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Arctic Oil and Gas Exploration and Development

With ice sheets predicted to form in the next month, Royal Dutch Shell abandoned its costly oil wells in the frigid Chukchi Sea. The failure of this highly anticipated project was a major blow to Shell executives and to shareholders who expected big returns on their multi-billion dollar investment. The well and the company’s entire Alaskan drilling project has not lived up to expectations or produced results commensurate with the oil and gas reserves evaluation.

Bad weather plagued the offshore drilling platform, which was located some 100 miles north of Barrow, Alaska, the northernmost city in the United States. In late August, the rig was battered by 11-foot waves and pummeled with gale-force winds that halted production. Amounts of oil and natural gas were much lower than expected. The shortcomings of this $7 billion project are a major embarrassment to leaders at Shell and raise serious questions about the future of petroleum exploration in the Arctic.

If one of the world’s largest oil companies failed, who can win in this high-stakes region? When Shell secured the $2 billion oil lease in 2008, oil was over $100 per barrel. The success of onshore fracking in shale deposits has affected the financial feasibility of offshore exploration in the Arctic for now. Over the past few decades, the petroleum industry has realized the dangers of cold-weather drilling. The big question is whether it is worth the risk.

According to a report prepared by the Eurasia Group for Washington, D.C.’s Woodrow Wilson International Center for Scholars, the biggest concern is a major spill. The admittedly fragile ecosystem will be difficult or impossible to clean. No one knows what will happen if an oil spill or pipeline fault releases oil in an area where there is permafrost or seasonal pack ice.

Political challenges are also putting pressure on exploration companies and limiting what can be done now. A joint report published by Lloyd’s of London and Chatham House, the Royal Institute of International Affairs, estimates that $100 billion will be invested to support oil exploration in the Arctic by 2022. Most experts believe that copious amounts of oil and natural gas lie deep below the Arctic. The United States Geological Survey estimates that the area contains massive natural gas reserves and some 90 billion barrels of oil. That is an estimated 30 percent of the world’s undiscovered gas and 13 percent of its oil.

The Geological Society of London has called the Arctic the final frontier for hydrocarbon exploration. According to its estimates, discovered reserves contain some 200 billion barrels of oil. Some 114 billion additional barrels and 2,000 trillion cubic feet of natural gas are waiting to be discovered. The biggest challenges will be finding the richest wells and developing an appropriate oil and gas risk assessment for each drilling location.

The vast resources required to explore and mine these petroleum reserves limit the number of companies who are equipped to handle the financial burdens. Experts at the Eurasia Group believe that international oil companies with significant offshore experience will be favorites to pursue the elusive arctic oil along with a small number of solvent and well-funded national companies.

With so much at risk, including a company’s financial backing, safety record and reputation, petroleum economics training will be increasingly important for drilling groups who want to tap into reserves in this nascent sector.

The North American Arctic represents a significant portion of the unexplored territory that has become accessible due to climate change, but other countries, including Russia, Denmark and Norway, will be facing similar challenges as they venture into the Arctic Circle.

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