Report: Cost, lack of infrastructure present challenges to Arctic development

By Katie Mazerov, contributing editor

The US, Norway and Russia are leading industry into the resource-rich Arctic, but economics, technical and infrastructure challenges and environmental concerns continue to linger for the largely untapped frontier, according to a report, “Arctic Oil and Gas,” from Ernst & Young. The study estimates the region may hold roughly 13% of the world’s undiscovered oil reserves and as much as 30% of the world’s undiscovered natural gas reserves.

“The cost of oil and gas production in the Arctic is extremely high, particularly for natural gas, which is enjoying healthy global price competition,” said Foster Mellen, a senior strategic analyst with Ernst & Young. “While companies are eyeing resources in the Arctic, they’re seeing a revolution in unconventional oil and gas that can be produced much less expensively in areas such as the Continental US. So, the potential market for Arctic reserves may not be there right now.” A short drilling window, as well as the need to supply tools and equipment to remote locations and that can withstand the harsh climate, also pose difficulties.

Under the jurisdiction of five nations – the US, Canada, Greenland (Denmark), Norway and Russia – the Arctic is primarily a province of large international operators focusing on offshore development, Mr Mellen noted. “Most activity to date has been in the Norwegian sector, with Statoil involved in a number of joint venture (JV) agreements,” he continued. “Norway is reasonably close to some infrastructure and has the benefit of being closest to existing markets for production.”

The US North Slope of Alaska, which lies above the Arctic Circle, also has been a key area of activity, notably by Royal Dutch Shell, which last year was granted permission by the US government to drill for oil in the Chukchi and Beaufort seas after a six-year court battle over environmental concerns.  The company subsequently ceased activity after a spill containment dome was damaged and recently announced another postponement for 2013 because of damage to two drillships. “Offshore Alaska has the most conveniently located infrastructure in place, and production could tie in with the Trans-Alaska Pipeline, which is currently under-utilized.”

Ramp-up in Russia

The report indicates Russia has the most ambitious plans, primarily because it has the “lion’s share” of the resources. “There is not a lot of activity going on now, but Russia will likely ramp up in the next couple of years with major JVs,” Mr Mellen said. Russia’s state-owned oil company Rosneft, which has existing JV agreements with TOTAL and Eni, has signed an agreement with ExxonMobil to explore the Russian Arctic Shelf and is expected to sign another agreement with BP, he said. “Most of the Russian resources in the Arctic are believed to be natural gas. But, if Russia does develop Arctic natural gas, it will be extremely high-cost gas that in theory will be competing for much lower-cost gas out of North America.”

Elsewhere, activity in Canada remains flat, while in Greenland, Cairn Energy, an Edinburgh, Scotland-based company, has staked out a position, drilling eight exploratory wells in 2010 and 2011. Despite limited success, the company has publicly stated it is there for the long term, but a major operator is likely to join in future exploration in the country. “Greenland is only getting started with an infrastructure and is far away from the markets,” Mr Mellen said.

A trend by operators to revitalize old wells in regions such as the North Sea also could hinder near-term Arctic development. “Technology is not standing still, and with oil at close to $100 a barrel, operators can do a lot of good things with old wells,” he noted.

Finally, international boundaries have not been completely ironed out. Norway and Russia settled their boundary disputes in the Barents Sea in 2010, but the US, which has not signed the United Nations Law of the Sea Treaty that determines what countries own from an offshore perspective, is engaged in a boundary dispute with Canada. As development moves closer to the North Pole, issues of where boundaries lie and how the continental shelf is defined will likely re-emerge, Mr Mellen said.