Despite Warming Climate, Still Many Hurdles to Drilling in the Arctic

One oft-cited benefit of rising global temperatures is that a warmer Arctic will open up vast, previously inaccessible tracts of the mineral rich Arctic Ocean for oil and gas exploration.  After years of litigation and protests dating back to the 1990s, Royal Dutch Shell was finally set to begin exploration this summer.  Even after delays related to barge certification and avoiding a 30-mile by 12-mile ice floe pushed back the expected start date, Shell remained optimistic.  

It turns out that the Arctic is even more unforgiving than the world's best engineers predicted.  Yesterday, the Chicago Tribune reported Shell's announcement that it will not drill into any oil reservoirs in the Chukchi Sea in 2012. (Article: http://trib.in/UhtXGd).  Apparently Shell's containment dome was damaged during tests and the required repairs could not be completed by the September 24th deadline set by the Department of the Interior and EPA.  Shell still plans to drill top holes in preparation for the 2013 drilling season before the October 31st deadline to halt all drilling operations for the winter.  Regardless, this is a setback in Shell's Arctic strategy as most engineers agree that actual production could begin in 2017 at the earliest, under ideal conditions.

While the Artic might be physically inhospitable, many energy companies are confident that drilling there can be profitable because of the relatively stable geopolitical climate in the region and enormous potential reserves.  Britain's Independent recently reported that geologists estimate there are 400 billion barrels of oil and gas underneath the frozen tundra of the Arctic Circle.  That is enough petroleum to power civilization as we know it for 125 years. 

With such large estimated reserves it should come as no surprise that the nations with coastlines on the Arctic have made a myriad of competing territorial claims.  For every country besides the United States (as the US has not ratified the treaty), territorial rights in the Arctic Ocean are governed by the United Nations' On the Law of the Sea Convention.  The convention provides that out to 200 nautical miles, within the exclusive economic zone, Arctic nations have absolute control over petroleum resources.  Out past 200 nm, Arctic nations retain their rights over seabed resources if they can demonstrate scientifically that the ocean floor is a 'natural prolongation' of the continental shelf closer to shore.  This is why Russia planted a flag on the sea floor at the North Pole in 2007; it claims the Lomonosov Ridge is an extension of its continental ocean floor territory.  These potential disputes are an issue to keep an eye on in the long term.

But well before those competing international claims can come to a head, energy companies must first drill exploratory wells to determine more exactly the location and size of the petroleum/natural gas deposits.  The large number of setbacks for virtually every company operating in the region combined with the global economic slowdown raises the question of whether crude oil prices will support the increased costs of extracting oil and gas from the artic.  Shell is making a significant bet that Arctic oil is indeed worth the price.  Since 2006 Shell's Arctic strategy has cost the company $4.5 Billion, one-sixth of its annual capital spending budget.  Though Shell will not discuss its production costs in the Arctic, some analysts put the costs at around $70-$80 per barrel while others put it closer to $30.  Going forward, those costs compared to the price of crude will dictate the pace of exploration in the Arctic.

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