p.3 ~ Offshore at 60: Arctic dreams and cold truths

The Cook Inlet is not "offshore" in the open waters of the ocean; nor is it above the Arctic Circle, which is some 500 mi (805 km) to the north.

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Much higher than expected bids on promising leases at federal government lease sales in 1982 and 1983 indicated that the rush was on. In January 1983, a feature article inBusiness Week entitled "The Great Arctic Energy Rush" left no doubt. The article used a variety of sources to estimate that Arctic regions (onshore and offshore) around the world held "as much as 170 Bbbl of oil and 1,800 tcf (51 bcm) of natural gas "in proved and potentially recoverable reserves." As with Arctic estimates before and since, these numbers were projections based on limited data about offshore basins, most of which had yet to be explored. As with the earlier NPC report, the article made little mention of the impact declines in oil and natural gas prices might have on commercial production.

As numerous major companies invested heavily to drill exploratory wells offshore Alaska,Business Week reported a "government estimate" that the cost of future Alaskan development would be $100 billion, plus some $10 billion in lease bids. In an extreme case that became a symbol of Arctic enthusiasm, a consortium of 11 major North American and European oil companies headed by Sohio bid a total of $1.5 billion for the right to explore the Mukluk structure, a very promising prospect in the Beaufort Sea. Such bids fed the frenzy. With oil prices high, seemingly excellent prospects to drill, and experts agreeing that the Arctic was the next big thing, 1983 had the makings of a banner year for Arctic exploration.

Things changed quickly. First, Sohio reported that wells drilled at Mukluk had come up dry. A spokesman for the company maintained his sense of perspective by explaining that good seismic data had shown a structure resembling that at nearby Prudhoe Bay, but "we were simply 30 million years too late." Better to laugh than to cry. Apparently in geological time oil once held in the structure had drained to other locations.

Dry holes in promising structures are common in oil history, but because of the extravagantly high expectations offshore Alaska and the size and reputations of the members of the Mukluk consortium, this one sent a shock wave throughout the global oil fraternity.

Another unexpected development followed: the steady decline of oil prices from 1983—1986. As prices went from unrealistically high to unbelievably low, it was clear that the party was over in Alaska, as well as in other regions where the assumption of high and rising oil prices had spurred investments that could no longer be justified when prices plunged.

Shell and Amoco held on throughout the decade, even drilling very challenging exploratory wells in the Chukchi Sea. It was clear, however, that they could not produce oil from the Chukchi Sea at prevailing low oil prices, and in 1989, they withdrew from offshore Alaska. Each lost heavily in money and time that could have been spent in other places. One prominent Amoco executive provided a succinct evaluation of his company's fling in the Arctic: "We failed miserably." The company's CEO provided a more optimistic, public relations-friendly perspective: "We perceive the Beaufort Sea offshore Canada as a near-term opportunity to develop a position in an area that could become increasingly important when oil prices return to more realistic levels."

Has that time come in 2014? A new Arctic rush has gained momentum in the recent past, with projections of giant reserves to be found under Arctic ice around the globe. A much quoted report in 2008 by the U.S. Geological Survey (USGS) encouraged the boom with estimates that Arctic regions around the world held as much as 170 Bbbl of oil and 1,800 tcf of natural gas in"undiscovered technically recoverable" conventional oil and gas (about 22% of estimated undiscovered conventional reserves). Unfortunately for future Artic development, the report concludes that as much as 78% of this reserve base is natural gas, which will have to compete with supplies of relatively inexpensive unconventional shale gas. Costs of development of offshore Arctic oil and gas are projected as 1.5 to 2 times higher than similar oil and as projects undertaken in Texas. Financial risks will be increased by unpredictable impacts of weather and regulations, with a high risk of delays and cost over-runs in the Arctic.

As in the early 1980s, there is much confidence today that oil prices have reached a permanent new plateau at a level high enough to support Arctic development. Such confidence can be fragile, and it often has been misplaced at the onset of a perceived boom. In the last decade, the shale gas boom abruptly shattered confidence in high natural gas prices. Technological advances and increased scientific knowledge gained from research and experience over the last 30 years encourage optimism that the industry is much better prepared to deal with Arctic conditions that it was in the past. But the growing knowledge of the potential environmental impacts of spills in Arctic waters has not yet been matched by investments in the infrastructure needed to respond effectively to accidents and disasters in the harsh conditions of the vast and remote Arctic. Surely it would make sense to address this problem as systematically as possible before, rather than after, a major oil spill.

Finally, recent events in Ukraine and elsewhere wave warning flags of new challenges reminiscent of the Cold War, when geopolitics shaped the terms of access to much oil and gas in many regions of the world. It is too early to predict how current global tensions will be resolved, but it is not too early to acknowledge that geopolitical risks are the risks over which companies have the least control.

The risks in developing oil and gas offshore in the Arctic are high given the uncertainties about future energy prices, continued access to promising offshore prospects in Arctic regions, and the capacity to limit environmental damages. With so much change afoot in global energy markets and so much uncertainty about future global responses to climate change, committing vast financial and technical resources to offshore regions in the Arctic that have not yet produced substantial amounts of oil will require considerable capital, confidence, and courage. History counsels caution.

Acknowledgment

The author notes: "I have made extensive use of the Arctic Technology Preservation Project at the University of Calgary, whose interviews became the primary source for the book Breaking Ice with Finesse: Oil & Gas Exploration in the Canadian Arctic (Arctic Institute of North America, 1997). I also have drawn heavily from Tyler Priest, The Offshore Imperative (College Station, Texas: Texas A & M University Press, 2007), and from Ty's comments on the article."

The author

Joseph A. Pratt is NEH-Cullen Professor of History and Business at the University of Houston's main campus. Dr. Pratt is a leading historian of the petroleum industry, and has been a consultant for the PBS mini-series on the oil industry, The Prize, and for the American Experience documentary on the Trans-Alaskan Pipeline. He has conducted several hundred interviews of offshore engineers and executives for the Offshore Energy Center's Hall of Fame oral history project. For a fully referenced version of this article, contact him atjoepratt@Central.UH.EDU.

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