Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
According to estimates by the U.S. Geological Survey, the Arctic may account for roughly one-fifth of global undiscovered oil and gas reserves and may also contain sizable mineral deposits -- possibilities that have piqued the interest of companies around the world.
Initially, exploration activity in the Arctic was confined primarily to Western oil majors. But recently, the China National Offshore Oil Corporation, better known as CNOOC (NYSE: CEO ) , became the first Chinese oil company to make a play for Arctic oil. Let's take a closer look at why China has become increasingly interested in the Arctic frontier's vast resource potential.
China's bid for Arctic oil
Earlier this month, CNOOC, the state-owned oil giant, teamed up with Eykon Energy, a small Icelandic energy company, to bid for an exploration license off the northeast coast of Iceland. CNOOC's move comes shortly after the two countries strengthened their ties in April, when Iceland became the first European nation to sign a free-trade agreement with China.
A handful of important business deals between the two nations have also recently been inked, including a confidential cooperation agreement between Arion Bank, one of Iceland's largest lenders, and China Development Bank, a large state-owned financial institution. And further bolstering its increasing interest in the region, China was recently inducted as a permanent observer at the Arctic Council, the chief decision-making entity in the region.
CNOOC's play for Arctic oil may seem surprising to some, given the recent spate of delays and shelved projects in the region. Most recently, Royal Dutch Shell (NYSE: RDS-A ) announced that it will "pause" drilling activities for the year in Alaska's Beaufort and Chukchi seas, after its $5 billion oil campaign was beset with challenges including harsh weather, equipment failures, and regulatory uncertainty.
Similarly, ConocoPhillips (NYSE: COP ) recently said it is suspending plans to drill in Alaskan waters in 2014 because of regulatory, permitting, and other uncertainties, while Statoil (NYSE: STO ) announced last year that it will postpone drilling in the American Arctic until 2015. To be sure, these companies have good reasons to be hesitant in their Arctic ambitions.
Risks in Artic drilling and the bottom line
That's because Arctic drilling faces several major risks, including the threat of an environmental backlash, regulatory uncertainty, and the constant threat of harsh weather. Tax policy can be another deterrent, since large tax increases can significantly diminish the profitability of marginal projects.
Take Statoil, for instance, which recently decided to delay developing its Johan Castberg oilfield in the Barents Sea because of an unexpected tax increase that would meaningfully increase the project's break-even cost of development.
But despite the Western oil majors' negative experiences in the Arctic, China's CNOOC appears undeterred. It even recently announced that it will set up a new Arctic research center in Shanghai, a move suggesting thast China's thirst for Arctic oil is far from quenched. Let's see if it can avoid the pitfalls that led some of the Western oil majors astray.
There are many different ways to play the energy sector, and The Motley Fool's analysts have uncovered an under-the-radar company that's dominating its industry. This company is a leading provider of equipment and components used in drilling and production operations, and poised to profit in a big way from it. To get the name and detailed analysis of this company that will prosper for years to come, check out the special free report: "The Only Energy Stock You'll Ever Need." Don't miss out on this limited-time offer and your opportunity to discover this under-the-radar company before the market does. Click here to access your report -- it's totally free.