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Registered: 12-2008
Posts: 546
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ARCTIC OIL RESERVES & DRILLING


Is there A Bonanza Waiting At the North Pole?
By Chris Nelder
Friday, June 5th, 2009

One way to know that the end of the Age of Oil will soon be upon us is the current excitement and chatter about going—literally—to the ends of the earth to find more oil.
The Arctic Circle, which circumscribes about 6% of the earth's total surface, is one of the last regions of any significant size to be explored for oil, and for good reason: It's locked in ice for much of the year, far from support and distribution lines, and is one of the most extreme environments on earth. Whatever oil and gas is extracted from the top cap of our planet will be the most expensive and difficult oil ever produced.

Yet the prospect of new oil production from the Arctic is attracting renewed attention as the world becomes increasingly cognizant of the end of cheap, easy oil, and the security and economic risks associated with the expensive, difficult oil that remains. Exploration opportunities are diminishing every year, as the world continues its 40+-year-long slide down the backside of the exploration bell curve.

With global warming causing the polar ice pack to break up and retreat, it has become possible to sail ships through the Northwest Passage for the first time in recorded human history. (When it was last open is not known, but it could have as recently as the Medieval Warm Period from 1000-1300 AD, when Norse and Icelandic explorers settled Greenland, or distant as the last inter-glacial period, 120,000 years ago.) Thus it now seems at least physically possible to tap the fossil fuel resources of the Arctic.

More specifically, the focus now is upon offshore resources in the Arctic Circle, in continental shelves under less than 500 meters of water. Onshore areas in the region have already been explored, with some 40 billion barrels of oil (BBO), 1136 trillion cubic feet (TCF) of natural gas, and 8 billion barrels of natural gas liquids having been developed, primarily in the West Siberian Basin of Russia and on the North Slope of Alaska. Deepwater basins in the Arctic Circle are considered weak prospects as they lack the appropriate source rock structures.

The important question now is: How much remains to be discovered up there?

In an effort to answer this question, the United States Geological Survey (USGS) in cooperation with an international group of geological experts from Canada, Demark, Greenland, Norway, Russia, and other governmental agencies has just completed an effort to round up the available data on the Arctic region and assess its potential, known as the Circum-Arctic Resource Appraisal (CARA). Their summary report, "Assessment of Undiscovered Oil and Gas in the Arctic," was released last week.

Much of the area is as yet unexplored, so an innovative approach to assessing the area and extrapolating from the limited data available was required. In order to have some way of evaluating the "very sparse geological data" on the area, the evaluators used "analogs" from the real world as comparison samples.

The team divided the area into 69 Assessment Units (AUs) that contained at least 3 km of sedimentary rock, since such source rocks are where the vast majority of oil is found. It limited its assessment to resources thought to contain at least 50 million barrels of oil, or 300 billion cubic feet of gas (50 million barrels of oil equivalent, or MMBOE). According to the report, fields larger than 50 MMBO make up more than 95% of the world's known oil and gas resources by volume, so the limit gives us a good approximation without pretending to more detailed understanding than is warranted by the data. It also considered only conventional oil resources, excluding unconventional resources such as coal bed methane, gas hydrates, oil shales, heavy oil and so on.

Most importantly, it presented its results "without reference to costs of exploration and development."

Maps of the resources reveal their uneven distributions: Sixty percent of the oil is concentrated in just six AUs, predominately in Alaska, and two-thirds of the undiscovered gas is in just four AUs, predominately in Russia.

A range of probabilistic estimates were developed for the assessment units, which were then aggregated into the summary report. Estimates of undiscovered resources are customarily stated in terms of a range of probabilities. The median, P50 estimates (50% probability) are usually reported in the press, but they're often shown to be optimistic once a given resource is produced.

Interestingly, an analysis by respected petroleum geologist Jean Laherrère in March 2008 on The Oil Drum estimated that the Arctic would contain 50 billion barrels of oil and 1000 TCF of gas, putting his estimates just above the P95 estimates offered by the USGS. Laherrère is one of the fathers of the modern peak oil study, a man with deep experience in the global oil and gas exploration and production industry, and his estimates are usually quite accurate.

