Arctic Oil Exploration Gains Momentum

Despite oil prices recording steep declines over the past month, explorers and producers are continuing to search for economically viable plays in ever more challenging settings.

With conventional land plays still making up the majority of major discoveries, more and more companies are now choosing to venture beyond the beaten path in the hope that rewards will be plentiful with higher-risk ventures.

Untapped potential?

The land sections currentlyup for grabs in the northeastern stretches of the Beaufort Sea are a prime example of this type of high-risk venture. Recently Ottawa placed 905,000 hectares of Canada’s northern offshore up for bids, effectively clearing the way for energy companies to snap up exploration rights for an area half the size of Lake Ontario. Since the region has never been drilled by an oil and gas company, some speculators are labeling the area a high-potential play and a possible game changer. The US Geological Survey estimates Arctic waters hold 26 billion barrels of recoverable oil and 130 trillion cubic feet of natural gas.

There is no guarantee that the current round will produce large numbers, as recent years have seen smaller bids from companies that some consider to be speculators with a questionable ability to mount effective drilling programs. With that said, there have been instances of large purchases in the past, and coupled with Arctic shipping lanes opening up, extraction from areas such as the Beaufort Sea is now a very real possibility.

The auction, which runs until September, puts in play a 30 percent expansion of the area already under lease in the Beaufort and Mackenzie Delta.

“World-class play”

Houston-based ION Geophysical Corp. (NYSE:IO) is a firm believer in the area’s potential and has admitted that while the economic and technical hurdles to producing oil from the Arctic remain high, recent data is altering the energy industry’s view of the potential up north. It has even gone so far as to describe the area as a “world-class play.”

The company has built up a highly sought after database that is beginning to alter perceptions within the industry. In 2006 it launched a multi-year program aimed at mapping the subsurface below the Beaufort Sea using seismic and gravity equipment to identify structures that might contain oil and gas.

The logistics of such a program do not come cheap, with hurdles including a region that is difficult to access, treacherous terrain, and continuous environmental group opposition. In a recent interview, Joe Gagliardi, director of Arctic Solutions and Technology for ION, confirmed that over $150 million has been spent on the program so far, before adding that a large portion of that money has already been recouped as the company’s data continues to gain “global” interest.

“The Beaufort-Mackenzie is a world-class play. It has the possibility to change the game when it comes to the world balance of oil and gas reserves,” said Gagliardi, before adding, “[t]he low-hanging fruit for large oilfields are drying up outside of the Arctic.”

“The new data that ION shot was revolutionary,” said John Hogg, vice president of exploration and operations for MGM Energy Corp. (TSX:MGX). “There’s much more sand [sedimentary rock] that goes out farther than what we would have thought.”

A frozen frontier

The excitement has not been limited to the Beaufort Sea. Many experts view the Alaskan Arctic as the last great US domestic oil prospect, with many feeling it might hold the potential to cut the country’s dependence on foreign oil. This sentiment is underlined by the fact that Royal Dutch Shell plc (NYSE:RDS.A) has spent over $4 billion on Arctic oil exploration since 2005, while BP (NYSE:BP) committed $1.2 billion in 2008 to drilling in the Beaufort. When crude prices spiked in the early 2000s, Shell joined the scramble accelerate exploration, bidding $44 million to lease Beaufort Sea prospects.

This momentum continues to grow, with executives forecasting that a high number of oil companies will line up to join in Arctic exploration. Some have forecast that the region could eventually yield up to a million barrels a day of crude – more than ten percent of current US domestic output.

Let the bidding begin

While there might be some concern in relation to companies not tabling serious offers for Beaufort Sea prospects, there has been increasing market activity over recent years. In 2007, Imperial Oil Ltd. (TSX:IMO) and ExxonMobil Corp. (NYSE:XOM) jointly bid $585 million for a large Beaufort Sea parcel, while in 2010 Chevron Corp. (NYSE:CVX) made a separate bid of $103 million.

It is likely that with the added benefits of up-to-date seismic data, a strong oil price, and new, effective methods of crude extraction, bidding will be highly competitive this time around. “If these guys are spending time up there, it’s not to chase little pools,” said Mike Dunn, an analyst with FirstEnergy Capital Corp.

Pius Rolheiser, a spokesman for Imperial, has commented that the company “continues to view the Beaufort Sea and our deepwater acreage there as a high potential area of opportunity,” while Chevron confirmed that it will be conducting its own data gathering in the Beaufort this summer. Chevron spokesman Leif Sollid stated, “[w]e view the Beaufort as an important future oil and gas region.”

Challenges remain

However, not all is rosy up north. Seismic data is only the first step in tapping this potential “game changer.” The technical and economic challenges are large and the Arctic remains an extraordinarily challenging terrain. In addition, existing estimates from companies and governments suggest that Canada’s Arctic holds a much smaller resource than other northern regions.

The Arctic, as the final energy frontier in Canada, continues to hold promise. Beneath the ice-covered waters of the Beaufort, explorers are confident that they might still discover the kind of mega-play that makes billion-dollar drilling programs worthwhile.

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.