An interesting article was published recently in the German newspaper Der Spiegel, examining the costs of oil extraction in the Arctic. The region, increasingly seen by the oil industry as the Promised Land, could hold significant amounts of hydrocarbons. The US Geological Survey (USGS) estimated in the past that the entire Arctic region could contain nearly 90 billion barrels of oil and 1.6 trillion cubic feet of natural gas (see inset).
Whilst the assumption from the oil majors has long been that it could get its hands on almost all of this oil, the Spiegel article has unearthed interim findings from a new USGS research report which questions the fundamental economic feasibility of extraction, suggesting that even if you ignored the enormous risks to the environment and global climate that drilling for Arctic oil poses, the costs of getting oil from the region would probably be prohibitively expensive.
The USGS team of geologists examined how much it would cost to look for oil in the East Greenland Rift Basins, which is suspected of housing around 7.5bn barrels of oil (noting however that statistically the chances of finding this much oil there is as high as finding absolutely nothing). The report concludes that even if oil was worth $100 a barrel (1 barrel of crude today sells at about $86), only 2.5bn barrels of oil could be commercially extracted. And only then with a 50% probability of success. Even if oil was selling for a fantastical $300 a barrel only 4.1bn barrels could be extracted, and again with only a 50% chance of success. And that $300 would just cover the cost of getting it out of the ground – without the oil company paying tax on it or making a profit.
Even accepting a degree of caution with respect to the modelling used by the USGS, this suggests that only a tiny amount of the oil that lies locked away under the high north is really likely to be exploitable. So why take such an expensive gamble?
This is a very good question, especially as Cairn Energy today confirmed it plans to drill up to 4 exploratory wells off Greenland this summer, subject to the green light from the oil-friendly government. It’s keeping its options open about where precisely the drilling will take place, maintaining up to 12 sites as potential wells, and also planning on doing 3D seismic surveys in 5 areas, probably in the significant prospecting blocks it owns off the east coast. Cairn continues to claim its operations will be safe and it has a “comprehensive” oil spill response plan, a now semi-legendary tome seen by no one outside of Cairn or the Greenlandic Bureau of Minerals and Management. Given the company was forced to write off the $185m it wasted on drilling 4 dry wells there last year and the enormous costs it would presumably incur dealing with a major oil spill, the USGS report is surely further reason why it’s time we all started to go beyond oil.