To give a sense of scale to these numbers, world oil consumption is around 30 billion barrels per year, and world gas consumption is about 110 TCF per year. So the Arctic may contain anywhere from a 1-3 year supply of oil and a 7-27 year supply of gas.

However, these are merely estimates of "original oil and gas in place." Typically, only 25-35% of that amount is economically recoverable using current technology. So the Arctic may in fact have perhaps a 4-month world supply of recoverable oil, and around a 2-year supply of gas.

In reality of course, the resources wouldn't be found or produced all at once, but rather in chunks, over time, and would have far greater implications for the nations that lay claim to it (for example, Greenland) than for the world as a whole. "With respect to oil, there's nothing that we see in the Arctic that suggests this preeminence of oil within and around the Gulf states would be significantly shifted," said geologist Donald Gautier, lead author of the survey.

Given the scarcity of actual drilling data and the reliance on analogs and statistical simulation for this survey, our understanding of the Arctic's hydrocarbon potential will no doubt evolve as fresh prospecting gets under way. In terms of the all-important production rate however, it seems safe to assume that although the Arctic's resources will be most welcome to the nations that possess them, they will amount to little more than a trickle of very expensive hydrocarbons within the context of enormous world demand.

Exploration and development of oil and gas from the Arctic Circle is a foregone conclusion. The world simply needs hydrocarbons too much, and the remaining prospects are few. But to exploit it will require technologies that don't yet exist, enormous amounts of capital, and a high tolerance for risk. In other words, the price of oil will have to be high, and stay high, to make the effort worthwhile.

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Last edited by AgnesW, 6/12/2009, 7:53 pm
6/12/2009, 7:45 pm Link to this post   Blog
 
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Re: ARCTIC OIL RESERVES


FUTURE REQUIREMENTS FOR DRILLING IN THE ARCTIC

Arctic drilling is not new. The first successful well was drilled in March 1968, when ARCO struck oil in the Prudhoe Bay field 250 miles north of the Arctic Circle on the North Slope of Alaska, near the Arctic Ocean. The find was the largest oil field in the U.S., with an estimated 13 billion barrels of recoverable oil (BP), twice the total reserves of the East Texas field, and a flow rate of around 400,000 barrels per day (EIA).

The discovery kicked off an exploration spree throughout the Arctic. By the mid-1970s, offshore drilling was under way as well, but offshore production in the Arctic and sub-Arctic has remained limited due to its difficulty. A mere two million barrels of oil, and no gas, have been produced from the Canadian Arctic offshore since 1985.

ConocoPhillips (NYSE: COP) is the second largest Arctic producer after Russia's Gazprom. Peter Noble, the Chief Naval Architect for ConocoPhillips, ticked off some of the main challenges to Arctic production at the OTC conference.

To begin with, the drillships used in the 70s and 80s are no more. The US hasn't built new icebreakers since the 1970s under Nixon. With a renewed interest in the Arctic, the oil and gas industry is now designing and building a new class of modern drillships and tankers for the Arctic, able to penetrate deeper waters and deeper reservoirs, and break ice continuously. These are highly specialized ships, made by manufacturers such as Finland's Wärtsilä Corporation (HEL:WRTBV).

Submersible drilling rigs can be used in the Arctic, but they can only be moved in open water season, and work best in water depths of less than 30 meters (most of the new prospects in the Arctic are in depths up to 1000 meters). Harsh environment semi-submersibles exist, but none are really capable of surviving months of being locked in ice.

Similarly, collecting 3-D seismic data in 600 to 1000 meters of water today is a much more difficult task than shooting 2-D seismic in 30 meters of water was in the 1980s.

What we need to keep going, said Noble, is drilling solutions that can operate in more than "tens of days" in the warm season. Year-round transportation is needed, instead of platforms being inaccessible to tankers for most of the year, while offshore platforms keep pumping into large and expensive storage tanks.

