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Arctic Explorers Retreat From Hostile Waters With Oil Prices Low
When Statoil ASA (STL) acquired the last of three licenses off Greenland’s west coast in January 2012, oil at more than $110 a barrel made exploring the iceberg-ridden waters an attractive proposition.
Less than two years later, the price of oil had been cut by almost half and Norway’s Statoil, the world’s most active offshore Arctic explorer in 2014, relinquished its interest in all three licenses in December without drilling a single well, Knut Rostad, a spokesman for the state-controlled company, said by e-mail.
Statoil’s decision shows how the plunge in oil, with Brent crude trading at about $45 a barrel, has dealt another blow to companies and governments hoping to tap the largely unexplored Arctic. That threatens to demote the importance of a region already challenged by high costs, environmental concerns, technological obstacles and, in the case of Russia, international sanctions.
“At $50, it just doesn’t make sense,” James Henderson, a senior research fellow at the Oxford Institute for Energy Studies, said in a Jan. 12 phone interview. “Arctic exploration has almost certainly been significantly undermined for the rest of this decade.”
Estimated Resources
The Arctic — spanning Russia, Norway, Greenland, the U.S. and Canada — accounts for more than 20 percent of the world’s undiscovered oil and gas resources, including an estimated 134 billion barrels of crude and other liquids and 1,669 trillion cubic feet of natural gas, according to the U.S. Geological Survey. That’s almost as much oil as Iraq’s proved reserves at the end of 2013 and 50 percent more gas than Russia had booked, BP Plc (BP/)’s Statistical Review of World Energy shows.
Yet, explorers seeking a piece of the Arctic prize have been tripped up for years.
After spending $6 billion searching for oil off Alaska over the past eight years, Royal Dutch Shell Plc (RDSA) in October asked for an extension of licenses as setbacks including a stranded oil rig and lawsuits risk delaying drilling further. Cairn Energy Plc (CNE) spent $1 billion exploring Greenland’s west coast in 2010 and 2011 without making commercial discoveries, and OAO Gazprom (OGZD) has shelved its Shtokman gas field in the Barents Sea indefinitely on cost challenges.
Ecosystem Concern
Environmental group Greenpeace has occupied oil rigs from Norway to Russia, arguing a spill would cause irreparable damage to ecosystems that sustain animals from polar bears to birds and fish. The possibility that economically marginal fields such as Arctic deposits might be stranded as governments adopt stricter climate policies has also shaken some investors.
The Brent crude benchmark fell 1.9 percent to $45.70 a barrel, deepening losses from the lowest closing price since March 2009. Statoil declined 1.4 percent to 127.3 kroner at 9:50 a.m. in Oslo, extending losses to 35 percent since a June high.
As oil companies cut spending to cope with falling prices, already costly and risky Arctic projects will fall down the priority list even if crude is expected to recover by the time production starts, Henderson said. Global capital expenditure will probably drop by more than 20 percent this year, according to a Jan. 9 note from Sanford C. Bernstein.
Like Statoil, Dong Energy A/S and GDF Suez have returned Greenland licenses because exploration has become too expensive, Danish newspaper Politiken reported.
Project Delay
Statoil, which cut spending plans to boost shareholder returns even before oil prices started to fall last year, last week signaled it could delay the flagship Johan Castberg project in Norway’s part of the Barents Sea for a third time as it struggles to find a profitable development solution. Even if the Barents Sea enjoys a milder climate than other parts of the Arctic thanks to the Gulf Stream, it remains a remote region with little infrastructure and logistics.
Statoil failed to boost resources sufficiently after drilling a record nine wells in the Barents Sea last year. It wouldn’t comment on exploration plans for 2015 until a capital market update Feb. 6, spokesman Rostad said.
OAO Rosneft (ROSN)’s plans to drill tens of wells in the Arctic with partners Statoil, Exxon Mobil Corp. and Eni SpA have been upended by sanctions over Russia’s role in the conflict in Ukraine, limiting access to technology and financing. While Rosneft is turning to potential Asian partners, it may have to delay drilling even after making a billion-barrel find with Exxon in the Kara Sea in September, board member Artur Chilingarov said last month.
Decisions Unlikely
“Investment decisions on developments are very unlikely in the next two years,” said Erik Holm Reiso, a partner at Oslo-based consultant Rystad Energy AS. In most of the Arctic, “exploration will be sporadic,” he said.
Still, exploration will go on at a “constant” pace in Norway’s Barents Sea, Holm Reiso said. Lundin Petroleum AB (LUPE), a Swedish explorer that made Norway’s biggest oil discovery in the Barents Sea last year, will drill four wells there in 2015, Chief Executive Officer Ashley Heppenstall said in a phone interview yesterday.
“We believe it’s unrealistic that oil prices will stay at these levels forever,” he said. “Ultimately, the viability of the Barents Sea will be driven by how much resources are actually found.”
3 Comments on "Arctic Explorers Retreat From Hostile Waters With Oil Prices Low"
shortonoil on Thu, 15th Jan 2015 7:58 am
As we have been saying for almost a year, the world’s economy can not afford the price that non conventional must command to make it economical to produce. This includes shale, arctic, ultra deep water, bitumen, and high sulfur extra heavy. They can no longer supply enough energy to the end consumer to justify their production:
http://www.thehillsgroup.org/depletion2_022.htm
Because the size of the world’s petroleum reserve is determined by production cost, and price the majority of the “undiscovered” oil needs to be moved to the resource category, and taken out of reserves. Most of this oil was included because it was “technically” extractable. Consideration was not given to its economic viability. It was erroneously “assumed” that the consumer would pay any price required for its production, when in actuality there is a finite limit to what the economy can afford. This assumption has inflated the world’s reserves to a number that is much larger than what will be ultimately extracted.
http://www.thehillsgroup.org/
Speculawyer on Thu, 15th Jan 2015 2:01 pm
They’ll be back. But for now, not much point trying to extract oil from the frigid polar waters with oil prices this low.
Something ironic about drilling off Greenland though. Our oil usage has caused global warming such that the iceberg threat is reduced . . . so it is easier to drill up in the polar regions to get more oil . . . to cause more global warming . . . making it easier to drill in polar regions . . etc.. Are we smarter than yeast? Remains to be seen.
GregT on Thu, 15th Jan 2015 2:21 pm
Spec,
Arctic oil production has been identified as the one positive feedback mechanism that we can actually stop. So yes you are correct in that respect. However, global warming is resulting in more icebergs, not less.
Short is correct in his summary, Arctic oil production is unaffordable to modern industrial society. High oil prices have already done their damage to our economies. Even if Arctic oil was affordable, we can’t afford to burn the vast majority of know reserves anyways, if we hope to leave a hospitable planet for our children. If it isn’t already too late.
If we are smarter than yeast, we will stop continuing to destroy the Earth, but I suspect that you are right, we aren’t, and we won’t.