StatoilHydro, Total and Gazprom early winners in this race

Implications: Jad Mouawad in New York reported in the July 25 issue of the International Herald Tribune that the race for oil and gas north of the Arctic Circle is likely to accelerate in the near future. The melting polar ice cap will permit exploration in areas now covered by ice. A major geological survey indicates the region could hold one fifth of the world’s remaining hydrocarbon resources. Many are likely to be found in Russia. Territorial claims may be in dispute as Canada, Denmark and others lay claim to parts of the Arctic. Oil and gas exploration in the region is no longer hypothetical. Most of the undiscovered fields are on the continental shelf already claimed by the several nations. The recent assessment of potential 1,670 trillion cubic feet of natural gas took four years to complete. At today’s consumption rate of 86 million bbl/day, Arctic fields represent a three year supply. Russia has already begun development of Shtokman field in the Barents Sea.

Analysis: With the recent crude oil price declines from $145/bbl to $125/bbl, the question rises about the medium term range for light sweet crude. A prolonged worldwide recession could possibly endure for several years forcing prices lower. However the outlook for natural gas is much rosier. Its role as a clean energy fuel for electricity generation assures its future. Furthermore, it is becoming more respected as a transportation fuel as compressed natural gas. Natural gas usage in the U.S. 2007 rose 6.5%, in China, 19.9% with Europe showing only a slight increase. Worldwide, consumption was up 3.1%, above the long term average. Gazprom is struggling to keep its commitments to supply domestic demand and fulfill its European contracts. That explains the urgency attached to development of the Nord Stream pipeline that will transit the Baltic Sea. Gazprom explained in its 2007 Annual Report that development of the Shtokman natural gas field 650 kilometers northeast of Murmansk would be a key contributor to the Nord Stream line, perhaps as early as 2010. Shtokman will add 3.8 trillion cubic meters to the Russian supply base. The idea of accelerated development was one reason to bring StatoilHydro and Total into the participation. These two western companies have extensive experience in extreme weather operations offshore northern Norway. In May of 2007, the Government of the Russian Federation adopted Resolution No. 333 which, in essence, sets a floor for Russian natural gas and has as its ultimate goal, the imposition of world market prices by 2011 in Europe and Asia and in Russia except for household use which will continue to be kept in a price range affordable by average families. The Russian government has a plan in place to bring natural gas to 95% of its citizens over the next few years and has already reached the 67% mark. This of course will require additional gas for the system. To pay for this expansion, the long range plan is to continue annual adjustments upward to keep pace with expected inflationary increases in extraction costs. Even today, natural gas price indications for years after 2011 are published on the official government web site. The above offers convincing evidence that Arctic exploration and development will continue apace. Indeed, Gazprom has already identified other promising structures in the Barents and Kara shelf areas.