As Shell
admits defeat this year, Russell Lynch looks at the risks and rewards for
explorers
TUESDAY 18 SEPTEMBER
2012
Miles beneath the
wilderness of the Arctic Circle lies a potentially huge prize – but the risks
are also huge. In an unforgiving climate where temperatures regularly drop as
low as minus 50C, geologists reckon there are 400 billion barrels of oil and
gas for the taking – enough to meet the world's energy needs for the next 125
years.
Getting it out is the
problem. Royal Dutch Shell became the latest oil major to suffer a serious
setback to its Arctic ambitions this week, as it was forced to postpone
drilling until next year because of failings with its safety equipment.
An environmental
lobby determined to protect the Arctic from invasive exploration also poses a
major complication for Shell and its rivals BP and Gazprom, with safety
concerns already to the fore following BP's Deepwater Horizon disaster in 2010.
Shell's decision to
postpone drilling off the coast of Alaska in the Chukchi Sea was met with
unalloyed triumph by Greenpeace, whose activists have been trailing the
company's drill ship Noble Discoverer since it left New Zealand six months ago.
Campaigners – with support from the likes of the actress Penelope Cruz and Sir
Paul McCartney – say Shell's "Arctic misadventure is an expensive and
risky mistake". The group managed to shut down more than 70 Shell petrol
stations in London and Edinburgh in July, at a cost of 24 arrests.
Ironically, it is the
receding ice-cap in recent decades caused by global warming which has opened up
the Arctic for this latest plundering of its natural resources. Arctic
exploration will also be under the political spotlight on Thursday when the
parliamentary Environmental Audit Committee's report on protecting the region
is published.
While Shell still
plans to launch full-scale oil and gas drilling next year when it has corrected
the mechanical faults in its spill containment system and gained the necessary
permits, the latest delay effectively shuts off Shell's attempts to explore in
the Chukchi Sea until next July because the drilling season ends next week. The
delay will add millions to Shell's $4.5bn (£2.8bn) bill in the Arctic so far,
having earlier faced delays when it had to shift its drill ship out of the way
of a 30-mile by 12-mile ice floe.
Shell will continue
to work off the coast of Alaska but will only drill the top parts of wells –
so-called "top holes" extending down about 1300ft – before
temporarily closing the holes and returning to them next year, creating a
"strong foundation for 2013". The bullish statement to investors
stated unambiguously that the exploration programme "remains critically
important to America's energy needs, to the economy and jobs in Alaska, and to
Shell".
But there are plenty
of far less confident signals from the industry when it comes to Arctic
exploration. In July BP shelved a $1.5bn offshore oil project in Alaska due to
cost overruns and technical setbacks. The decision came after an 18-month
review concluded that the Liberty project – an offshore field with about 100
million barrels of recoverable oil – was no longer viable. This was the second
time in ten years that Liberty has been shelved due to cost concerns.
Russian behemoth
Gazprom's Shtokman gas project in the Barents Sea has also fallen victim to cost
overruns and falling gas prices in a slowing European economy. Gazprom – the
major partner in the joint venture with France's Total and Norway's Statoil –
came to the conclusion that "the financing is too high to be able to do it
for the time being". The remote field is estimates to hold gas reserves of
almost 4 trillion cubic metres.
Meanwhile Statoil
itself is holding off from Arctic exploration until 2015 while it waits to see
how Shell copes with the challenges. A spokesman said the firm was taking the
"prudent step" of observing the outcome of Shell's efforts before
finalising its own exploration timetable.
Unofficially, Shell
is playing down the delays. Sources say the company is there for the long haul
because its offshore Alaska wells are not due to produce commercial oil and gas
until 2017. But analysts point out that the vast estimated reserves of oil and
gas under the Arctic – 22 per cent of the world's recoverable oil and gas is
supposed to be down there, according to the US Geological Survey – are just
that: estimates. At the current oil price of $117 a barrel there is an economic
case, but if prices fall steeply, that case could come under pressure.
Seymour Pierce oil
analyst Sam Wahab said: "Compared to the cost of drilling a well in the Falklands
– say around £80m – Arctic exploration is much more expensive. It depends
what's down there but you may need an oil price of $75 a barrel-plus."
With pressure from environmentalists unlikely to ease, it's now up to Shell to
make the numbers stack up and hold its nerve where rivals are losing theirs.
Source:
http://www.independent.co.uk/news/business/analysis-and-features/cold-calling-the-lure-of-arctic-oil-8145167.html
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