BMI View: Activit y in the world's Arctic region is accelerating. The m ain players remain large oil companies such as ExxonMobil, Rosneft, Shell and Statoil and these majors could easily be the main beneficiaries of a progressive unveil ing of the world's 'last untapped frontier'. Nonetheless, the high cost of exploration in the Arctic seas is as much linked to environmental safety concerns as to climatic conditions.
Opportunities for international oil companies (IOCs) to explore the A rctic, often referred to as the last untapped frontier, are growing. For more than a decade now, climate scientists have been predicting the melting of the A rctic ice cap, which will progressively open -up affordable access to additional offshore acreage. Sustained high oil prices, as well as anticipated global oil demand growth, support this fall in exploration risks and the consequent reduction in the cost of exploration - further stimulating the interest of these IOCs .
In 2008, the US Geological Survey (USGS) provided estimates of potential oil resources in the Arctic region, which could amount to 90bn barrels of oil and 44bn barrels of natural g as l iquids (NGL) . At present, there are few Arctic fields which are commercially viable:
The Prudhoe Bay Oilfield in the Alaska North Slope started production in 1977 and has been a large source of hydrocarbon s for the US since. It is thus far the only example of successful long - term production in the Arctic Circle. Originally holding 25bn bbl, the BP - operated field, shared with ExxonMobil and ConocoPhillips , has a current output of about 650,000 barrels per day (b/d), down from its 1979 peak of 1.5mn b/d.
The Snøhvit natural gas field offshore Norway is another example. It was discovered in 1984 and is estimated by operator Statoil to hold as much as 193bn cubic meters (bcm) of gas, 113mn bbl of condensate and 37.4mn bbl of NGL. Small production volumes started flowing from Snøhvit and an associated field, Albatross , in 2007.
The Prirazlomnaya field is the first commercial Arctic development in Russia. It is estimated to hold 610mn bbl. First production is set to start in 2013, having been postponed from an initial 2012 date owing to environmental safety concerns.
|The Top Of The World|
|Map Of Main Arctic Fields|
Furthermore, we have seen a rally in Arctic exploration and production (E&P) over the last couple of months. There are several instances, each of varying significance to the Arctic frontier.
In early February 2013, ExxonMobil and Rosneft entered into an agreement that gives the US giant exploration access to seven new blocks in the Chukchi Sea, Laptev Sea and Kara Sea. In exchange, Rosneft will get access to a 25% interest in the Point Thompson unit on the American Alaska North Slope. Exxon is certainly one of the most experienced players in the Arctic. Building on this expertise will be critical in defining the main winners from the opening up of Arctic exploration.
Canada has called for bids for exploration licences across its Arctic archipelago. The Eastern Arctic territory of Nunavut is already subject of exploration. Between 1985 and 1996, Suncor produced about 2.8mn barrels from the region. Similar calls to restart exploration in the area were made in 2000 and 2009 but proved unsuccessful. The Canadian authorities believe that current market conditions will spur interest in the prospects. In addition, we believe that this call for bidders will be useful in assessing the extent of the IOCs' interest, and will indicate which companies are willing to take on the risks.
Norway upped its Arctic reserves estimates in February, ahead of the opening up of acreage in the Barents Sea. Officials are stating that Arctic areas could hold 2.5bn barrels of oil equivalent (boe). Several companies have already expressed interest in Barents Sea exploration, with Statoil as the front-runner.
Overall, we expect 2013 to be a critical year in establishing which IOCs are interested in the Arctic region. Shell's experience in the Chukchi Sea has thus far proven how costly such exploration can be (see our online service, February 2 2013, 'Shell Faces Safety And Environmental Violations For 2012 Arctic Work'). The company announced in early March that it would put Arctic exploration on hold in 2013. Even if the melting of ice caps reduces exploration costs, the main source of expense for explorers will remain the cost of meeting stiff environmental regulations. The high regulatory standards in the Arctic are often linked to two factors: the absence of coastal security services, which makes intervention lengthier, and environmental pressure to protect the Arctic ecological system, thereby raising the costs of precautionary measures companies have to make in tapping the Arctic's riches.
The high costs of Arctic exploration (and production) make the region a long-term bet for most of the players involved. Unconventional sources of oil and gas - from tight formations - are making new and less contentious hydrocarbon resources available at a lower cost. This has delayed new projects from coming online in the Arctic - the most notable of which is Gazprom's beleaguered Shtokman gas project in the Barents Sea, which is being put on a standstill after the US' shale gas boom destroyed demand from its targeted market ( see 'Beyond Shtokman', August 30 2012).
Interest by these IOCs in much of the Arctic most likely lie in the technical understanding and expertise they can obtain from exploration to gain a first-mover advantage in the future, than for their immediate production prospects. Even Russia's Natural Resource Ministry, which increasingly views the development of its Arctic shelf as key to sustaining its hydrocarbons sector, is only looking at a 2030 date for Arctic production to make a sizeable contribution to the Russian economy. Nonetheless, as growing world demand continues to fuel a scramble for new sources of oil and gas, it would not be wise for capital-rich firms to lose out on the hydrocarbons promise held by the world's last untapped frontier to sustain their long-term future.