ExxonMobil Corporation's Arctic Opportunity

The Arctic is the one of the last remaining hydrocarbon-rich areas in the world that has not yet been exploited in order to feed the world's growing hunger for fossil fuels. However, that is now beginning to change, and companies like ExxonMobil are leading the charge.

May 24, 2014 at 1:18PM

Some of the best opportunities for oil and gas producing companies can be found in the Arctic. This is partly due to the sheer quantity of resources that can be found in that area. By some estimates, the Arctic regions of the world contain approximately 400 billion barrels of oil equivalent or roughly 13% of all undiscovered oil and 30% of all undiscovered natural gas in the world. As such, it may be a good idea for investors to take a look at those companies that are attempting to develop the area. One such company is ExxonMobil (NYSE:XOM).

Kara Sea Exploration Project
One of ExxonMobil's projects in the Arctic is the Kara Sea Exploration Project, which is a joint venture with Russia's Rosneft. This project, which is nearing the stage when the companies can begin exploration drilling, could potentially pay off big for ExxonMobil and Rosneft. This is due to the size of the prospect that geological surveys have revealed. This prospect, named Universitetskaya, is larger than the city of Moscow and could contain up to nine billion barrels of oil. This would make it one of the largest discoveries in recent years, if it does indeed contain that much oil, which is by no means certain.

Unfortunately, the Arctic regions tend to be extremely expensive to drill and operate due largely to the challenges presented by the harsh weather conditions found in the area. For this reason, the exploration well that ExxonMobil intends to drill in the Universitetskaya formation later this year will be one of the most expensive that the company has ever drilled. The company expects that it will cost nearly $600 million to drill the well. However, if the resources discovered are anywhere close to their estimated potential then this will prove to be a very profitable project for ExxonMobil in the long run.

Canadian Beaufort Sea
Another Arctic project being run by an affiliate of ExxonMobil, Imperial Oil (NYSEMKT:IMO), was in the news recently due to the company's ambitious plan to drill the deepest Arctic offshore well ever in an attempt to discover oil. Forbes states that this well will be approximately 24,000 feet deep while other sources state that the well will be 34,000 feet deep. Regardless, this is an extremely ambitious project that quite effectively illustrates the challenges that companies such as ExxonMobil have to go through as they attempt to develop the last great frontier for oil.

One of the reasons why this project will be so challenging is the environmental conditions in the Beaufort Sea. This sea, which is located off of the northeastern coast of Alaska, contains numerous icebergs for roughly nine months out of the year. Thus, the company can only drill for the approximately three month-long period in the summer when the risk of an iceberg hitting the drilling rig or otherwise disrupting operations is much lower. Because of this, it will take Imperial Oil around three years to drill its exploration well instead of the less than one year that it would normally take. This means that it will both cost much more and take longer than it otherwise would before Imperial Oil and, by extension, ExxonMobil realize any profits from this project.

However, once these profits come, they could be tremendous. According to David Ramsey, Minister of Industry, Tourism, and Investment for Canada's Northwest Territories, the resource potential of the Beaufort Sea could rival that of the Gulf of Mexico, which has been one of the hotspots for offshore development in recent years. Robert Peabody, COO of Husky Energy, seconded this statement by stating that the resources are indeed there but that they are very difficult to access. Therefore, this is definitely a project that could pay off for ExxonMobil.

Other companies active in the Arctic
ExxonMobil is not the only company that has been actively engaged in developing the Arctic. For example, BP (NYSE:BP) has a 50% stake in the Beaufort Sea project discussed above (the Imperial Oil/ExxonMobil combination have the other 50%) and Royal Dutch Shell (NYSE:RDS-A) has been actively attempting to develop various areas in the nearby Chukchi Sea. Shell expects to drill several exploration wells in the Sea this year.

Ultimately, the Arctic operations of these and other companies could prove to be highly profitable despite the many challenges of safely operating in the area. This is due to the enormous resource potential of the region, resources that could be very useful in satiating the world's growing hunger for fossil fuels.

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Daniel Gibbs has a long position in BP. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may have positions in any of the stocks mentioned. Powerhedge LLC has no positions in any stocks mentioned and is not a registered investment advisor. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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