Energy issues

Unless you have been hiding in a cave somewhere in sub-Saharan Africa, you know by now that Shell has exited the Arctic after a number of years, with more than $7 billion in expenditures and a proposed program that has generated more attention and protest than the first man on the moon. Their 6,800-ft well, 80 mi offshore in the Chukchi Sea, did not find enough potential to warrant further exploration in the area, Shell said, despite the fact that the Chukchi and Beaufort Seas may contain as much as 26 Bbbl of recoverable oil, according to the U.S. Geological Survey.

The eco-wackos, of course, danced in delight. “Big oil has sustained an unmitigated defeat,” said Greenpeace UK Executive Director John Sauven. “Polar bears, Alaska’s Arctic and our climate just caught a big break. Here’s hoping Shell leaves the Arctic forever,” echoed Miyoko Sakashita, oceans program director for the Center for Biological Diversity. Let them wish on. The Arctic is not dead.

Significant industry interest. The Chukchi Sea, in particular, remains an area of interest to a number of companies. ConocoPhillips has purchased 98 tracts there. An exploratory well, scheduled for 2014, was deferred, due to high costs and regulatory uncertainty. Several international operators have lesser holdings in the Chukchi, including: Repsol E&P USA with 93 leases; Eni Petroleum US with 17 leases; Statoil Hydro USA E&P with 16 leases; and, Iona Energy Co. and North American Civil Recoveries Arbitrage with one tract each.

At the same time that Shell was exiting the Arctic, Exxon Mobil was promoting exploration there. Looking two decades down the road, when shale oil production has dwindled, Jed Hamilton, senior Arctic consultant at Exxon Mobil argued, at a recent University of Houston Energy Symposium Series event, that the world would need the additional Arctic oil to meet the increasing thirst for energy, and that exploration should begin sooner rather than later, since it would likely be 2030 before a discovery made today could begin production. The development of the Arctic has international security implications also, according to Hamilton. “If the U.S. stands in the background, Russia will move forward and things won’t be as good as they could have been if the U.S. had a seat at the table …” he said. So, despite Shell’s withdrawal, interest in the Arctic, in general, and in the Chukchi and Beaufort Seas in particular, remains relatively high. The question is, how much higher could that interest go?

Any number of groups would have us believe that the answer depends on our commitment to environmental stewardship. Can we prevent an incident and spill? Are we willing to commit the energy, equipment and money to do that? We can answer yes to both of those. The issue then becomes one of money. With oil prices in the mid $40s for WTI, and Alaskan development and production cost averaging in the mid to upper $70s/bbl, Alaskan exploration appears to make little sense in the short-to-medium term. But, in the long term, as Exxon Mobil’s Hamilton pointed out, not only does it make sense, it’s an imperative, given the ultimate decline in shale production. While there might be a short hiatus in activity, I don’t think the U.S. Arctic will be quiet for too long.

Lower for longer. How long might the too long be? It depends on oil price recovery, and recovery of a battered industry. Nymex predicts that WTI will remain below $80/bbl through 2022. The U.S. Energy Information Administration believes it may break the $80 mark in 2021. Either date is a long time for an industry in disarray. Walker Moody, COO for asset management at Tudor, Pickering and Holt Co., put it succinctly when speaking at Rice University’s Baker Institute. “It’s ugly out there, and the duration of the downturn is causing more distress with the industry, and more angst within the investment community, than we have seen in a very long time,” Moody said. The distress and angst were detailed by Chis Tomlinson in a commentary in the Houston Chronicle. He noted that, during the second quarter of this year, “77% of energy companies in the S&P 500 cut capital expenditures, spending 23.8% less than they did during the same period in 2014.” More deep cuts are expected next year. The implications for the industry are devastating. Most companies are now showing negative balance sheets, paying more in debt service than the profits they make. Access to credit has, more or less, dried up. If we remain in the current low-price scenario longer, a third to a quarter of the industry could go bankrupt, said Moody. It’s certainly not an environment that encourages Arctic development. But, high, required expenditure levels in a time of low oil prices are not the only disincentives for Arctic development.

The challenges. A presentation by Exxon Mobil, entitled “Arctic Leadership¹,” lists the physical challenges for Arctic operations. These include: remote locations, icebergs, mobile pack ice, permafrost, sensitive environments, changing ecology, prolonged darkness, severe storms, earthquakes and deep water.

Given the oil price scenario, a severely pummeled industry and the list of challenges above, it would seem that only a lunatic could be interested in Arctic oil and gas development. But, apparently, there are lunatics aplenty. Norman Wells, the first commercial Arctic oil field, was discovered in 1920 by Ted Link, an Imperial Oil (affiliate of Exxon Mobil) geologist. Maybe Ted was crazy. More likely, he had some inkling of the huge reserves in the Arctic: 90 Bbbl of oil, 1,670 Tcf of gas and 44 Bbbl of NGLs, according to the U.S. Geological Survey, are hard to dismiss, regardless of the reason.  

REFERENCE

1. http://corporate.exxonmobil.com/~/media/global/Brochures/2013/news_pub_poc_arctic  

About the Authors

William J. Pike

World Oil

William J. Pike has 47 years’ experience in the upstream oil and gas industry, and serves as Chairman of the World Oil Editorial Advisory Board.