Arctic Oil: A High Stakes Gamble for the Oil Industry

The arctic ice shelves pose a difficult question to the world’s largest oil companies. According to the U.S. Geological Survey, they may contain the largest remaining untapped oil reserves on the planet, but accessing this oil requires large amounts of time and money. Factor in the recent oil crash and the increasingly uncertain outlook for the industry, and pursuing arctic oil becomes a gamble akin to a billion dollar toss up.

Arctic oil has always been a gamble, but when oil prices tanked globally about a year ago, the stakes became too high for many and they withdrew their fleets. Exxon, BP, and Norway’s Statoil were all among companies to suspend their projects last year. European Energy giant Cain Energy withdrew after the one billion dollar investment they made failed to produce a commercial discovery. A joint project between Exxon and state controlled Russian oil company Rosneft did strike oil last year, but the sanctions placed on Russia put exploration on hold.

The one company that seems undeterred by the bleak industry outlook is Royal Dutch Shell. The Anglo-Dutch company is set to begin drilling in the Chuckchi Sea in mere weeks, a project that will cost at least a billion dollars, adding to the six billion dollars already invested in the arctic. In the past year Shell discovered only a fourth as much oil as they pumped, a practice that is unsustainable for future production. Based on U.S. Bureau of Ocean Energy Management  estimates, the Chuckchi Sea could contain 29 billion barrels of oil, an amount that would effectively double Shell's current reserves and provide years of future supply for the company.

Shell is undoubtedly looking at this project as a long term investment. If oil were to be discovered in the Chuckchi, it would take at least ten years to begin pumping and the earliest that commercial quantities of oil could be produced is 2030. With this 15+ year timeline, Shell is not only placing a bet on if they can find oil in the Arctic, but also on the future of the oil sector. This second gamble is equally as risky as the first. Oil prices fell over 60% from July to January last year, and while there has been a modest recovery many analysts, including those at the International Energy Angency, believe the worst is yet to come. A possible nuclear deal with Iran could allow Iranian oil to enter the world marketplace, only worsening the current supply glut that is responsible for the drop in prices. In addition, various situations across Europe including the turmoil in Russia and financial situation in Greece could lead to depressed demand across the continent.

With countless unknowns surrounding this project, the only thing that is certain is that Shell is going to come out looking either very smart or very foolish, but only time will give us the answer to this 7 billion dollar question.