Is This the Next Big Offshore Oil Frontier?

Though the Arctic is believed to contain about a fifth of the world's undiscovered hydrocarbon reserves, harvesting that oil and gas has proved excruciatingly difficult. In the Alaskan Arctic's Chukchi Sea, for instance, Royal Dutch Shell's drilling program has been plagued by equipment failures, as well as regulatory and legal issues, which forced the company to suspend its drilling plans this year.

Similarly, ExxonMobil decided to exit exploratory projects off the coast of Greenland late last year because of disappointing drilling results and overwhelming operating challenges including sub-zero temperatures, perilous icebergs, and the year-round presence of ice. The company does, however, have several Arctic ventures in Russia, Canada, and elsewhere.

But despite these setbacks, there is one Arctic region that has generated considerable interest among oil companies and has been hailed as the next big offshore oil frontier -- the Norwegian Barents Sea.

Source: Wikimedia Commons.

The allure of the Barents Sea
The Barents Sea, located off Norway's northern coast, offers more favorable conditions for drilling than other Arctic locations, including shallower, less icy waters and a more bearable climate. It may also contain undiscovered resources totaling 8 billion barrels of oil equivalent, representing more than 40% of Norway's total undiscovered hydrocarbon reserves.

The first offshore development in the Barents Sea was Statoil's Snohvit field, the world's most northerly offshore gas field, which is currently the only producing field in the region, according to the company. But it's about to be joined shortly by the Goliat field, which is expected to begin producing in the third quarter of this year.

The field, which is being developed by Eni SpA and Statoil using a floating, cylindrical production facility called the Sevan 1000 FPSO, will have a maximum production capacity of 110,000 barrels of oil per day. It contains an estimated 174 million barrels of oil reserves and 8 billion standard cubic meters of gas reserves.

There have also been a number of major discoveries in the Barents Sea over the past few years, the most important of which was Statoil's Johan Castberg. Other major ones include Lundin Petroleum's Gohta field and OMV's Wisting Central discovery. Still, despite the Barents Sea's relatively more hospitable environment, developing these prospects isn't without its fair share of hurdles.

Challenges remain
Take Johan Castberg, for instance. Discovered in April 2011, the field was hailed as one of the biggest Arctic finds ever. But exploration drilling failed to turn up the hydrocarbon volumes Statoil was expecting, and the company had to revise the field's oil and gas reserve estimates downward. Another pressing issue has been how to actually develop the field.

Statoil and its partners, Eni and Norway's Petoro, initially envisioned developing Johan Castberg using an onshore hub and pipeline network estimated to cost between $13 billion and $14.6 billion. But they delayed that plan last year because of uncertainties over the field's economics because of a combination of high costs and high government tax rates.

The company and its partners are now considering alternative options, including building a cheaper floating production facility or a pipeline link to an offshore terminal. In addition to high costs and logistical challenges, Statoil also suffered a recent setback when its Apollo well turned out to be dry.

A game-changing discovery?
Still, that doesn't eliminate the possibility that companies like Statoil could make a huge, high-impact discovery in the area. Statoil's head of exploration for the NCS, Irene Rummelhoff, told the Financial Times: "[The Barents Sea] is the most immature area, hence we also have the largest room for big discoveries. If you are looking for larger volumes, the Barents Sea offers that."

And Statoil is just the company that can make that type of high-impact discovery. Last year, it was the world's most successful oil and gas explorer as measured by the total volume of conventional oil and gas discovered. In addition to its exceptional track record of exploration success, Statoil also has the most experience drilling in the Barents Sea, having drilled the vast majority of wells there to date.

It also has the advantage of extensive seismic data for the region and the benefits of learning from its recent Apollo well failure. If anybody's going to make a game-changing discovery in the Barents Sea, it'll probably be Statoil or one of its joint venture partners.