Are U.S. And Russia Overstating Amount Of Oil In Arctic As Shell Produced No Oil In Eight Years?

Posted: November 5, 2014 in Econ 101, Technology and Energy





Editor’s Briefing | Victory in the Arctic


Rosneft and Exxon say they have struck oil in the Kara Sea. Commerically, its worth remains to be seen. Politically, there is no doubt about its value

September 29, 2014 – 4:15am – By Kevin McGwin

Unless you are oil industry insider, you’d be excused for overlooking the gravity of the official statement issued by Rosneft announcing that it, together with Exxon, had struck oil in the Kara Sea at its Universitetskaya-1 well.

Granted, the headline does state that a “new hydrocarbon field” had been found, and its make it clear that it is the northernmost well ever drilled.

But, what immediately follows is something of a technical description of the well and how it was drilled.

If you did not have the background knowledge or the insight to be able to read between the lines to glean the importance of the announcement, then the name given to the field – buried in the fourth paragraph of the announcement – should serve as an indication of the importance Moscow attaches to the discovery.

The name, ‘Pobeda’, means ‘Victory’ in Russian.

Superficially, the name could refer to the simple fact that oil was found in the forbidding region that has become a strategic priority for Moscow.

Were this the case, it would be an overstatement of the commercial significance of the field. Although the size of the find (100 million tonnes of oil and 338 billion cubic metres of compressed gas) and their ‘liquid’ (and thus more valuable) state are encouraging, their dimensions are far from earth-shattering. Just the day before, Statoil said a similar-sized find was too small to be commercially exploited.

Likewise, the Financial Times reported that the results of a single well might not be indicative of the quality of the field.

“They’ve drilled one well in a huge area, so you can’t make any definitive statement,” an individual identified by the as a “briefed on the drilling” said.

Russia watchers will note that this is not the first time Russia has declared ‘Victory’ in the Arctic. In 2007, Russia launched the 50 Let Pobedy, the most powerful icebreaker ever built. It is named in honour of the triumph over Nazism in the Second World War.

‘Victory’ then, bears a special significance for the Russians, and in this case, the name refers not to any scientific or commercial achievement. The victory is a much greater political achievement: the defeat of Western sanctions.

The find was made, Igor Sechin, Rosneft’s managing director and a close associate of Vladimir Putin, made sure to note, “thanks to our friends and partners from ExxonMobil, Nord Atlantic Drilling, Schlumberger, Halliburton, Weatherford, Baker, Trendsetter, FMC”.

Not only have these Western firms continued their Russian activities at the same time as their governments have tightened the economic screws against Moscow, in response to their continuing suspected meddling in the Ukrainian conflict, Sechin himself has been slapped with personal sanctions due to his ties to Putin.

Western oil firms had already shown their willingness to do business as usual with the Russian oil industry multiple times in the past year, but last week, it appeared sanctions were finally about to bite, as Exxon announced it was winding down operations at the site. As it turns out, their find came just as the sanctions would have forced the company to pull out of the project.

Even if the find turns out to have commerical potential, the question of whether Russia will be able to develop the site without a Western partner remains. If not, it will need to wait until the sanctions are lifted before it can begin.

Arctic waters have also been a scene of conflict between oil firms and environmental groups. Given the increasing calls to protect the Arctic from development, full-fledged production in the Victory field may, somewhat ironically, attract even more clashes.

No matter what happens, the Universitetskaya-1 well will remain, as the Financial Times decribed it, “emblematic of Russia’s ambitions to develop its enormous Arctic oil development in the face of western sanctions”. And, one can now add, emblematic of how the West was beaten.


Shell Seeks 5 More Years for Arctic Drilling

Bill DiBenedetto | Tuesday November 4th, 2014

shell_mainimage.375263553Despite spending eight years and $6 billion — with no oil production to show for its efforts — Royal Dutch Shell is asking the U.S. government for another five years to drill in the Arctic. Earlier this year, Shell sent a letter to the Department of the Interior and its Bureau of Safety and Environmental Enforcement (BSEE), requesting that its Arctic leases — which expire in 2017 — be paused for five years while the company regroups and attempts to restart drilling operations. The letter was made public late last month by the environmental group Oceana, after obtaining it through a Freedom of Information Act request. Oceana and other groups have sued to block the Arctic exploration.

