Is Arctic Drilling Set For Revival Amid Environment Concerns?

The resource-rich Arctic offshore has long been viewed as the hot spot for hydrocarbon development. Nevertheless, weak oil prices during the slump period along with technical challenges associated with Arctic exploration and increasing shift toward low-carbon economy amid climate change issue have curbed interests in the Arctic offshore drilling. However, the recovering commodity price environment along with President Trump’s pro-energy policies is likely to spark renewed interests in the exploration and development of the region.

In fact, Trump signed an executive order in April aimed at reviving the drilling activities in the Arctic, as part of his promise to unleash an energy revolution. Early this month, the U.S. Senate passed a bill permitting oil and gas exploration in Alaska’s Arctic National Wildlife Refuge (“ANWR”) which had been off limits for decades.

The legislation, which has been rolled in with a larger tax reform bill, might be lauded by the industry advocates but has been criticized by the environmental groups who are concerned about its catastrophic effects on the indigenous communities.

Potential Riches and Problems in Arctic Drilling

With the increasing demand for oil and gas, the Arctic and its seas are of crucial importance.

Estimated to hold vast untapped oil and gas reserves, Arctic exploration can bolster the economy of United States by creating jobs and supplying cheap oil. Per the U.S. Geological Survey, ANWR has around 4.3-11.8 billion barrels of recoverable oil.

Certain reports forecast that exploration in ANWR could create over 130,000 jobs, consequently generating around $440 billion revenues over the life of the drilling. Drilling in ANWR would help the nation tap into domestic resources and reduce the oil imports from Russia, Venezuela and other Middle Eastern countries. This would pave the way for a more energy independent and secure nation.

However, the environmental challenges associated with offshore Arctic drilling remains a key concern for the green campaigners. The opponents claim the projected revenues are quite overestimated as it fails to account for market conditions as well as excessive production and operating costs. The criticizers believe that the drilling will only endanger coastal communities and wildlife, aggravating the climate issue further. Opponents claim that offshore Arctic drilling can reinforce reliance on environmentally harmful energy sources.

Access to areas both on land in ANWR and the Arctic Ocean (the Chukchi and Beaufort seas) can cause irreparable damage to the environment. Industrial drilling activities in Chukchi and Beaufort seas could harm the native animals including polar bears, seals and whales among others. Drilling oil in some areas of the Arctic could cause toxins to be released into the ocean. Further, oil spills, which are part of drilling activities, can devastate the Arctic ecosystem. Environmentalists argue that oil companies have not demonstrated the capability to clean up an oil spill.

Oil exploration and drilling in ANWR would carve up industrial infrastructure in the area, endangering the pristine habitat, consequently exposing the flora and fauna of the region to toxins and oil spills.

Abandoned Endeavors

In 2015, Royal Dutch Shell (LON:RDSa) plc RDS.A announced its decision to quit the $7 billion Arctic drilling program due to the Arctic region’s huge operating expenses and excessive regulatory hurdles for environmental issues. Notably, the project was deemed unfeasible amid weak oil prices. By quitting the project, Shell joined the likes of other supermajors including BP plc (NYSE:BP) , Chevron Corp. (NYSE:CVX) and ExxonMobil Corp. (NYSE:XOM) which have also abandoned the Arctic program.

Last year, various oil companies including Eni S.p.A. (NYSE:E) , ConocoPhillips (NYSE:COP) , Statoil (OL:STL) ASA (NYSE:STO) , TOTAL S.A. and Iona Energy Inc among others had also discontinued their drilling rights in the U.S. Arctic waters. The pullout was part of the cost-cut initiatives adopted by the energy companies during the slump period. Arctic exploration entails excessive costs and environmental risks which the companies did not find rewarding. Consequently, having struggled to capitalize on the huge deposits of oil and gas buried below the icy waters, oil companies relinquished over 2.2 million acres of drilling rights in the Chukchi and Beaufort seas.

Is Arctic Exploration Bound for a Comeback?

Following a two-year hiatus, Arctic offshore drilling seems poised for revival on the back of Trump’s pro-energy policies and improving energy landscape.

Late last month, Eni received permit to drill in Beaufort Sea north of Alaska after a thorough review of the company’s well designs and safety protocol. This was the first time United States had issued a permit to drill in its Arctic waters since Shell’s unsuccessful attempt in 2015. Eni plans to drill two exploration wells and two potential sidetrack wells in the next two years.

Recently, the Zacks Rank #3 (Hold) company announced its intention to restart production at the Goliat oil field located in the Barents Sea. Along with Eni’s Goliat project, Statoil’s Snohvit project is also operating in the region. Several other middling discoveries have been made in the region and some are waiting for development and necessary approvals. You can see the complete list of today’s Zacks #1 Rank stocks here.

Earlier this month, Statoil also gave the go-ahead to the $6 billion Arctic project after reducing costs to half. Previously the project was not considered economically feasible with capex of 100 billion Norwegian kroner and a break-even oil price of $80 a barrel. However, after having successfully adapted itself to operate amid low oil prices, the company has managed to reduce the investments to 49 billion Norwegian kroner and a break-even oil price of $35 a barrel.

With this, the Johan Catsberg project — holding around 450-650 million barrels of oil equivalent — has become the biggest offshore project to be approved this year. Being the operator of the project, Statoil owns 50% interest, while Eni and Petoro hold 30% and 20%, respectively. Production from the Catsberg project located in the Barents Sea is anticipated to commence in 2022.

Next year, Statoil intends to drill 25-30 wells in Norwegian waters, out of which five to six are expected in the Barents Sea. More than half of Norway’s undiscovered oil and gas is expected in Barents Sea which will help address the country’s dwindling oil production.

Recently, the U.S. Senate passed a tax reform package authorizing oil drilling in Alaska's ANWR, which will help in generating at least $1 billion in lease sale revenues in the next 10 years. Though the prospects seem promising, the overall long-term consequences of the Arctic offshore drilling remains a wait and watch story.

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