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Is Arctic Drilling Still Profitable For Norway?

Arctic Rig

Arctic drilling may become unprofitable for Norway if oil prices continue to fall, says a new report looking into the best and worst scenarios for this new frontier in the context of the new normal for international prices. The report comes on the heels of a tender that saw a record-high number of Arctic exploration licenses—102—the vast majority of them in the Barents Sea.

The report’s authors, Mads Greaker and Knut Einar Rosendahl, revise significantly downward previous government estimates for the profitability of Arctic exploration, which were made back in 2012 and 2013 when the price of a barrel of crude was much higher than the US$49 for Brent today.

At today’s prices, the study’s authors argue, Norway’s Arctic exploration could actually lead to a loss of US$240 million (2 billion crowns), under the worst-case scenario. Under the best-case scenario, profits would be US$4.92 billion (41 billion crowns). This compares to the 2012-2013 estimate of US$6-33.6 billion (50-280 billion crowns) in profits.

It makes sense that estimated economic benefits of major projects bear revisions every once in a while, especially after such a substantial change in the oil price environment over the last couple of years. But it’s certainly worth noting that the report was commissioned by Greenpeace and Nature and Youth – groups that are currently suing the Norwegian government precisely because of its Arctic oil and gas exploration plans, which, they claim, “violate the Paris Agreement and the people’s constitutional right to a healthy and safe environment for future generations”. Related: ‘’U.S. Rig Count Must Drop 150 For Oil Markets To Balance’’

The government has not commented on the report, saying it will be presented as evidence in court when the trial starts this November. Yet the latest news from Norway’s oil and gas industry suggests the push into the Arctic is moving quickly along.

Over the last two weeks, Statoil announced an oil find in the Kolje formation in the Barents Sea, as well as the launch of drilling at another location there, and a greenlight from the Petroleum Safety Authority for a third drilling project, also in the Barents Sea.

This sea is estimated to contain more than half of Norway’s undiscovered offshore reserves, and climate change has made the weather there a little less harsh, opening it up for hydrocarbon exploration.

Arctic ecosystems are extremely fragile, which is the basis for Greenpeace’s case against the oil and gas industry, and the fight is likely to be severe. Yet, with 65 percent of Norway’s undiscovered oil and gas reserves located in the Barents Sea, it is certainly an attractive destination for Statoil and its partners, among them Exxon, Eni, Total, Chevron, and ConocoPhillips, as well as Russia’s Rosneft. Related: U.S. Shale Gas Booming Despite Global Glut

The price argument, unlike the environmental one, doesn’t sound strong enough to convince anyone there’s no future in Arctic exploration. Back in February, Bloomberg reported that drilling in Norway’s Arctic shelf is set for a record this year, and back in February oil prices were not that much higher than today. Statoil, for one, is among the global leaders in efficiency gains and production cost cuts, and it also has a pretty good track record with safety: Greenpeace called a 0.1 point increase in serious incidents between 2015 and 2016 “a surge”, with the actual figures at 0.2 and 0.3 incidents per million worked hours for each respective year.

The oil and gas industry accounts for a sizeable portion of Norway’s GDP. Most of the oil and gas the country produces is export-bound, as Oslo pushes one of the greenest agendas in the world that led New York Times’ Somini Sengupta to call it a Norwegian Paradox. Paradox or not, Norway needs the oil and gas in the Arctic, and is actively working on ways to tap it in a way that would ensure profitability.

The energy industry knows about production costs, and it continues to focus on lowering them. The environmental costs are a different matter – a matter that is bound to get a lot of spotlight and inevitably turn into a priority for Statoil and its partners in the harsh waters of the Barents Sea.

By Irina Slav for Oilprice.com

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