Arctic Riches Lure Explorers — Exxon, Rosneft, Shell Set to Pour Billions Into Potentially Huge, Risky Prospects

By Russell Gold, Wall Street Journal, above image courtesy GAZPROM

ExxonMobil Corp.’s blockbuster $2.2 billion deal to drill for oil in the frigid waters north of Russia with OAO Rosneft is the latest sign of the energy industry’s white-hot interest in exploring above the Arctic Circle.

The region encompasses about 12 million square miles — just 6% of the earth’s land mass. But it is estimated to contain the oil and natural-gas equivalent of 412 billion barrels of oil, about 22% of the world’s undiscovered oil and gas.

More recently, thinning ice has made it easier to work in some parts of the Arctic. And the persistently high price of oil, along with political constraints elsewhere, has encouraged Royal Dutch Shell PLC and Cairn Energy PLC to invest billions of dollars on previously unexplored areas.

The challenges, however, are daunting. The extreme weather and ice flows during colder months could wreak havoc on oil-industry platforms. Cleaning up an oil spill would be a huge effort. The seas there don’t support the microbes that can break down oil droplets. Existing air strips, ports and villages in the Arctic couldn’t accommodate the type of massive response that occurred in the Gulf of Mexico last year.

The Arctic is largely untouched by industrial development and, due to its year-round cold, would be least resilient to an oil spill, notes the Arctic Council, an intergovernmental forum of nations bordering the region.

Despite such environmental objections, arctic exploration is poised to move ahead quickly. Exxon and Rosneft, for instance, hope to begin preliminary exploration work next year.

A Rosneft official said on Wednesday that the two companies hope to drill their first exploratory well by 2015 and, if everything goes well, could begin production in the region by early next decade.

Rosneft estimated the areas it hopes to explore over the next few years have estimated recoverable reserves of 4.9 billion tons of oil, or about 36 billion barrels.

Shell has received conditional U.S. approval for up to 10 wells over the next couple of years in shallow waters off Alaska, although the Anglo-Dutch company still needs additional permits.

Off the western coast of Greenland, operating on both sides of the Arctic Circle, Scotland’s Cairn Energy has drilled three wells and plans another four this year.

The two parts of the Arctic that are thought to contain giant deposits of oil and gas are north of Alaska and Canada’s Northwest Territories as well as the waters north of Russia, stretching from its boundary with Finland and continuing east for more than 1,000 miles.

“All around the coast of Russia, geologists salivate over what they see from the little exploration that we have and salivate over the opportunity to drill,” says Peter Robertson, a retired Chevron vice chairman and independent oil advisor to consulting firm Deloitte LLP. “There is the potential for very large finds. It’s a great opportunity.”

Marilyn Heiman, director of the U.S. Arctic Program at the Pew Environment Group, the conservation arm of the Pew Charitable Trusts, cautions that the energy industry is moving faster to start drilling than most countries are moving to craft appropriate regulations for the region.

“The Arctic is one of the most dangerous places to drill in the world and we need to have standards in place to prevent oil spills,” said Ms. Heiman.

Shell spokeswoman Kelly op de Weegh said the risks are manageable and the company plans to have oil-recovery vessels staged and ready to respond to any accidents.

“We could respond to any incident within an hour,” she said. In addition, the wells that Shell plans to drill are not considered complex by oil industry standards, she said. “Pressures encountered in the Gulf of Mexico are five times greater than what we would encounter in offshore Alaska wells,” she said.

There are other challenges for arctic hopefuls. For instance, designing permanent platforms to manage producing wells will require steel that can withstand years of extreme cold without turning brittle.

Border nations are laying the groundwork for more activity. Recently, countries have been clarifying often ill-defined maritime borders above the Arctic Circle, in preparation for expected oil and gas development. Norway and Russia ended decades of negotiation last year and agreed on their border.

Lawson Brigham, a professor of geography and Arctic policy at the University of Alaska at Fairbanks, said several countries that border the Arctic — including Norway and Russia — have economies whose future growth is dependent on developing its oil and natural-gas resources. “The key to the Arctic,” Mr. Brigham said, “is that there is a lot in the Arctic that can be sold.”