Energy companies around the world have eyes set on the Arctic.
On the heels of renewed interest in the Arctic region, leaders of Russia, Norway, and Finland are negotiating the creation of a wealth fund devoted to oil and gas production in the Arctic Barents region. These three nations all owe much of their wealth to the energy sector and already have assets in the world’s largest sovereign wealth fund, Bloomberg reports.
According to Finnish Prime Minister Jyrki Katainen, most of the money would come from Russia, but some would also come from the Nordic Investment Bank and the European Investment Bank.
Statoil (NYSE: STO) of Norway plans to drill 12 test wells this year and will devote $13.8 billion to explore the Skrugard and Havis fields in the Barents.
The Arctic portion of the Barents contains 6 billion barrels of oil. And with ice glaciers receding, it will be easier for companies to find more oil reserves.
Energy companies have always shown interest in the Arctic because it is one of the last unexplored frontiers in the realm of energy exploration.
The Arctic is home to 13% of the world’s oil reserves and 30% of global natural gas reserves. According to information from the U.S. Geological Survey, the Arctic holds 160 billion barrels of oil and 1.67 trillion cubic feet of natural gas reserves – 84% of which is concentrated offshore. Arctic drilling is a tough frontier, but most of the oil reserves are only one-third mile deep below the ocean.
Royal Dutch Shell (NYSE: RDS-A) has proposed shallower well testing to decrease the likelihood of accidental spills.
As more interest is generated in the region, so too will come oversight and regulation.
The Arctic Council is an international governing body comprised of Canada, Denmark, Norway, Sweden, Russia, Iceland, Finland, and the United States, but recent inductees also include Italy, China, Japan, and South Korea.
The intentions of this international body are to monitor any business activity in the Arctic and to ensure that human settlements and wildlife are not being threatened.
Roughly four million people dwell in the Arctic – many of whom are indigenous groups and recent settlers.
During a meeting in Kiruna, Sweden, ministers that comprise the Arctic Council signed a binding document that would assure cooperation from state governments on controlling oil pollution and addressing any spills that may stem from oil production.
Petroleum activity in the far north is a touchy issue – especially in light of the 2010 BP (NYSE: BP) Gulf Coast spill and a rig accident involving Shell off the coast of Alaska in 2012. But that isn’t the only barrier oil companies will face.
Arctic Dilemmas
Lacking infrastructure is a main concern in the Arctic – not only for extraction but also to prevent oil spills.
Shell pulled out of operations in the Alaskan coast due to revolving investigations from the Justice Department, the Coast Guard, and the Interior Department for various safety and environmental violations.
Officials determined that Shell did not have the proper spill prevention technologies to tackle a potential accident.
Because of the controversial nature of drilling in the Arctic, government agencies and activist groups like Greenpeace have been watching energy companies closely.
As recently as this year, ConcoPhillips (NYSE: COP) said it will delay planned 2014 drilling operations off the coast of Alaska, citing uncertain regulatory measures. In the U.S., there are no concrete regulations for Arctic drilling, but there is still heavy heat from the current administration, which has some energy companies and investors nervous.
Activists and opponents of drilling in the region believe oil and gas companies do not have the necessary safety standards and equipment to prevent accidents.
But the energy industry is also suffering from a general lack of infrastructure in the Arctic.
Currently, there are not enough ports to drill into deepwater surfaces or to transport any crude. In some areas, the nearest port is 1,000 miles away. The cost in basic infrastructure is also priced higher than other oil and gas fields.
In a 2011 deal between Exxon Mobil (NYSE: XOM) and Russian state-run oil company Rosneft (MM: ROSN), Deputy Prime Minister of Russia Igor Sechin said it costs a minimum $15 billion for one ice-proof platform in the Kara Sea!
And the Arctic is still one of the hardest places on the planet to explore. Exploration ships are forced to trudge through of thick ice sheets that accumulate every season, and this was evident when Shell had problems navigating through ice sheets from the Chukchi Sea in Alaskan waters.
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Is It Worth It?
Knowing whether or not to invest in the Arctic depends on your venture appetite.
There are energy companies that are skittish about touching the Arctic because of the negative publicity attached with drilling in an environmentally sensitive area.
But despite the gamble, other companies are still willing explore such largely unmanned territory.
A comparison can be made to energy companies that conduct business in Iraq; the risk is great, but the reward can be worth the hardship.
When investing in the Arctic, you want to throw your lot behind companies already adept at Arctic campaigns. Look to companies like Rosneft, Gazprom (MM: GAZP), Total (NYSE: TOT), BP, and Statoil, to name a few. These are companies that have had extensive experience in Northern sea operations.
And look to the Nordic nations, like Norway and Finland, since they are the countries that derive a great portion of their economic livelihoods from oil profits in Arctic waters.
To get the safest bet out of investing in the Arctic, follow Russia or any company that deals with its state-controlled companies.
Exxon Mobil and Rosneft may have to pay over $15 billion per ice-proof platform, but there is a projection of $300 to 500 billion in direct investment coming from the deal in the next ten years.
The Russians may have experience in the region, but they also conceded that foreign partnerships, and investment is needed to get more reserves.
But Russia still holds all the cards with its lock on 70% of Arctic oil.
Besides Exxon, Shell has an agreement with Gazprom, and even mega-giant China has to pay homage to Russia.
But if you’re looking for something a little closer to the U.S., then watch out for Alaska.
The state government up there is looking to revive its oil production in order to catch up with oil and gas booms of the lower 48 states. BP is one company that has recently taken advantage of Alaska’s tax incentives – investing in two new oil rigs worth $2 billion, which will be ready by 2016. ConocoPhillips and Exxon Mobil are also expected to announce Alaskan plans soon.
But reviving Alaska’s oil industry will be a long-term project, and with investing in Alaska also comes tighter regulations from the U.S., which spelled Shell’s undoing when it operated off the coast of Alaska.
If you’re an investor that falls more on the safe side, stick to the Bakken or the Eagle Ford. The United States is undergoing booms in both the oil and gas industries, and there are so many other reserves around the world waiting to be unlocked with the right investment and technology. And aside from Alaskan oil production, the U.S. has no real experience in dealing with frigid drilling operations.
Since scrapping planned operations in the Arctic, ConocoPhillips is more focused on warmer places in Tanzania and Argentina.
Bottom line, the infrastructure and equipment requires higher costs in the Arctic – not to mention the tight regulations in comparison to the less restrictive atmosphere of South Texas or North Dakota.
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