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Arctic Resource: Mostly Gas and Mostly Challenging, Says Study

A new study examining the potential of oil and gas production from the Arctic contains disappointing news for anyone who was counting on the region to become the next oil breadbasket for the United States.

"The U.S. can no longer consider the Arctic as a long-term strategic energy supply source," say study partners Wood Mackenzie and Fugro Robertson. "Future of the Arctic" finds that the energy potential of the region is "significantly less than previous estimates had suggested." Additionally, the resource mix is much more heavily weighted to natural gas than oil. About 85% of the discovered Arctic resource and 74% of the exploration potential is gas.

"This oil-gas mix is not ideal because remote gas is often much harder to transport to markets," said lead study author Andrew Latham, Wood Mackenzie vice president of energy consulting. "In addition, export and technology constraints are expected to delay production of a large portion of the commercial gas until 2050."

Many Arctic basins already have discovered resource volumes, which total 233 billion boe. Beyond this, the study says yet-to-find resource potential is 166 billion boe. Under the study's most likely scenario, Arctic production could contribute 5 million boe/d of natural gas and 3 million boe/d of liquids at peak production, which is not expected for at least 20 years, longer for gas, according to the study, which was released Wednesday.

"[A] large portion of the potentially commercial gas is unlikely to be produced before 2050 due to constraints in export systems, particularly in Russia, and a significant amount of the liquids are those associated with the gas production."

Further, the proportion of production that could potentially come from basins in the United States will likely be lower than previously expected.

"This assessment basically calls into question the long-considered view that the Arctic represents one of the last great oil and gas frontiers and a strategic energy supply cache for the U.S." Latham said.

Costs in the Arctic are high, mainly because of extreme transportation costs, which hinder the attractiveness of natural gas even more than oil. However, there is wide variation in costs among the Arctic basins. "Average field development costs of around U.S.$6/boe are comparable with many other parts of the world," the study says. "High costs elevate average development breakeven prices across the Arctic to above U.S.$30/boe."

Still, economically attractive opportunities exist around the Arctic, and three factors drive the potential for full-cycle returns:

Two basins achieve exploration full-cycle returns greater than 20%: the Alaskan North Slope and Russia's Pechora Sea. However, these are both oil-prone basins with good access to markets via pipelines and ice-free seas.

"The Arctic offers distinct opportunities for the oil and gas industry, particularly those who have the appetite for high-risk exploration and leading edge development solutions," the study says.

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