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Colin Chilcoat

Colin Chilcoat

Colin Chilcoat is a specialist in Eurasian energy affairs and political institutions currently living and working in Chicago. A complete collection of his work can…

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Shell Approval May Trigger Resource Race In The Arctic

Shell Approval May Trigger Resource Race In The Arctic

In a few short months Shell will (re)enter the Chukchi Sea. The oil and gas major still awaits approval from a number of state and federal agencies, but in early May the company received the consent of the Obama administration to explore the remote Arctic sea 70 miles off the coast of Alaska. 

AlaskanSea

Source: Nicolas Rapp, Fortune

If it sounds familiar, that’s because it is. Shell was in the Chukchi and Beaufort Seas for much of 2012 – a stint that ended with more headaches than drilling. Following some high-profile failures with its Noble Discoverer and Kulluk rigs, Shell put its Arctic operations on pause in early 2013. Amid slumping profits, the group called off its 2014 plans to resume. Today, the economic indicators are not much better – Shell lost $1.1 billion in the Americas in the first quarter of 2015 – but the company is committed to moving forward. Related: Oil Prices Will Fall: A Lesson In Gravity

One of the richest sedimentary basins in the world, the Arctic Alaska Petroleum Province is estimated to hold approximately 28 billion barrels of technically recoverable oil and 122 trillion cubic feet of non-associated gas spread across Alaska’s continental shelf and rift shoulder.

For Shell in particular, it expects the Arctic to be its biggest source of crude oil globally within the next 20 years. Estimates vary, but the Bureau of Ocean Energy Management calculates the hurdle, or breakeven, price to be roughly $38 in the Chukchi Sea. With a profit margin of around 39 percent – probably generous – Shell could be earning $1 billion or more in annual profits for each 100,000 barrels produced per day at prices not much higher than today’s.

For his part, Obama has more than just 28 billion reasons to take exploration to the next level. To start, US Arctic development could add $145 billion in new payroll for US workers and $193 billion in new local, state, and federal revenue over the next 50 years. In that time, annual employment – including direct, indirect, and induced – is expected to average 35,000. Related: Clock Running Out For Struggling Oil Companies

As things currently stand, production decline rates in Alaska will threaten the operational ability of the Trans-Alaska Pipeline System toward 2040, potentially stranding 0.3 million barrels per day of oil production. Given longer than average lead times, meaningful exploration must start sooner rather than later.

The Arctic is rich with hydrocarbons, but everyone knows that and the jockeying for position is heating up. Economic considerations included, the opportunity for power projection and technical development – however implicit in the Shell approval – is not lost on President Obama.

Between 2009 and 2013, Chinese companies – mainly the big three, China National Petroleum Corp, Sinopec, and China National Offshore Oil Corp. (CNOOC) – were the largest buyers of international oil assets. Several of these acquisitions were made with the Arctic in mind, i.e. Canada’s Nexen and Russia’s Yamal LNG to name a few. Early last year, CNOOC obtained an exploration license for Iceland’s Dreki region in the Norwegian Sea. The company is also expected to be involved in Norway’s 2016 licensing round in the Barents Sea. Related: OPEC Struggling To Keep Up The Pace In Oil Price War

Russia too – while slowed by sanctions – has remained active in its Arctic waters. Gazprom Neft expects to more than double oil production this year from the country’s only offshore Arctic oil project. Last year, the Prirazlomnoye field delivered roughly 2.2 million barrels. The Kremlin is also expanding its already world-leading fleet of nuclear and diesel icebreakers.

What’s more, marginal players like India and Vietnam are increasingly demonstrating that influence in the Arctic is not limited to those who share its borders.

Still, with its new role as head of the Arctic Council – and factoring in Shell’s ambitious plans – the US has the potential to define the Arctic race for the next several years.

By Colin Chilcoat of Oilprice.com

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