Shell’s record in the Arctic to date, featuring a string of accidents, is lackluster to the say the least. The Natural Resources Defense Council has noted that Shell’s efforts “illustrate like nothing better just how dangerous it is to drill in the Arctic”:

  • July 2012: Shell Oil’s Noble Discoverer drill ship drags anchor and nearly drifts ashore in Dutch Harbor, Alaska.
  • September 2012: Caught off guard by sea ice, Shell is forced to halt drilling just one day after it started.
  • September 2012: In an initial test in Puget Sound, Washington, Shell’s Arctic oil spill containment system is “crushed like a beer can.”
  • October 2012: The CEO of French oil giant Total says drilling in the Arctic is too risky.
  • November 2012: The Noble Discoverer catches fire.
  • Dec. 31, 2012: The Kulluk drilling rig breaks loose from tow lines five times in heavy storm and runs aground off Kodiak Island, Alaska.

According to a recent Bloomberg news report, Shell says setbacks and legal delays could push the start of drilling past the 2017 expiration of some leases. The oil major’s letter to the Interior Department said “prudent” exploration before leases expire is now “severely challenged.”

“Despite Shell’s best efforts and demonstrated diligence, circumstances beyond Shell’s control have prevented, and are continuing to prevent, Shell from completing even the first exploration well in either area,” Peter Slaiby, vice president of Shell Alaska, wrote to the regional office of the BSEE.

“Ultimately, Shell has no one to blame but itself,” said Michael LeVine, Pacific senior counsel for Oceana, based in Juneau, Alaska. “The government should not bend the rules to accommodate Shell or any other company just because that company spent a lot of money.”

Bloomberg’s article continued that Shell has left open the possibility of returning to Arctic drilling as soon as next year. Spokesman Curtis Smith said that timeline remains on the table. “We’re taking a methodical approach to a potential 2015 program,” Smith said in an e-mail.

The U.S., which is revising drilling safety regulations for the Arctic, has ordered that any drilling in the Arctic end each year before Oct. 1, when ice starts forming.

Shell estimates that the Arctic holds around 30 percent of the world’s undiscovered natural gas and 13 percent of its yet-to-find oil. “This amounts to around 400 billion barrels of oil equivalent, 10 times the total oil and gas produced to date in the North Sea. Developing the Arctic could be essential to securing energy supplies for the future, but it will mean balancing economic, environmental and social challenges.”

With those numbers beckoning it’s easy to see the lure of the Arctic for Big Oil, but it’s also easy to see from the billions that Shell has foolishly wasted there that it’s way too risky.


Feds increase Arctic oil estimates in move to appease court
 By Laura Barron-Lopez10/31/14 06:39 PM EDT

The Obama administration increased its estimates on Friday for the amount of oil that is recoverable from Arctic drilling leases sold to oil companies in 2008.

The move, which nearly quadruples the Bureau of Ocean Energy Management’s (BOEM) initial estimates, is in response to a court decision in January, which ruled the administration issued an unsound environmental review of the 2008 drilling leases.

The leases in questions were sold to companies who wanted to drill in the Arctic’s Chukchi Sea.
The BOEM’s 2008 environmental analysis based its findings off of a 1 billion barrels of oil benchmark, which the court called “arbitrary and capricious” because the amount of economically recoverable oil from the Chukchi Sea could reach up to 12 billion barrels.

Under it’s new environmental analysis, mandated by the court, the bureau proposes a new estimate of 4.3 billion barrels of oil.

Due to the increased estimate in recoverable oil, the bureau’s analysis also changed its projections on the chances of oil spills.

“There is a 75 percent chance of one or more large spills occurring,” the draft report states.

A large spill would mean more than 1,000 barrels of oil. The administration said six years ago at the time of the lease sales that there was a 40 percent chance of a large spill occurring.

The findings provided ammunition to green groups, who said the new analysis “confirms” that “drilling in the Chukchi Sea puts Arctic people and wildlife at risk from major oil spills.”

“It also puts the climate at risk. Drilling for more oil in the rapidly melting Arctic Ocean adds climate insult to climate injury,” said Erik Grafe, staff attorney with Earthjustice.

Proponents of Arctic oil and gas drilling like Sen. Lisa Murkowski saw it differently.

Murkowski called the updated environmental report “good news.”

“Hopefully this will satisfy the court and allow responsible drilling to resume next summer,” Murkowski said.

“There’s already been some slippage in the timeline for releasing the revised review. We’re now getting down to the wire and it’s vital that there be no further delay.”


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