Beyond ships and rigs is a much bigger problem: there is no infrastructure or workforce in the Arctic. Marine vessels, airports, road access, municipal support, and all of the conveniences of civilization simply do not yet exist in the frozen north. There are no deepwater ports either, which limits offloading capabilities.

Completely commonplace activities like trenching and laying pipe are a whole different game in ice covered waters. Simply knowing when to expect ice, and how much, is another area that needs improvement.

Evacuation and rescue operations in the Arctic must be self-sufficient, because it's so remote; backline support systems are simply too far away. By the same token, mobilizing fast responses to oil spills requires a local self-sufficiency that currently does not yet exist.

Wildlife protection, cooperation with indigenous tribes, and a "don't spill a drop" ethos mean that oil companies must be extremely careful in the Arctic, and take a holistic view of their activities encompassing the needs of all stockholders in the area, including social needs.

One such non-technical but crucially important challenge is working successfully with the First Nations (aboriginal tribes) of the Arctic. Many areas under development are the property of Inuit and other natives.

Nick Poushinsky, the Senior Vice President of infrastructure consultancy Stantec (NYSE: STN) explained some of the issues, speaking from his long experience working for the Canadian government in negotiating resource development agreements with aboriginal people. He now works for companies owned by them, which are developing joint venture partnerships with Devon Energy (NYSE: DVN) and ExxonMobil (NYSE: XOM), and working on Beaufort Sea development.

It takes a great deal of effort, he said, to work through issues like royalty regimes, environmental protection, and not interfering with native rights to traditional hunting and fishing. The best time to move ships through the Arctic is in warm, ice-free seasons, which is also when wildlife need to move through it.

Along with environmental concerns and oil spill prevention have come a host of regulatory issues in which conflicts abound; according to Poushinsky, it has "gotten totally out of control." For example, Americans want to protect polar bears, but at $100,000 a head, the Inuit want to hunt them. The US Environmental Protection Agency will not allow testing and research on the water, so those working toward US development of the resources must turn to Norway and other partners for that.

Royal Dutch Shell (ADR: NYSE: RDS.A) and ConocoPhillips are going well outside their domains of expertise, spending $100 million per year on biological and geological research in the Arctic, studying such things as climate change and environmental factors affecting polar bears, seals, walrus, and whales.

Recognizing the importance of their oil and gas resources, aboriginal peoples are starting to feel their oats and demand a piece of the action, exchanging access to their lands for something else. Their aspirations are very high, but they lack the necessary skills and capabilities to participate in building the Arctic infrastructure. At the same time, crews imported from warmer climes often find the conditions unpleasant, and don't come back after their first tours. Manpower and training are desperately needed at the earth's northernmost extremity.

Finally, there are the jurisdictional challenges. Everyone is amused by Russia's planting of a flag at the Arctic, but that was just a publicity stunt. Real oil and gas production can only happen after successful resolution of border disputes. Canada has ongoing border disputes with Denmark, the US and Russia. The US also has its own border conflicts with Russia. Greenland is seeking revenue that will allow it to separate from Denmark, and Iceland is anxious to retain its share of the spoils because one-third of its exports are derived from energy.

Still, as Mead Treadwell, chair of US Arctic Research Commission noted, if the US does not exercise its visible presence in the Arctic, we cede it. We can't put a ‘keep out" sign on the ocean, she said; it's open to any and all who can get there and develop it.

Nation-states tend to be adversarial in these discussions, Poushinsky observed, taking hardline positions on the issues and refusing to talk to each other. Once the parties sit down and negotiate, results are easier to come by. "We gotta get over this kinda crap," he sighed in a long-suffering tone.

All speakers seemed to agree that a great deal of international cooperation is needed across the board to develop the Arctic. Environmental studies and protection, seismic surveying, spill prevention, protecting the subsistence of indigenous residents, developing drilling and shipping standards, providing infrastructure, and a slew of other crucial areas all transcend borders.

 

6/12/2009, 7:52 pm Link to this post   Blog
 


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