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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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Is The Arctic Dream Dead?

The Arctic offshore will be drilled; it’s only a matter of time. However, the dream to have commercially viable production in the immediate future may very well be dead. Continually slumping oil prices are the primary suspect, but they don’t tell the whole story of what is a complex demise.

The Arctic is awash in hydrocarbons. It is estimated to hold 90 billion barrels (bbl), or 13 percent, of the world’s undiscovered conventional oil – 30 bbl are thought to reside in Alaska’s Arctic region. The figure is even higher for the world’s undiscovered conventional natural gas at 30 percent, the majority of which lies in Russia’s West Siberian and East Barents Basins. In all, 84 percent of the Arctic’s undiscovered oil and gas is believed to occur offshore.

Arctic fields

Onshore ventures to date have been fairly successful. Since 1962, 46 of the 61 “large” discoveries – fields with more than 500 million barrels – have been developed and massive fields in Alaska and Russia are still producing today. However, output is at a fraction of its former levels and boosting production, even onshore, is no easy feat. Enhancement projects and new development are estimated to cost 50-100 percent more than comparable projects in Texas. Related: Drilling In ANWR Likely To Resurface If GOP Wins Congress

Previously viewed as the solution to decades of declining production, Arctic offshore drilling now has more question marks than ever. After years and several billion spent, Shell has come up empty in the Chukchi Sea; Total is taking a break on its Yamal venture; and Canada’s Beaufort Sea remains untouched. Since 2003, nearly half of all leases in the US Arctic have been abandoned. Vice-president of LUKoil Leonid Fedun doesn’t believe commercial development will happen during his lifetime. Fedun, only 58, is probably right.

Total 202 Liquids production

Source: Rystad Energy

The market tailspin hatched by OPEC spells disaster not only for the Arctic offshore, but also a number of expensive plays across the globe. Most notably, the depressed prices will wreck capital expenditures in a sector with notoriously long lead times. A pessimistic futures market makes hedging above $80/barrel difficult and US shale fields will likely see a 10 percent decrease in investment. If money is leaving shale, you can be sure it’s already left the Arctic. Arctic’s breakeven, onshore included, ranks last among its competitors, behind oil sands, shale oil, and ultra-deepwater. Globally, oil and gas exploration is expected to decline up to 20 percent in companies’ and states’ 2015 budgets. Collapsing commodities prices and breakeven figures are easy targets, and rightly so as they properly demonstrate the Arctic’s competitiveness, or lack thereof. Still, they fail to account for a number of variables.

Geopolitically, the Arctic is not the necessary gamble it once was. The oil crisis in the ‘70s and distrust of Middle Eastern producers helped to skyrocket US Arctic onshore production, which peaked in the ‘80s. Today, a grain of distrust remains, but the relationship is as symbiotic as ever. Conversely, sanctions and increasing conflict between the West and Russia have stalled Arctic development in Russia’s two basins. State oil company Rosneft – perhaps the Arctic’s most loyal backer – has lost 30 percent of its value on the year and its debt is now $10 billion greater than its market capitalization.

Related: Shell Needs Five More Years In The Arctic

Ownership rights are equally dooming in the Arctic. Even under the assumption of advantageous prices, offshore commercial development cannot begin in earnest without resolution of the conflicting sovereign and territorial claims.

Finally, the Arctic is gassy, quite literally. The Arctic resource base is primarily natural gas and natural gas liquids, which has little appeal to US customers who have abundant supply more close at hand. Europe’s interest is hamstrung by their lack of resource base and ideological stance against Russia.

The IEA predicts an abundance of supply through 2020. Low prices and low investment to finish the decade will bring a shortage as we approach mid-century. Perhaps then the Arctic offshore will only be another 10-15 years away. In short, the dream is dead – for now.

By Colin Chilcoat of Oilprice.com

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