Northwest gassage?
Email this article By Duncan Sutherland- Exclusive to Gas Investing News
“Seeking gold and glory, leaving weathered, broken bones
And a long-forgotten lonely cairn of stones.
Three centuries thereafter, I take passage overland”
–Stan Rogers, Northwest Passage
If you have been following the business pages lately, you may have seen articles related to the new United States Geological Survey report. The Survey has come up with a mean estimate of “1,670 trillion cubic feet of natural gas” in the Arctic Ocean.
Additionally, the mean estimates predict “90 billion barrels of oil” and “44 billion barrels of natural gas liquids” lying undiscovered. Perhaps, the key finding is that the “Arctic as a whole is gas-prone (~3 x oil)”. Although more reserves are always welcome, a number of specific challenges obstruct exploration and production. These problems can be grouped into three categories: capital, technical and political.
Capital
The capital challenges are fairly straightforward. It costs a lot to explore for hydrocarbons. Expenses are high even in areas where gas quantities and distributions are known. When you factor in the relatively unexplored terrain, a shortened exploration season and extreme weather, it becomes clear that just finding the best fields will be costly. Once the premium formations are found, specialized cold and ice-tolerant equipment must be procured and transported to a remote location. Meanwhile, the paucity of infrastructure for storing, liquefying and moving the gas to market will require large initial investments.
In a previous examination of the economics, the USGS predicted that costs for a billion barrel plus field in the region would run approximately USD$37 per barrel, not including exploration. Factoring in exploration costs is much more difficult, as they are necessarily contingent on multiple, unpredictable factors, but estimates are in the US$2-5 per barrel range. To put this in perspective, oil from the region would only be slightly less expensive to produce than Canadian oil sands. One study suggests that high Arctic gas would be economically sensible given today’s gas spot prices. These numbers apply only to the largest oil and gas deposits, which benefit from economies of scale. Smaller and more remote deposits will necessarily be more expensive.
Technical
Such costs are not prohibitive, but there are multiple factors that must be applied for a full accounting. A related deterrent is the technical challenge of doing anything in the high Arctic, let alone performing a difficult, dangerous and potentially explosive task.
A Canadian Energy Research Institute report provides a good introduction to the issue. They outline the four most feasible options for gas delivery: LNG direct to the northeastern seaboard, LNG with transshipment in Greenland, CNG to a Mackenzie pipeline, and Gas-to-liquid transport to the northeastern seaboard.
The option they view as most affordable requires “a barge mounted liquefaction facility” and “icebreaking LNG tankers” that would unload their cargo in Greenland for transfer to conventional LNG tankers. It would be an understatement to call this difficult. Procurement alone will be arduous, especially as most oil & gas equipment manufacturers have full order queues. For the fields in the Alaskan and Russian Arctic, existing infrastructure and supply chains will mitigate some of these problems. Archipelagic Canada is lacking in the road, airfield and port faciilties necessary to bring such kit to site, let alone to move hydrocarbons southward.
Aside from these specific technical challenges, there is a paradoxical one. In the next decade, several LNG terminals will be coming online in the natural destination for Arctic gas; North America. As North America’s capacity to offload and use LNG is limited and fully contracted for many years ahead, this new infrastructure will allow existing LNG supplies from Africa, Southeast Asia and the Middle East greater access, which would leave little to no spare capacity for potential high Arctic supplies. So, barring a massive expansion of regasification capacity, Arctic producers may be forced to use more expensive (given shipping distances) compressed gas or to build new pipeline capacity. Like the Stan Rogers song, they may be forced to “seek passage overland”.
These challenges are by no means insurmountable, but Canadian Energy Research Institute projections rule that scenario B would only be feasible with CNG, and scenario C would not be practical.
•Price line A – flat at $5.85 (Canadian) to 2015, increasing to $13.89 (Canadian) in 2040
•Price line B – flat at $5.85 (Canadian) to 2015, increasing to $10.23 (Canadian) in 2040
•Price line C – flat at $5.85 (Canadian) to 2015, increasing to $7.55 (Canadian) in 2040
•Price line A’ – flat at $7.37 (Canadian) to 2015, increasing to $13.89 (Canadian) in 2040
•Price line B’ – flat at $7.37 (Canadian) to 2015, increasing to $10.23 (Canadian) in 2040
•Price line C’ – flat at $7.37 (Canadian) to 2015, increasing to $7.55 (Canadian) in 2040”
Political
Much of the area north of the Arctic Circle (66° 33’ 39”) is of undetermined sovereignty, but ostensibly will be assigned under the aegis of the United Nations Convention on the Law of the Sea (UNCLOS). Currently, the Russian, Canadian and American governments are researching continental shelves and preparing claims over territory based on it. Russia has been especially vigorous in mapping the ocean floor, even planting a flag below the North Pole.
The United States has refused to ratify the agreement explicitly because of the terms it places on resource development in non-territorial waters, making the situation especially complex outside the exclusive economic zone (200 nautical miles). Luckily, the USGS study’s findings should minimize the political implications. It found that “Most estimated resources are on continental shelves and not in UNCLOS areas”.
Conclusions
So despite the hubbub around the study, investors should remember a few key points:
1) There are significant infrastructural developments necessary to extract the gas and bring it to market
2) Any high Arctic projects will be extremely capital intensive
3) Much of the gas is located in indisputably Russian territory, which is not investor-friendly
4) The companies with previous Arctic experience are state-owned or industry giants like ConocoPhillips.
It is clear that the exploitation of these reserves will not present the investor with a chance for a big score, but will instead serve largely to supplement the production of already large oil and gas companies. If you already hold stock in these energy blue chips, then you might see marginal improvement in your returns.
The overall picture is friendlier to oil than gas. Gas producers may find themselves frozen out entirely. Additionally, the complicated plans for LNG icebreakers and transhipment points in Greenland should give pause. Seeking passage overland may not be such a bad idea after all.
Tags: Arctic, companies, Gas, investing, investors, Oil, oil and gas, USGS
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