drillers.
Shell’s unsuccessful exploration in the Chukchi Sea, which it abandoned last year, hardly blazed a trail. The firm gave up on its campaign after a string of mishaps and poor results from a well test, having ploughed an estimated $7bn or so into the project.
Record low ice cover in the past winter could make the Arctic cheaper to exploit. But environmentalists will claim that melting ice is hardly an advert for more fossil-fuel drilling. Few in the industry believe that, when push comes to shove, those Arctic leases are likely to be put up for auction any time soon, unless the next US president brings a radically different perspective.
In Russia, Rosneft’s plans to drill in the Arctic have been scuppered not just by the oil price, but also by the lack of well-resourced foreign partners. Since ExxonMobil’s departure from state-owned Rosneft’s Kara Sea project in 2014 – following Western sanctions on Russia – the campaign has been on hold.
The Russian government is keeping a candle alight for Arctic drilling: natural resources minister Sergei Donskoi said at the end of March that, while Rosneft would restrict its Arctic activities to seismic surveys this year, it was hopeful of resuming drilling in 2017. However, few would be surprised if next year slipped past without wells being sunk.
In Greenland, companies including Statoil, Denmark’s Dong Energy, and France’s GDF Energy have all handed back licences in recent years, unenthused by economic conditions and drilling prospects. Cairn Energy did mount an eight-well drilling campaign there in 2010, but found no commercially exploitable reserves.
Norway could prove the exception to the negative outlook, assuming the oil price can rise and stay risen. Arctic waters there are much more benign than elsewhere, lying over a shallow continental shelf and warmed by the Gulf stream, which reduces ice cover. They are also within reach of the well-established oil and gas logistics hubs of coastal Norway.
The resolution of a border dispute with Russia in the Barents Sea in 2010 brought a rash of applications for Norwegian acreage close to the boundary and the government – facing declining production from the North Sea – is keen to encourage exploration further. In March, Norway announced a new oil and gas licensing round in mature areas, which it expanded into the Arctic region of the Barents Sea.
Despite enthusiasm to snap up licences, decisions to develop them demand some serious thought by the oil firms. The story of Eni’s Goliat project – the first oil rig to start production in the Norwegian Arctic – is cautionary. By the time the oil started pumping in March, the project had been delayed by two years and costs had reached more than $5.5bn – around 50% more than the original budget. Eni says Goliat is viable with oil at $50/b or less, but others think it may need oil at double that price for a decade or more. Either way, it is unlikely Eni would sanction such a project if it were taking the decision today.
Longer term, Arctic drilling may still have its day – provided prices are high and supplies elsewhere more scarce. All that would need to be worked out then is who controls the vast swathes of the region whose ownership is still contested by the US, Russia, Norway and a host of others.
But that thorny matter can, for now, once again be put on the “not urgent” pile.
This article is part of an in-depth series on offshore production. Next article: Canada offshore weathering the storm.