The Coming Boom In Arctic Drilling

Published in Investing on 12 April 2012

Big Oil moves forward in its goal to tap Arctic offshore reserves.

A version of this article initially appeared on our US site, Fool.com.

Technology is changing the oil exploration and production picture, and one of the biggest impacts will be on Arctic drilling. The US Geological Survey estimates that 25% of the world's remaining undiscovered conventional oil and gas reserves are located in the Arctic, with most of it in offshore reservoirs. The US lays claim to about a third of those reserves, an excellent position to be in as more high Arctic licenses are granted to exploration and production companies.

Though several nations will benefit from Arctic drilling, the US, Canada and Russia stand to gain the most. Below is a snapshot of how Arctic drilling is shaping up in these three countries.

United States

Royal Dutch Shell (LSE: RDSB) has spent $40 billion on 10-year leases in Alaska's Chukchi and Beaufort Seas. The company has been attempting to drill for five years, its efforts delayed by regulatory agencies and courts.

Things began to change last August, when the company received conditional approval from the Department of the Interior to begin drilling exploratory wells. Last month, Shell received approval on its oil spill response plan, which means drilling may commence as early as this summer.

The details of Shell's plan highlight the risks facing all companies that intend to drill in icy Arctic waters. Specifically, the company had to demonstrate a plan for dealing with a spill at the end of the operations season. At that time, the region is dark and the water has iced over, rendering traditional oil spill cleanup plans useless.

Shell still needs a few final permits, but the company is hopeful that drilling will begin in early July.

Canada

Canada launched an Arctic Review in the wake of the Gulf of Mexico disaster in order to develop new filing requirements for companies applying for Arctic offshore drilling permits. As of right now, there are no companies actively drilling, or applying to drill, in Canada's Arctic waters, but Shell, BP (LSE: BP), ExxonMobil (NYSE: XOM.US) and Imperial Oil all hold exploration licenses in the region.

The new filing rules will also affect those applying for permits in the Beaufort Sea, located just south of the Arctic Ocean and, for all intents and purposes, home to the same conditions and drilling risks. Earlier this year, Chevron (NYSE: CVX.US) and Statoil (NYSE: STO.US) signed an agreement to explore Beaufort's frigid waters. The two companies are tentatively scheduled to begin a 3D seismic program this summer.

Russia

Right now, Russian law prohibits any company that isn't state-owned from exploring its offshore waters. That's something that Vagit Alekperov, CEO of Russia's Lukoil, sees changing in the near future.

Alekperov, speaking to the Financial Times last month, expressed frustration at the current policy, largely because the state-owned companies Gazprom and Rosneft have been sitting on their licenses. State-owned oil companies frequently lack the expertise of private companies, and this seems to be true in the case of Russia's arctic reserves. Alekperov claims Russian Prime Minister Vladimir Putin "understands that we have to resolve this issue. State companies take the licenses and do nothing with them".

Non-state-owned companies can only enter the region in partnership with state-owned companies, as ExxonMobil did last year, partnering with Rosneft to explore the South Kara Sea.

But Alekperov may well get his way sooner rather than later. Russia's major Siberian fields are in decline, and the country needs to open up new oil fields if it intends to maintain its 10-million-barrels-per-day production target until 2020.

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> Aimee owns shares of Statoil.

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