Pace of widespread Arctic drilling still uncertain

Tue Jul 17, 2012 11:11pm IST

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* Untapped oil and gas reserve potential attractive

* Commercial viability of exploration is uncertain

* Risks and costs could be huge

By Nina Chestney

LONDON, July 17 (Reuters) - The extent of interest in widespread drilling in the Arctic for natural resources such as oil and gas is still uncertain as the commercial viability of exploration in such a remote environment is unknown and huge risks remain, a panel of experts said.

High commodity prices and concerns about future energy security are driving several oil and gas majors to seek new sources of hydrocarbons.

Majors like Statoil, Exxon Mobil Corp, Gazprom, Rosneft, Eni, BP, Shell and Total have started or plan to start drilling for oil and gas in Arctic regions, sparking fears among environmentalists of a rush for hydrocarbons in an environment they argue should remain untouched and protected.

"The Arctic is globalising, development is happening now but its future pace is uncertain as there is no such thing as a risk-free environment," said Charles Emmerson, senior research fellow in energy, environment and resources at Chatham House, at an event at the London think tank on Arctic opportunities.

"A race (to drill) is inevitable in the Russian Arctic, very probable in the Norwegian Arctic and probable in the Alaskan Arctic. The question is whether it is economically viable to bring oil out," he told Reuters.

The Arctic is attractive for exploration because it is estimated to hold up at least 32 percent of the world's undiscovered oil and gas reserves and as global warming melts sea ice, making the region more accessible.

Investment in the Arctic could reach $100 billion or more in the next decade, driven by the oil, gas, mining and shipping industries, a report by Chatham House and the Lloyd's of London insurance market estimated in April.

BETTING ON RETURNS

However, drillers in the most remote parts of the Earth run huge reputational risks if something goes wrong and the fragile environment is damaged. Firms face huge costs from complying with safety standards, developing technology, transport and insurance.

"(It has been said that) an oil field has to contain one billion barrels to be commercially viable. You can't find that (amount) anywhere except in the Arctic," Emmerson said.

"It is worth so much money it is potentially worth putting in the money to get (oil). But it would be 'curtains' if something went wrong, especially in the U.S. Arctic."

Shell is among the firms betting on the commercial viability of the Arctic. It plans to start exploratory drilling in the Arctic's Beaufort Sea in the first week of August, drilling 3 to 5 wells up to 50 metres deep, said Robert Blaauw, senior adviser to Shell's global arctic division.

The company has spent $4.5 billion on acquiring drilling rights in Arctic seas and meeting safety standards set by the U.S. government after an explosion at BP's Macondo well in the Gulf of Mexico in 2010.

"We wouldn't go on if we didn't believe we could do it safely but also if there was not a good return for our shareholders," Blaauw said.

Commercial viability is not certain for every part of the Arctic, however.

Greenland's Arctic seas are thought to hold huge potential but only 13 wells have been drilled there and no hydrocarbons have been found so far, Blaauw said.

Shell plans a seismic programme in Greenland this summer to gather information on the prospects for future drilling but progress is likely to be very slow, he added.

"There are very different Arctics. The Bering Sea is like (drilling in) the North Sea but the north-east coast of Greenland is very different. We are seriously considering how we should respond to that (region) based on the technology we have today and whether it is worth taking that risk," Blaauw said.

"Development in some of the harsher and more remote parts of the Arctic will go very very slowly," he added.

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