Arctic Challenges Could Delay Rebound Of Oil Production


BMI View: Technical challenges and high costs remain considerable risk s to future Arctic developments in the wake of news that Eni's Goliat project may face further delays. We highlight that with the elevated costs of development and a forecast for oil prices to moderate , the Arctic could be come a less attractive region despite its con siderable prospects and growing exploration .

Eni's landmark Arctic oil project at the Goliat field could again be facing delays as the technical challenges completing the development in the Arctic continue to prove a barrier. First oil from the project was initially scheduled for the fourth quarter of 2013, though surging costs and challenges in construction of the floating production, storage and offloading (FPSO) platform in 2012, postponed this to Q3 2014. However, it now appears that further delays to the project could be announced, according to Norwegian publication TU Petroleum.

It is thought that poor communication between Eni and FPSO constructor Hyundai Heavy Industries regarding Norwegian legislation has impacted the pace of development, while certain processing components may need to be replaced. The FPSO is an enlarged version of a Sevan Marine designed production platform and is the first Sevan facility to require 'winterisation' in order to cope with the sub-arctic conditions of the Barents Sea. However, being the first arctic-ready Sevan platform and being around 50% larger than previous designs, there have been a number of difficulties leading to delays in its construction.

While currently Eni still claims the platform is due to move into position in the summer of 2014, we are cautious as to whether this deadline can be met. We therefore note downside risk to Norway's short-term oil production outlook despite having a positive overall outlook on the country's oil and gas sector. Based on the challenges, we do not expect production from the Goliat field to begin until 2015.

Arctic Challenge Key To Oil Production Growth
Oil Production 2010-2022, '000b/d

Arctic Challenges Continue

The difficulties experienced with the Goliat project further highlight the considerable learning curve surrounding offshore Arctic developments and the risks involved with the project. We have seen similar delays in other Arctic developments such as Gazprom Neft's Prirazlomnoye field in the Pechora Sea ( see, 'On Thin Ice In Arctic Offshore, August 18). Other major Arctic projects in Norway, such as the 400 to 600mn barrel Johan Castberg field, may also face delays as a result of technical challenges and operator caution. With profit margins at oil and gas projects globally increasingly squeezed, the high cost and high risk of Arctic oil and gas developments could cause them to be among the first postponed. Operators may instead choose to take more time to maximise their expertise in order to minimise delays and cost overruns, while improving safety.

Some of the remote Arctic oil developments are mooted to cost around US$500mn per a well, a price that is not economic even with the current historically elevated price environment. To put this in perspective, the Arctic compares unfavourably to other costly deepwater projects, such as the Brazilian pre-salt developments, which are reportedly costing around US$100-US$150mn per well. However, with an improving oil supply outlook globally, BMI expects to see a gradual weakening in the price of Brent over the next decade. This will further challenge the economic viability of prospecting for oil and gas in Arctic and sub-arctic environments, with operators more likely to focus on more financially manageable projects.

Becoming Less Supportive Of High Cost Ventures
Average Brent Price Forecast 2010-2020, US$/barrel

Therefore despite the substantial below-ground potential of the Arctic, which the USGS calculates to hold as much as 90bn barrels of oil equivalent, we expect it will take some time for Arctic projects to advance. Nevertheless we are at a critical point with regards to exploration in the Arctic with a number of countries seeing increased investment. Norway remains the most progressed in the Arctic due to more favourable weather conditions limiting the extent of sea-ice in the Barents Sea. The Snohvit LNG project has been producing since 2007, albeit with a number of stoppages; we expect the Goliat project to be producing by 2015, while the Johan Castberg project remains a key future development for Statoil.

Russia has also undertaken extensive exploration in the Kara and Okhotsk Seas, with Rosneft and ExxonMobil leading proceedings. In the US, Royal Dutch Shell is planning to begin its drilling campaign in the Chukchi Sea in 2014 following the difficulties the company faced with harsh weather in 2012. 2014 may also see drilling return to Greenland, while Chevron is due to drill 400km offshore Newfoundland in Canada.

It is therefore the major oil and gas companies with the financial backing able to justify the huge risk that will be conducting much of the work. However as oil prices relax over the medium-term it will be increasingly crucial for these companies to collaborate on Arctic knowledge and technology in order to minimise risks and cost. This is particularly crucial considering the controversy surrounding oil spill prevention and response efforts in areas with sea ice. A failure from one company would likely have an industry wide impact and further delay development in the Arctic.

This article is tagged to:
Sector: Oil & Gas
Geography: Norway, Canada, Russia, United States