Arctic draws oil money with stability, shallow seas

on February 12 2013 9:33 AM
Royal Dutch Shell logo
The Royal Dutch Shell logo Reuters

(Reuters) - It may not be this year, but Royal Dutch/Shell and other oil companies will be back to drill in northern Alaska's seas, drawn by political stability and shallow waters.

Weary of Middle Eastern turbulence, alarmed by Argentina's nationalization of Spanish group Repsol's assets, and shocked by the Islamist siege of an Algerian gas plant, companies are looking to unexploited parts of the Arctic.

Drilling in the cold, remote waters is technologically difficult and expensive but dwindling reserves elsewhere have forced oil firms to look deeper offshore, which is also costly.

Alaskan seas so shallow a walrus can hunt on the bottom are now looking competitive and the prize is an estimated 13 percent of the world's undiscovered oil and 30 percent of its gas.

"A lot of these (oil) companies want to go somewhere with less political risk," said Emily Stromquist of global political risk research and consulting firm Eurasia Group.

Exxon Mobil is at the centre of a dispute in Iraq, oil is regularly stolen from Shell's Nigeria pipelines by armed gangs, and BP and Statoil are reviewing operations in Algeria and Libya after a deadly Sahara gas plant siege.

The offshore Arctic has no such risks. Border disputes between the eight politically stable Arctic Council are peaceful. Its very isolation offers a security of sorts.

"The Arctic is so inhospitable, you are not going to get maritime threats," added Fraser Bomford, an intelligence analyst at security firm AKE Group. "It is not near land where there are lawless areas, like the Gulf of Guinea or the Gulf of Aden."

UNTAPPED

Nevertheless, storms and daytime temperatures averaging minus 30 degrees centigrade on the northern coast in January make it a challenging place to operate.

Shell has suffered a series of setbacks since it bought the Beaufort and Chukchi Sea leases in 2005. In the latest of these, three out of four engines on a brand new tug failed in near hurricane conditions on New Year's Eve 2012, allowing the Kulluk rig to break free from its towline and run aground.

The company has yet to decide whether to drill in 2013, and on Monday sent the Kulluk to Asia for repairs. But Chief Executive Peter Voser was adamant last week that Shell, and others, would be back.

The Beaufort and Chukchi Seas alone contain some 23 billion barrels of recoverable oil, according to the U.S. Bureau of Ocean Energy Management (BOEM).

Leaving aside associated gas - which may be hard to bring to market given the weak outlook for U.S. gas prices - that's twice the contents of Shell's producing oil and gas wells, which are emptying at a rate of 1.2 billion boe a year.

Shell first drilled in the Arctic at 150 feet in 1982 when the offshore industry was still proud of reaching the 400 feet depths of the North Sea. It abandoned the area in the late 1990s as oil prices slumped.

The deepest offshore wells now start at over 5,000 feet and are twice as costly as established parts of the North Sea and shallow offshore finds on the scale promised by Shell's Arctic licenses are long gone elsewhere.

Some 77 billion boe of oil and gas are set to be developed in deepwater zones between now and 2020 at a cost of $650 billion, according to research by Macquarie Equities Research - an indication of industry confidence in profitability.

And at $35-$40, an Arctic barrel's cost can be on a par with those deepwater barrels, according to Lars Lindholt, a researcher at Statistics Norway. International Energy Agency (IEA) figures also show Arctic and deepwater costs overlap.

PUSHING THE BOUNDARIES

However, the Arctic price tag has yet to be tested where Shell is working, and where it has spent $5 billion since 2005 without a barrel to show for it. While onshore Alaskan development and work in milder Norwegian seas has defied the cold and remoteness for decades, Shell's plans push the boundaries much further.

Daytime temperatures are colder than a similar latitude in Norway and storms and currents cause ice surges called "ivus" that push and throw car-sized ice blocks inland. One once crushed a dwelling, killing its inhabitants.

A 2012 report by the think tank Chatham House analyzed storm tracks dating back to 1950s that suggest climate change - while opening up the seas - may be worsening the Arctic weather, producing more storms like the "Blizzicane" that struck western Alaska in 2011.

Melting permafrost is damaging pipelines and coastal infrastructure ashore, and the retreating ice could result in larger icebergs, more coastal erosion, and bigger waves on a more open sea, the report says.

Experts say offloading oil to tankers from the Chukchi and Beaufort Seas looks unfeasible, even during the July-to-October season in which Shell wants to work. Shell says it has completed pipeline projects in Russia, Canada and Norway in "similar" conditions, yet no subsea pipeline of the length required has been attempted in the area it targets despite an established onshore industry close by with some modest offshore development.

Then there are the kit requirements. While a North Sea platform will typically operate with just three or four supply and support vessels, most Arctic regulations require a back-up rig and as many as a dozen response vessels.

Rigs need expensive hydraulic fluids to cope with the temperatures. They also need to be winterized to protect people and pipes, and supplies have to move huge distances. Rigs of all types are in short supply.

Support vessels are also hard to come by. Russia's Yamal liquefied-natural-gas (LNG) project in the Kara Sea alone will need up to 16 ice-capable LNG vessels plus several ice breakers.

Nevertheless, Chatham House estimates Arctic investments, mostly in offshore oil and gas extraction, could total $100 billion over the next decade.

Statoil on Tuesday said it will develop an Arctic field and onshore oil hub in Norway at a cost of up to $16.3 billion and recently approved $10 billion for its Aasta Hansteen project.

Italy's Eni is meanwhile spending $6.7 billion on Goliat in the Barents Sea north of Norway, and Novatek and Total may put $20 billion into Yamal LNG. Rosneft and ExxonMobil also plan Kara Sea work, and Norway will sell 72 blocks in the Barents Sea this summer. Elsewhere in the north Alaska offshore, ConocoPhillips, Statoil, Eni, Repsol and Total also have Chukchi and/or Beaufort leases and plans to drill in 2014 and 2015.

SPILL FEAR

An oil spill is everybody's worst fear.

"For the past 20-30 years, drilling technology has improved by leaps and bounds but oil spill response remained at fairly basic levels," said Knut Oerbeck-Nilssen of Det Norske Veritas, a firm that certifies oil and shipping equipment. "You will see lots of shovels on the beaches and oil collection on water."

Ports are distant, communication patchy, and workers tire fast in the cold and dark. The environment is fragile.

"While particular risk events - such as an oil-spill - are not necessarily more likely in the Arctic than in other extreme environments, the potential environmental consequences, difficulty and cost of clean-up may be significantly greater," the Chatham House report said.

Shell says it is taking every precaution. Its 2011 response plan for a spill in the Beaufort shows nine support vessels.

Alaska's Governor Sean Parnell has spoken out in support of Shell's plans despite the Kulluk grounding.

"Many wells have been safely drilled in the Arctic Outer Continental Shelf (OCS)," he said. "We believe it is strongly in the state's and the nation's interest that we continue to responsibly explore the vast hydrocarbons known to be available in the shallow waters of the Arctic OCS."

Some locals are less sure.

"It might not be wise to conclude that oil operations can be conducted safely in the offshore Arctic just because we have learned, more or less, how to function on land," said Willie Hensley, an Inupiat Eskimo and longtime Alaska Native leader.

"It's a big gamble to try to operate with the wind, water and ice. It's like going to the casino. You think your next doggone spin might do it. And so it is out there."

(Additional reporting and writing by Braden Reddall, Balazs Koranyi and Andrew Callus; editing by Anna Willard)

Copyright 2012 Thomson Reuters. All rights reserved.

More News from IBT MEDIA