The entire international Arctic region contains “much less” potential petroleum resources, with a mix of more natural gas, than previously estimated, according to a joint study released Nov. 1 by Wood Mackenzie Ltd., Edinburgh, and Fugro Robertson, part of the Fugro group of companies based in the Netherlands.
Using detailed geoscience analysis of individual basins and their petroleum reserves “ground-truthed” via industry data on exploration wells and exiting discoveries, the study indicates only a quarter of the oil volumes previously estimated in key Arctic basins in North America and Greenland. Moreover, it concludes that the Arctic is primarily a gas province, with natural gas accounting for 85% of the discovered resources and 74% of the exploration potential in that northernmost region of the globe. Under the study’s most likely scenario, the Arctic is projected at its peak in 20 years to produce 8 million boe/d, split 40:60 of oil and gas, with the proportion of production from US basins lower than previously anticipated.
“This assessment basically calls into question the long-considered view that the Arctic represents one of the last great oil and gas frontiers and a strategic energy supply cache for the US,” said Andrew Latham, vice-president of energy consulting for Wood Mackenzie and lead author of the study. “These findings are disappointing from a world oil resource base perspective,” he said. “The oil-gas mix is not ideal because remote gas is often much harder to transport to markets.”
Moreover, Latham said, “Export and technology constraints are expected to delay production of a large portion of the commercial gas until 2050.” The largest resource plays may not generate the highest returns because they are gas prone or cannot be readily monetized due to constraints on available export infrastructure, he said.
As a result, the study said the US “must look elsewhere to meet rising demand,” including member nations of the Organization of Petroleum Exporting Countries “such as Venezuela,” and to Russia-areas of “broader, geopolitical concerns relating to security of supply.”
This study is the first overall assessment of the Arctic’s total oil and gas potential by Wood Mackenzie or anyone else, Latham said. “Nobody has done it all, not even the US Geological Survey,” he said.
“While these results are disappointing to the US as a whole, the Arctic still holds great potential for individual oil and gas companies with the advanced technology, money, and time to develop the challenging resources and build the infrastructure required to transport it,” Latham said. There are economically attractive opportunities in many areas of the Arctic. Three key factors drive high full-cycle returns potential in individual cases: a predominance of oil rather than gas, short production lead times, and proximity to export routes. (A more detailed look at these opportunities appears in Exploration & Development, p. 31).
“The chance to lead in cutting-edge technologies and to access world-class volumes make many of the opportunities attractive for the largest companies. For the intermediate and smaller-scale players, there are niche opportunities in plays for those willing to take a risk on frontier exploration,” Latham said.
‘Yet-to-find resources’
Many of the Arctic basins already have world-class discovered resource volumes totaling 233 billion boe. Beyond that, the Wood Mackenzie-Fugro Robertson study assessed yet-to-find resource potential of 166 billion boe. The South Kara-Yamal basin and the East Barents Sea in Russia, along with Greenland’s Kronprins Christian basin, have yet-to-find resources greater than 10 billion boe, the study reported. “Only the South Kara-Yamal basin and the East Barents Sea offer the majority of yet-to-find potential in pool sizes of over 1 billion boe,” the report said.
Most of those yet-to-find resources are in either ice-free or seasonal ice areas offshore or in the onshore areas of the basins, according to the study. “The engineering challenges away from the permanent ice zone are less daunting, with emphasis on cost and efficiency improvement of existing technologies rather than radical new solutions. Subsea technologies will unlock the greatest share of resources,” it said.
The cost of Arctic operations is high, driven by extreme transportation costs, with wide variation between basins. “Average field development costs of around $6/boe are comparable with many other parts of the world. High costs elevate average development breakeven prices across the Arctic to above $30/boe,” said the report.
It said there are attractive niche opportunities in many basins where the breakeven price of the largest fields are much less than average, below $20/bbl in some cases. Two basins-the North Slope in Alaska and Russia’s Pechora Sea-achieve exploration full-cycle returns greater than 20%. “These are both oil-prone basins with good access to markets via pipelines and ice-free seas,” Latham said.
All five host governments with oil and gas holdings in the Arctic-the US, Canada, Greenland, Norway, and Russia-favor exploration by foreign and domestic companies. Competition in that region “is lower than in other resource plays of comparable scale,” and no preeminent “pan-Arctic champion” has yet emerged, said Latham. “Infrastructure will be key to success in many parts of the Arctic, and local infrastructure owners already hold strong advantages in the more-developed basins.”
Future license rounds will indicate the industry’s appetite for Arctic exploration, along with application of technology and development of export infrastructure, he said.
Nearly three quarters of the yet-to-find liquids resources and half of the yet-to-find gas resources are potentially commercial under the base-case price scenario, with Arctic adaptation of proven technology, Latham said.