Cairn ventures into icy waters of Arctic

By bne IntelliNews July 15, 2010

Nicholas Watson in Prague -

By being the first of what is expected to be a growing band of explorers drilling for oil in the Arctic's pristine waters, Cairn Energy has found itself slap-bang in the middle of a fight between governments desperate to access what could be huge hydrocarbon deposits and environmental groups worried about the dangers of offshore drilling.

Coming as it did when BP is still trying to get the massive oil spill in the Gulf of Mexico (GoM) under control, the timing of Cairn's announcement on July 1 that it has commenced drilling operations approximately 175 kilometres offshore west Greenland is unfortunate. However, Cairn tells bne that the three-month summer period offers the company the safest time to carry out these drilling operations in what for most of the year are extremely difficult conditions. "There's a summer window that provides the capability to safely operate, it's the best time to operate and we're working at the invitation of the Greenland government," says David Nisbet, head of corporate affairs at Cairn.

Cairn said this summer it plans to drill up to four wells off the west coast of Greenland at a cost of about $100m each.

That safety issue is what worries many environmental campaigners, who have condemned the decision by Greenland's government to green light the drilling, especially for a company they claim has little experience operating in such harsh conditions. "In Greenland, the oil drilling is planned for Disko Bay, an area notorious for its icebergs - it's even known as 'Iceberg Alley' - and special vessels would need to be employed just to keep these massive hunks of ice away from the oilrigs. Can you imagine?" says Dave Walsh of Greenpeace.

Critics of Arctic drilling have urged Greenland's government to apply a moratorium on deepwater oil and gas drilling like the US has done until lessons can be learned about what exactly went wrong with BP's well in GoM. However, Greenland, a territory of Denmark, wants to wean itself off subsidies from Copenhagen that amount to about $600m a year and regards the development of Cairn's Sigguk block and the other surrounding exploration blocks that have been awarded to majors such as Chevron and Exxon Mobil as crucial to this.

Bonanza or blowout

Greenland has been tempted by a 2008 survey by the US Geological Survey (USGS) that, if accurate, shows there's a lot more oil and gas in the Arctic than was once previously thought. The USGS said the area north of the Arctic Circle has an estimated 90bn barrels of undiscovered, technically recoverable oil, 1,670 trillion cubic feet of technically recoverable natural gas, and 44bn barrels of technically recoverable gas liquids. All told, the area accounts for about a fifth of the world's recoverable oil and gas reserves: 13% of the oil, 30% of gas and 20% of gas liquids. To put that in perspective, at today's consumption rate of 86m barrels a day, the Arctic could meet global demand for three years.

That same year, Russia planted a flag on the ocean floor beneath the North Pole, highlighting another thorny problem of drilling in the Arctic, namely the competing claims over the region's oil and gas deposits.

Experts from the International Boundaries Research Unit (IBRU) at Durham University in the UK have released a map that shows the current boundaries in the Arctic and possible future claims by Canada, Russia, Denmark (Greenland), Norway and the US (Alaska). This shows no country actually owning the North Pole or the surrounding ocean, because the Arctic states are limited to a 200-nautical-mile economic zone around their coasts. But upon ratification of the United Nations Convention on the Law of the Sea, a country is given 10 years to make claims to extend that 200-mile zone. Norway (ratified the convention in 1996), Russia (ratified in 1997), Canada (ratified in 2003) and Denmark (ratified in 2004) have all launched claims on certain Arctic sectors that they believe should belong to their territories. Both Russia and Denmark assert claims over the North Pole itself, though the IBRU doesn't rule out the possibility of Canada making a claim to the North Pole as well. A UN panel is supposed to decide on Arctic control by 2020.

Russia's latest research centres on the Lomonosov ridge beneath the Arctic Ocean, which Moscow argues is an extension of the Siberian continental shelf. The claim is disputed by Canada and Denmark, which believe the ridge is connected to their territory. Russia also has competing claims with Norway over parts of the Arctic Ocean. Other contentious areas highlighted on the map include a 6,250-square-km section of the Beaufort Sea that both Canada and the US consider theirs. The disputed Northwest Passage, which connects the Atlantic and Pacific oceans, is shown on the map as part of Canada's internal waters rather than as the international strait that the US and other countries argue it is.

Unfair criticism

Back to Greenland, Cairn says the criticism levelled against it is unjustified for several reasons. First and foremost, Cairn says this isn't deepwater drilling; the first two Cairn wells (the second two are awaiting approval) lie in water depths of between 300 and 500 metres, meaning the pressure is significantly below that encountered in BP's blowout in GoM, which took place at about 1,500 metres.

Second, the drilling operations will be carried out by two state-of-the-art drilling vessels - the Stena Forth, a drillship, and the Stena Don, a semi-submersible drilling rig - which means that if one rig is drilling in the reservoir, the other is nearby to drill a relief well if there is any issue with the first. This, plus the fact its Greenland-based operations have been designed and planned to the very high and onerous Noregian North Sea standards, means that it has "a robust strategy with the capability in place to deal with any eventuality."

Third, Cairn, which made its name and fortune drilling in the sands in India, disputes that is has no experience operating in the harsh conditions like those found in the Arctic; on the contrary, its operational team has "more than 400 years" of harsh-environment experience. "Yes, you get icebergs in that part of the world, but it's no different to what the east coast of Canada has, which has been exploring and producing oil and gas for the last 30 years. Our main contractor for iceberg management has been operating in that very area," Nisbet says.

None of that is likely to satisfy the critics of offshore drilling and the heated debate is likely to continue until Cairn gives its update on the drilling operations in August. Six wells have been drilled in the Arctic historically and all have come up dry - many will be hoping Cairn's two wells currently being drilled will do likewise.

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