Arctic Oil-Gas Investments

(from Lloyd’s Report 2012: Arctic Opening – Opportunity and Risk in the High North)

The scale of potential investment in both the onshore and offshore Arctic oil and gas industry is a small fraction of overall investment in the global oil and gas industry over the next 10–20 years: the International Energy Agency has suggested that overall investment in the oil and gas sector should total $20,000bn between 2011 and 2035¹. Nevertheless, sustaining current and projected rates of Arctic oil and gas could transform local economies and global energy dynamics. If implemented, the Russian government’s ambitious vision for investment in its high north would establish the Arctic as a major gas-producing region.

Given regulatory, commercial and geological uncertainty, meaningful long-term investment projections in this sector are hard to come by and difficult to make (xxiii). Each potential project faces a different set of technical, environmental and infrastructure issues: each country presents a different legal and political context that will influence investment. Below is a look at current investment projections for each territory.

Russia

Shtokman is by far the largest single potential offshore Arctic project, 550 kilometres into the Barents Sea. Overall, investment could reach $50bn². However, the Shtokman project has been repeatedly delayed owing to concerns about drifting icebergs, negotiations over the tax regime with the Russian government, and concerns about export markets (xxiv). At the time of writing it is unclear whether the project will proceed, or to what schedule. Investments in the onshore Yamal peninsula – the lifeline for Gazprom’s ability to maintain and increase Russia’s overall gas production – could run to more than $100bn, in order to provide eventual production of 115–140 bcm, if not more³ . In October 2011, Total paid $425m for a 20% stake in Novatek’s Yamal LNG project – which is expected to require investment of $18–20bn to 2018 – while also taking a $4bn equity stake in Novatek⁴.

In oil, TNK–BP plans to spend up to $10bn on developing onshore Arctic oilfields in the Yamal-Nenets Autonomous Area, with exports to Asia from 2015– 2016⁵ . Offshore, Gazprom’s Prirazlomnoye platform is expected to be in place in 2012. In August 2011, the Russian state company Rosneft signed a deal with Exxon for three offshore blocks in the Kara Sea and one in the Black Sea, to which Exxon committed $3.2bn for the initial prospecting phase – most of this tabled for the Arctic areas. Russian Deputy Prime Minister Igor Sechin said this project would attract $200bn–$300bn in direct investment over the next 10 years, though this figure is highly speculative⁶.

Norway

Given the arguably more stable regulatory and operating environment, investment in Norway’s Arctic fields is more predictable. The Norwegian government expects the Snohvit gas field (producing gas for the Melkøya LNG plant) and the Goliat oil field (expected to produce from 2013) to attract a total of $9.2bn of investment ($2.17bn has already been spent to 2010)⁷ . The Skrugard and Havis oil and gas fields, estimated to contain 400–600 million barrels of recoverable oil equivalents, are likely to produce sustained investment, with associated economic opportunities for oil service firms able to operate in the Barents Sea⁸.

Canada

In Canada, there has been renewed interest in Arctic wells previously abandoned as unprofitable at the end of the 1980s. Several 9-year exploration leases were awarded between 2007 and 2010, subject to investment commitments of some $1.8bn. These projects have been on hold since May 2010 pending a review of offshore drilling.

United States

In addition to on-going onshore oil production on the North Slope of Alaska, US companies are now also looking further offshore, beyond artificial islands which have been producing in the near offshore for some time. Shell, ConocoPhillips, Statoil, Repsol and Eni won exploration leases for the Beaufort and Chukchi Seas in 2008, paying out a total of $2.66bn (xxv). Subsequent legal challenges and the 2010 post-Macondo moratorium on offshore drilling in Canada and the United States held exploration largely in check. In 2011, a report commissioned by Shell estimated “commercial production of Arctic Alaska offshore oil and gas resources would generate government revenue estimated at $97bn (in 2010 dollars) in the Beaufort Sea and $96bn in the Chukchi Sea over 50 years”⁹. In line with an increasingly supportive approach taken by the Obama administration to Arctic development, in December 2011 Shell received conditional federal approval for six exploratory wells.

Greenland

Between 2002 and 2010, hydrocarbon exploration costs in Greenland amounted to around $740m. A second licensing round for exploration acreage in the Greenland Sea will be held in 2012/2013. To date, Cairn Energy is the only company undertaking exploration; it has probably invested over $1bn in total to 2011, so far without major success. Greenland’s national oil company, Nunaoil, has suggested the potential for $10bn in investment in the exploration-to-production phase in West Disko (2011–2030) and a further $10bn in Baffin Bay (2011 to beyond 2040)¹⁰.

Footnotes:

(xxiii) The offshore oil consultancy Infield has projected an average $7 billion annual investment in offshore Arctic exploration and development alone from 2011 to 2017. But this figure depends to a large extent on the 2016 go ahead for the Shtokman gas field development in the Barents Sea, a partnership between Gazprom, Statoil and Total.

(xxiv) Other LNG supplies, from Australia and elsewhere, may mean that the window of opportunity for Arctic LNG exports is becoming more challenging.

(xxv) Shell was by far the most substantial bidder, paying $2.1 billion.

Charles Emmerson, Glada Lahn, 2012, Arctic Oil-Gas Investments, Lloyd’s.©