Can Oil Majors Conquer the Arctic?

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Source: Wikimedia Commons

Do you think you could make it out in the Arctic? Well ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) think they can, and plan on spending a combined $14 billion to do so.

Iceberg valley
ExxonMobil holds a 36% stake in the Hebron project in offshore Canada, in an area known as iceberg valley, and Chevron owns a 26.7% stake. ExxonMobil announced the project back in January and won approval for Hebron in May. 

ExxonMobil took control of the project back in 2008 from Chevron and currently is the operator. ExxonMobil and Chevron see 707 million barrels of recoverable heavy oil in the area with a $14 billion devolvement cost. Doing some simple math you get a cost of $19.80 per barrel, excluding future maintenance costs and operational costs.

While heavy crude trades at a steep discount to WTI due to transportation bottlenecks in Western Canada's oil sands, it is right next to the 300,000 bpd refinery in St. Johns, New Brunswick.

This just so happens to be Canada's largest refiner, so even though Canada's heavy crude trades around $60-$75 ExxonMobil and Chevron will be able to get better prices due to the close proximity. Prices are low due to lack of pipeline infrastructure, but as more capacity is built up expect the spread between WTI and Canadian heavy crude to shrink.

The project
The Hebron project has 1.2 million barrels of storage capacity built into it and is going to start producing 150,000 bpd in 2017. At $70 a barrel ExxonMobil and Chevron will be able to cover the cost of construction within 1,867 days, or five years and one month.

Keep in mind that in four years there is a high possibility that the WTI spread will shrink and heavy oil prices will go up, making this an even more profitable project. At $100 a barrel, the project will have paid for itself in just three years and two months.

Going beyond the cost of production, the current amount of reserves allows for ~13 years of production at 150,000 bpd. There is a good chance that the amount of reserves could be revised upwards, as it already has been revised upwards from previous estimates. Hebron will offer ExxonMobil and Chevron stable cash flow for years if they follow through with their plans.

More than one company is looking toward the Arctic for growth. Rosneft is trying to brave the Kara Sea in Russia, and has turned to ExxonMobil for help.

Russia
ExxonMobil and Rosneft back in June announced the Arctic Research Center, which will be jointly funded by both parties. ExxonMobil will provide $450 million to help fund and build the center, and Rosneft will provide $250 million. The research from this center will enable oil majors all around the world (especially ExxonMobil) to tap into more oil fields in the Arctic and extract enormous amounts of crude.

The purpose of the center is to be able to tap into the Kara Sea's 37 billion barrels of recoverable oil, and in 2014 ExxonMobil and Rosneft plan on drilling their first exploratory well in the region. If the well turns up good results the amount of recoverable oil could increase.

Arctic potential
The United States Geological Survey sees ~412 billion barrels of recoverable oil in the region, with ~90 billion barrels of crude oil. This is why oil majors are willing to go out in the freezing cold, build up rigs that can withstand icebergs, and deal with horrible weather conditions; they want to find billions of barrels of crude.

Final thoughts
The Arctic holds trillions of dollars' worth of energy, and those who are able to successfully get it out of the ground will reap huge returns. ExxonMobil and Chevron's move into the Arctic through the Hebron project will offer years of cash flow, with the potential for growth from finding more recoverable oil and from higher oil prices.

The ExxonMobil-Rosneft research center has the potential to yield some better drilling techniques, which could boost the amount of recoverable oil in the Kara Sea and elsewhere.

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