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Royal Dutch Shell Plc .com: Arctic Harshness Hinders Search for Oil

FROM THE WALL STREET JOURNAL

Region Boasts Vast Reserves,
But Conditions Could Stunt
Development for Decades
By IAN TALLEY
July 11, 2006; Page A10

OSLO — Major energy companies are making billion-dollar bets in the world’s frozen Arctic regions as they seek to tap vast deposits of oil and natural gas. But they face some of the harshest conditions on Earth, presenting formidable challenges and likely constraining development for decades.

The Arctic has almost 108 billion barrels of proven discovered oil and natural gas, or roughly 40% of Saudi Arabia’s total reserves, and the U.S. Geological Survey estimates it could hold 25% of the world’s undiscovered petroleum resources. As a result, Statoil ASA of Norway, Royal Dutch Shell PLC and other oil companies are expected to pour $3.5 billion into field-development drilling alone over the next four years.

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Industry experts say the Arctic poses tremendous logistical problems for oil-and-gas exploration and drilling, including temperatures that drop lower than minus 40 degrees Fahrenheit, months of darkness and the psychological effects on workers under such extreme conditions. Owen Williams, an energy analyst at consulting firm Infield Systems Ltd., based in London, predicts that, based on companies’ current plans, only 133 wells will be producing in the Arctic by 2026. By comparison, thousands of wells are operating in the Gulf of Mexico alone.

Already, raw-materials costs and other issues are complicating existing projects. Shell’s Sakhalin II in Russia’s east coast — which isn’t in the Arctic but faces ice and other harsh conditions — has seen its budget rise to $20 billion from $12 billion. Costs at Statoil’s seven-trillion-cubic-foot Snohvit liquefied-natural-gas project in the Barents Sea have surged 50% to $9.3 billion. Given those overruns, analysts fear similar rising costs at the 130-trillion-cubic-foot Shtokman offshore gas field, operated by Russia’s OAO Gazprom. Gazprom says it can complete the project for about $20 billion, but it hasn’t conducted a comprehensive engineering study.

Western companies’ interest stems in part from the troubles they face trying to replenish the oil-and-gas reserves they pump out of the ground amid surging demand and rising prices. (See related article.) Much of the world’s more-accessible untapped reserves are in countries closed to Western investors or facing political turmoil. Much of the Arctic oil territory is in Alaska, Canada, Greenland and Norway.

“As global concern grows over declining reserves and the burgeoning imbalance between energy supply and demand, the vast potential offered in developing the Arctic’s reserves will be increasingly sought after,” said Mr. Williams, of Infield.

Besides its Snohvit project, Statoil is continuing an exploration drive in the Norwegian Barents after winning several blocks in Norway’s latest licensing rounds and is short-listed for a potential stake in Gazprom’s massive Shtokman gas project. It also is waiting for Russia to complete its new natural-resources law to bid for more northwest Russia prospects. The company says it wants to make the Russian Arctic a core production area within the next two decades.

To prepare for drilling in the Arctic, Statoil has to insulate and enclose working areas and make sure no drilling fluids or other substances leak into the environmentally sensitive Barents Sea. Basic rig structures must be reinforced for harsh wind and waves, says Bjarte Yvstebo, who is in charge of rigs for the Norwegian company. Retrofitting an older rig can cost an additional $50 million to $100 million.

Although ConocoPhillips also is short-listed as a potential partner in Shtokman, its focus has so far been in the North American Arctic, where it is aiming to bring three projects onstream between 2010 and 2012. For repairs, supplies or moving people in and out, “you can’t just call a helicopter in,” says Dennis Seidlitz, manager of Arctic technology development. “Weather windows drive everything.”

While actual exploration costs are comparable with deep-sea drilling, industry officials say the strongest drivers for higher costs stem from transporting oil and gas produced. Without pipelines, natural gas requires expensive plants to convert it into the more mobile liquid state, and oil needs specialized, icebreaking tankers.

Then there is ice. Moving ice several yards thick can crush and capsize normal rigs. Roaming icebergs are a constant danger that require heavily shielded and reinforced drilling rigs and special tactics. Ice buildup on the exterior of ships and rigs also can wreak havoc.

Staff must endure severe weather and handle the stress that comes from physically demanding work.

“There is a tendency to develop cabin fever working on remote sites, and people can often develop insomnia and depression” with 24-hour days and nights, says Oystein Mikelborg, head of logistics at Norway’s Polar Institute. “Everything is also physically more demanding; even getting dressed is a chore in itself,” he adds.

Write to Ian Talley at [email protected]

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