Greenland Gears Up for Oil Search

NUUK, Greenland (THE WALL STREET JOURNAL via Dow Jones), Apr. 26, 2010

Oil, one way or another, promises to transform this barren ice mass.

For years, many Greenlanders and scientists have blamed the burning of oil and other fossil fuels for rising temperatures that have caused Greenland's huge ice cap to recede and its building-size offshore glaciers to crack apart.

Yet the slow-speed meltdown has also helped create a huge opportunity for the oil industry, opening more of this North Atlantic island's
coastal areas for exploration and making it possible for boats to navigate and for drilling rigs to be planted in new offshore regions.

Starting around July, U.K. oil company Cairn Energy PLC is set to drill the first exploration well in Greenland in a decade, which analysts say may turn up sizable quantities of crude.

Greenland's government also is slated this summer to award as many as 14 new oil-exploration licenses off its northwest coast to companies likely to include major U.S. and European oil concerns.

The U.S. Geological Survey estimates that Greenland may have the equivalent of about 50 billion barrels of oil, which could put it
roughly in the same league as Libya. Realizing just a fraction of those potential reserves could prove transformational for Greenland,
an island three times the size of Texas with a population of just 56,200, where vast sheets of ice cover 80% of its territory much of the year.

The island has extensive self-governance since gaining home rule in 1979 from its former colonial parent, Denmark. But Greenland, which relies on shrimp and fish for most of its exports, still depends on Denmark for an annual subsidy of 3.2 billion Danish kroner (about $576 million) that accounts for roughly 30% of the island's economy. Hitting an oil jackpot would raise hopes here of eventually breaking that financial dependence and putting Greenland on a path toward full independence, say some government officials and Greenlanders.

Greenland's oil potential has long been rumored but never realized. In most offshore areas, where exploration has focused, drilling can only occur about four months of the year because of the long, harsh winters.

Developing oil in Greenland requires an oil price of at least $50 a barrel for companies to operate at reasonably profitable rates, versus
$5 to $10 a barrel in Libya, according to analyst estimates. U.S. benchmark crude prices have exceeded $80 a barrel in most of the past two months. Since the 1970s, companies, including Chevron Corp. and Statoil ASA of Norway, have tried finding crude here, but left after weaker oil prices made exploration uneconomical.

Higher oil prices in recent years have changed the drilling equation in Greenland. U.S. and European oil companies are in need of new oil prospects as they are mostly unable to drill in places like the Mideast, or to operate in such nationalist-minded regions at paltry profit margins.

Hans Kristian Olsen, head of the island's government-run oil company, Nunaoil, says offshore drilling technology today among oil companies is more advanced than during previous failed efforts. More is known about where exploration should be targeted, such as Baffin Bay in northwest Greenland, where companies hope to win licenses for the 14 fields on offer.

"We feel more confident about our oil prospects today," says Mr. Olsen at his office overlooking a hilly landscape above a bay here in
Greenland's capital.

Oil analysts say Greenland has offered foreign companies contract terms that are more attractive relative to nations in the Middle East,
where oil is easier geologically to exploit. The Greenland government will get as much as 60% of any oil profit, but that is much less than the 95% to 98% profit take that Iraq's government will get from recent contracts with foreign oil companies. Greenland's government last year established a sovereign wealth fund to manage future crude revenue.

Some Greenlanders aren't keen on the oil-drilling plans. "We're already experiencing climate change because of the burning of fossil
fuels, so why are we trying to produce the same fuels?" asked Alfred Jakobsen, head of Greenland's main fishermen's association, Knapk, which also worries about the possible impact drilling may have on the island's thriving fishing industry. Mr. Olsen and other Greenland officials say those fears are overblown.

Some scientists, such as Paul Batty at Greenland's Climate Research Center in Nuuk, say the melting ice is also the result of natural variations in climate.

Cairn Energy is set to drill as many as four exploration wells off Greenland's west coast. Other companies could soon follow if Cairn finds enough commercially recoverable oil, analysts say. Exxon Mobil Corp. is among a small number of other companies with drilling stakes here, but has yet to start drilling.

Oswald Clint, a senior analyst at Sanford Bernstein, calculates that one relatively small commercial oil discovery for Cairn of 300 million
barrels, if realized, could be worth around GBP 1 ($1.54) a share for the company. Cairn shares currently trade on the London Stock Exchange at just over GBP 4. Mr. Clint doesn't own Cairn stock.

Mr. Clint thinks Greenland's oil quest could turn out positive this time, because companies will drill in deep areas of so-called Cretaceous-age sedimentary rocks, between 70 million and 145 million years old, that weren't tested in previous drilling campaigns. That type of geology has yielded huge offshore oil discoveries in places like Brazil and Ghana.

For now, Greenland's oil industry is tiny. Any oil industry that develops here will rely almost fully on foreign workers for some time. Government-run Nunaoil has seven employees, including just one oil geologist, and one of its main tasks is assessing Greenland's oil-bearing potential, not oil drilling.

Such labor deficiencies reveal deeper problems: Barely one-third of the population has an education level above elementary school. The island has high rates of alcoholism and suicide among young men. Such problems, says Birger Poppel, a social scientist at the University of Greenland, raise doubts that Greenland would be able to handle full self-determination, at least in the near term.

Copyright (c) 2010 Dow Jones & Company, Inc.


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