Statoil may abandon US Arctic drilling leases

Statoil spent $23 million buying leases to drill in the Chukchi Sea five years ago, but now the company may abandon the prospects as both the costs and challenges of exploring in U.S. Arctic waters mount.

The company already postponed plans to drill in the Arctic waters north of Alaska until 2015 at the earliest. But Tim Dodson, executive vice president of global exploration for the Norwegian firm, said Tuesday that Statoil may never hunt for crude in the Chukchi Sea, even as it aggressively pursues other Arctic prospects at the top of the world.

“We’ve (said) we wouldn’t drill before 2015,” Dodson said in an interview before he spoke to delegates at IHS CERAWeek in Houston. “Whether that means we drill in 2015, or maybe not until 2016 or whether we’d drill at all, I think maybe the jury’s still a little bit out on that.”

Statoil and other energy companies have been warily watching as Shell navigated evolving regulatory requirements and launched a new era of Arctic drilling in the Chukchi and Beaufort seas last year. After a series of high-profile blunders, Shell has decided not to resume drilling in the region this summer; instead, the company’s conical drilling rig Kulluk and another contracted vessel, the Noble Discoverer, will undergo repairs in Asian shipyards.

“One of the reasons — if not the only reason — for us to push back is that ideally we’d like to see Shell carry through . . . and basically learn from that before we embark on something similar,” Dodson said.

Statoil has until 2019 to begin developing the U.S. Chukchi Sea leases before forfeiting them.

The company already has an aggressive Arctic portfolio outside the United States. It has bored scores of explorations wells in the Norwegian Barents Sea and is on the verge of launching drilling of three off Newfoundland.

Separately, Statoil is a minority partner in ConocoPhillips’ Devil’s Paw prospect in the Chukchi Sea, where wells could be drilled in 2014.

The company also has tripled its Arctic research budget to $43.9 million in 2013 from some $14 million last year.

But the costs of operating in remote American Arctic waters — and complying with U.S. drilling regulations stiffened in the wake of the 2010 Gulf of Mexico oil spill — are formidable, Dodson said.

“Costs have escalated significantly,” Dodson said. “We have to consider all the time whether the business opportunity and the subsurface risk of actually finding something — since we have no guarantee of finding anything — (is worth) the cost of drilling that single well.”

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Dodson noted that Statoil is spending $1.8 billion annually on about 50 exploration wells.

“If one of those wells is going to be taking 5 percent of my budget, I need to think very carefully through whether that business opportunity is good enough for me,” he said.

“We have to adhere to the regulator’s requirements, and if we can’t do that from combination of an operational cost perspective then we have to consider whether we can proceed or not,” Dodson said. “You get to a certain point where your business opportunity has to be able to defend the costs of adhering to the regulatory requirements.”

Unlike some other areas north of the Arctic Circle, the U.S. Arctic is remote and covered with ice much of the year. Federal regulators at the Bureau of Safety and Environmental Enforcement have required Shell to have a second drilling rig on hand to bore a relief well in case of an emergency, since transporting another to the region could take weeks, if not longer. Other countries with more accessible Arctic targets don’t have similar requirements.

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ConocoPhillips may propose tapping one of Shell’s rigs for a relief well as part of its plan for exploring the Devil’s Paw prospect.

Dodson said that kind of equipment sharing makes sense in remote frontier areas such as off Alaska’s north coast, where oil companies may be targeting just one prospect at a time.

“Ultimately, you need more of a collaborative effort,” Dodson said in an interview. “I think we all agree that generically, this is not really the place to go it alone. This is the place where you need to be learning from each other (and) where you need to be sharing both experiences and sharing facilities and common costs.”

Addressing the IHS CERAWeek delegates later, Dodson repeated his call for collaboration.

The oil industry “needs to explore and develop new business models (if we are) able to succeed in some of these more costly environments,” he told the executives assembled in a Houston hotel’s ballroom. “We can’t afford — all of us, each on an individual basis — to develop competing technologies or solutions. We need to collaborate…if we are to exploit these resources commercially.”