COLUMN-Russia's tantalising Arctic oil and gas deposits: Kemp

Thu Nov 8, 2012 9:47pm IST

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By John Kemp

LONDON Nov 8 (Reuters) - Some of the world's largest undiscovered oil and gas deposits lie under shallow seas on the broad continental shelves off the northern coasts of Alaska, Canada and especially Russia -- a tantalising prize for the major international oil companies, but once which has so far eluded them.

"The extensive Arctic continental shelves may constitute the geographically largest unexplored prospective area for petroleum remaining on Earth," according to the United States Geological Survey (USGS).

"The Arctic Circle encompasses about 6 percent of the Earth's surface, an area of more than 21 million square kilometres, of which almost 8 million square kilometres is onshore and more than 7 million square kilometres is (offshore) on continental shelves under less than 500 metres of water," USGS explained in 2008.

USGS estimated the region's undiscovered but technically recoverable oil resources at 90 billion barrels of oil, with another 1,669 trillion cubic feet of gas (278 billion barrels of oil equivalent) and 44 billion barrels of natural gas liquids.

The Arctic accounts for 15 percent of the world's undiscovered oil, according to USGS assessments, but a massive 30 percent of the world's undiscovered gas (excluding shale and other unconventional gas plays).

Some of the deposits lie onshore in Alaska and Canada, or on the continental shelf claimed by the United States and Canada. Others lie onshore in Russia's West Siberian and Timan-Pechora sedimentary basins, where deposits like the super-giant Urengoy gas field (Gazprom) and Russkoye heavy crude field (TNK-BP) have been developed over the last 30 years.

But there are thought to be vast deposits of condensate-rich natural gas in the string of huge sedimentary basins along the wide continental shelf on Russia's northern coast. From west to east: the Barents Sea on the border with Norway, the Kara, Laptev and East Siberian seas off Russia's remote north, and the Chukchi Sea bordering Alaska.

UNEXPLORED SEAS

Russia's shelf remains comparatively unexplored. By 2010, just 1.345 million kilometres of seismic surveying lines had been done on the 6.5 million square kilometres of shelf, an average density of just 200 metres of surveying line in every square kilometre, according to Russian geologists Alexey Piskarev and Mikhail Shkatov in a recent survey ("Energy potential of the Russian Arctic seas" 2012).

"For comparison, in the North Sea, the density of seismic surveying exceeds 4 kilometres per square kilometre," Piskarev and Shkatov wrote.

"Seismic and drilling exploration maturity of the Russian shelf is tens and hundreds of times lower than the exploration maturity of waters off the United States, Norway and the United Kingdom."

Just 252 wells have been drilled on the whole Russian shelf and most of them are concentrated in the Barents and Kara seas in the west, and north of Sakhalin island on Russia's east coast. The Laptev, East Siberian and Chukchi seas remain almost entirely un-surveyed and undrilled.

HIGH PROSPECTIVITY

Despite the lack of surveying, geologists are confident the region holds big oil and gas deposits, in concentrations large enough to make them profitable to extract despite problems posed by the harsh climate.

The geology is similar to hydrocarbon rich areas such as the Gulf of Mexico and the North Sea, as well as the oil-rich Mississippi and Niger deltas. And the shelf under the Kara Sea is an offshore extension of the onshore West Siberian Basin, which is already the largest petroleum basin in the world. The basement rock is covered by as much as 6-16,000 metres of sediment, giving the region strong oil and gas-generating potential.

Five large hydrocarbon fields have already been discovered: the supergiant Shtokman gas and condensates field and the giant Ledovoye and Ludlov fields in the Barents Sea, and the Rusanov and Leningrad gas fields in the Kara Sea. Based on experience with similar basins in the North Sea and the Gulf of Mexico, many more giant and even some supergiant fields are likely to be found.

USGS estimates there could be as much as 11 billion barrels of oil, 380 trillion cubic feet of natural gas (63 barrels of oil equivalent), and 2 billion barrels of natural gas liquids under the Barents Sea, mostly concentrated in the eastern part of the basin, where Shtokman and the other fields already found are located.

Underneath the Kara Sea, USGS assesses there could be 2.5 billion barrels of oil, 622 trillion cubic feet of natural gas (103 billion barrels of oil equivalent) and 19 billion barrels of natural gas liquids.

TECHNICAL CHALLENGES

The conventional reserves represent an enormous prize; the problem is the cost.

Oil and gas deposits off Russia's northern coast are found in relatively shallow water. Fields discovered so far in the Kara Sea are under less than 50 metres of water, while those in the Barents are under 150-350 metres. The average depth of the deposits themselves is less than 2 kilometres below sea-level.

By contrast, deepwater deposits in the Gulf of Mexico are under 500-2,000 metres of water, at average total depths of 7.6 kilometres below sea-level. Fields in the offshore Niger delta are found under 700-3,000 metres of water and at average total depths of 2.5 kilometres.

In other ways, however, Arctic exploration and production presents harder technical and economic problems.

Freezing temperatures and ice cover present formidable operating challenges. Undersea pipelines in shallow water areas would need to be buried to avoid ice scouring, while pipelines in depths of more than 200 metres would need to be specially insulated.

Many of the fields are far offshore. Long pipelines would be needed to bring oil, gas and liquids back to the shore, and oil and liquids pipelines would need to fitted with subsea booster pumps every 200 kilometres to keep them flowing.

One USGS study put the total development and operating cost for a hypothetical Arctic oil field producing 200,000 barrels per day from 20 wells as high as $22 billion to build and run over 21 years ("Engineering and Economics of the USGS Circum-Arctic Oil and Gas Resource Appraisal (CARA) Project" 2008).

The other problem is that most of the hydrocarbons are gas rather than oil. Gas is more difficult to transport, requiring expensive pipelines or LNG facilities to take it to customers in distant markets.

With natural gas prices under pressure in the United States and elsewhere as a result of the shale revolution, Russia's northern seas may have the wrong sort of molecules to justify massive capital spending on offshore projects. Russia's vast offshore gas deposits are just too high on the cost curve.

SHTOKMAN DEFERRED

Shtokman's troubled history is a classic example of the problems besetting the sector.

Following seismic surveys in 1981-85, an exploratory well was drilled into the supergiant gas and condensate field in 1988. Shtoktman lies in just 300 metres of water. With its enormous reserves and simple geological structure, Shtokman should be the jewel in Russia's Arctic crown. But development has been repeatedly delayed.

The Shtokman development company was set up in 2008 between Gazprom (51 percent), Total (25 percent) and Statoil (24 percent) to design, construct and finance a field producing up to 410,000 barrels of oil equivalent per day.

However, the final investment decision has been repeatedly postponed, and Statoil transferred its shares to Gazprom in July 2012, perferring to concentrate on simpler parts of the Arctic shelf.

Last month, Murmansk Governor Marina Kovtun complained about the project being put on hold indefinitely. According to the Russian presidency's website, President Vladimir Putin responded: "Why indefinitely? The investment decision is planned to be taken in the near future, so we are talking about a project launch before 2017" -- which is hardly an accelerated timeline.

The shale revolution may have killed off the prospects for Russia's Arctic oil and gas fields -- at least those more than a few miles offshore.

But the sheer scale of these deposits explains why peak oil theories are wrong, and their presence will continue to loom over the oil and gas markets, helping cap long-run prices.

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