The Arctic Holds an Estimated 90B Barrels of Crude, 1,670TCF of Gas

(Wall Street Journal via Dow Jones Newswires), July 23, 2008

The Arctic contains just over a fifth of the world's undiscovered, recoverable oil and natural gas resources, according to a long-awaited review released Wednesday, confirming its potential as Big Oil's final frontier.

A report by the U.S. Geological Survey found that the area north of the Arctic Circle has an estimated 90 billion barrels of crude oil and 1,670 trillion cubic feet of natural gas - more than the proved oil and gas reserves of Russia, the world's no. 2 crude producer after Saudi Arabia. 

The report, the culmination of four years of study, is one of the most ambitious attempts to assess the Arctic's petroleum potential. One of its main findings is that natural gas is three times more abundant than oil in the Arctic: and most of that gas is concentrated in Russia.

The survey reflects growing interest in an area once off-limits to oil exploration that has become more accessible as global warming reduces the polar icecap, opening up valuable new shipping routes, oilfields and mineral deposits.

But any attempt to create an Arctic drilling frenzy will likely meet strong resistance from environmentalists worried about the impact on what is still a near-pristine wilderness. And it could trigger a flurry of territorial disputes over who really controls the oil and gas under the Arctic seabed.

The USGS survey, which brings together disparate data held by individual countries as well as new information from geologists working in the field, is the first time anyone has produced a comprehensive, publicly available estimate of the Arctic's hydrocarbon treasures.

Its conclusions will be read closely at a time when concerns about future supply are driving up crude prices to astronomical heights. But scientists cautioned that it will take decades to develop the Arctic's hard-to-get-at oil and natural gas.

"It will not ratchet up global production like a new Saudi Arabia," said Donald Lee Gautier, a USGS geologist who played a key role in the survey, known as the Circum-Arctic Resource Appraisal. "These are additions that will come over time."

Exploration in the area north of the Arctic Circle has already unearthed more than 400 oil and gas fields. They account for about 40 billion barrels of oil and more than 1,100 trillion cubic feet of gas, the USGS said.

But large parts of the Arctic, especially offshore, remain unexplored: the presence of near permanent sea ice makes it almost impossible to acquire seismic data and drill exploratory wells.

Climate change is opening up the region's potential, however. The North-West Passage, home to deadly ice floes that can crush ships, was ice-free last summer: some predict it will turn into a new trade route between Europe and Asia and a channel that oil companies can use to ferry workers, equipment and supplies around more freely.

Enticed by the promise of vast deposits, energy companies are flocking northward - often because they have few other places left to go. The Arctic, especially offshore Alaska and northern Canada, is one of the few parts of the world where the majors can easily acquire exploration acreage. Elsewhere, soaring crude prices have prompted oil-rich states to renegotiate contracts and sometimes kick out western oil companies altogether.

Earlier this year, Royal Dutch Shell PLC (RDSA, RDSB) spent more than $2 billion acquiring drilling leases in Alaska's Chukchi Sea. Last year, Exxon Mobil Corp. (XOM) and Imperial Oil Ltd of Canada bid nearly $600 million to win a big exploration block in Canada's Beaufort Sea. BP PLC (BP) will spend $1.5 billion to develop Liberty, an oilfield off the northern coast of Alaska.

Yet drilling in the Arctic is controversial. Shell has been forced to delay a drilling plan off northern Alaska because of a legal challenge from environmental groups who say it could harm local whale and walrus populations.

Oil exploration might also be hampered by rising nationalism. The five circumpolar states - Canada, Russia, the U.S., Norway and Denmark - are now scrambling to claim new territory in the central Arctic Ocean. Last August, a Russian submarine planted the country's flag on the seabed 14,000 feet under the North Pole. Shortly afterward, Canadian Prime Minister Stephen Harper announced the country's military presence in the Arctic would be beefed up.

The rhetoric stems from disagreements over who has sovereignty over the North Pole. Russia rests its claim on the theory that two underwater mountain chains that cross the Arctic Ocean, the Lomonosov and Mendeleev Ridges, are in fact extensions of its continental shelf. Denmark disputes that. A U.N. body that rules on such claims has recommended additional research.

Gautier, the U.S. geologist, said one of the survey's main conclusions was that a lot of the gas in the Arctic is in Russian waters, in places like the South Kara Sea and South Barents Basin. These are both geological extensions of onshore areas that are rich in gas.

The presence of so many hydrocarbons there "will reinforce Russia's global dominance in natural gas resources," he said. Russia is already the world's largest producer of natural gas and sits on the world's biggest gas reserves.

Yet there's little likelihood that much of Russia's Arctic wealth will be exploited any time soon. The country still has vast untapped fields onshore that are first in line to be developed.

Development would also be hampered by Russia's likely reluctance to let in foreign companies with experience developing oil and gas riches in hostile environments like the Arctic.

The situation could change in the future, though. Neil McMahon, an oil analyst at Sanford Bernstein, says Russia will come under mounting pressure to sell offshore leases to Western companies and use the cash to boost investment in flagging domestic oil production.

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