Arctic explorers retreat from hostile waters with oil prices low

When Statoil ASA (STL) acquired the last of three licenses off Greenland's west coast in January 2012, oil at more than $110 a barrel made exploring the iceberg-ridden waters an attractive proposition.

Less than two years later, the price of oil had been cut by almost half and Norway's Statoil, the world's most active offshore Arctic explorer in 2014, relinquished its interest in all three licenses in December without drilling a single well, Knut Rostad, a spokesman for the state-controlled company, said by e-mail.

Statoil's decision shows how the plunge in oil, with Brent crude trading at about $45 a barrel, has dealt another blow to companies and governments hoping to tap the largely unexplored Arctic. That threatens to demote the importance of a region already challenged by high costs, environmental concerns, technological obstacles and, in the case of Russia, international sanctions.

"At $50, it just doesn't make sense," James Henderson, a senior research fellow at the Oxford Institute for Energy Studies, said in a Jan. 12 phone interview. "Arctic exploration has almost certainly been significantly undermined for the rest of this decade."

The Arctic -- spanning Russia, Norway, Greenland, the U.S. and Canada -- accounts for more than 20 percent of the world's undiscovered oil and gas resources, including an estimated 134 billion barrels of crude and other liquids and 1,669 trillion cubic feet of natural gas, according to the U.S. Geological Survey. That's almost as much oil as Iraq's proved reserves at the end of 2013 and 50 percent more gas than Russia had booked, BP Plc (BP/)'s Statistical Review of World Energy shows. Yet, explorers seeking a piece of the Arctic prize have been tripped up for years.

After spending $6 billion searching for oil off Alaska over the past eight years, Royal Dutch Shell Plc (RDSA) in October asked for an extension of licenses as setbacks including a stranded oil rig and lawsuits risk delaying drilling further. Cairn Energy Plc (CNE) spent $1 billion exploring Greenland's west coast in 2010 and 2011 without making commercial discoveries, and OAO Gazprom (OGZD) has shelved its Shtokman gas field in the Barents Sea indefinitely on cost challenges.

Environmental group Greenpeace has occupied oil rigs from Norway to Russia, arguing a spill would cause irreparable damage to ecosystems that sustain animals from polar bears to birds and fish. The possibility that economically marginal fields such as Arctic deposits might be stranded as governments adopt stricter climate policies has also shaken some investors.

The Brent crude benchmark fell 1.9 percent to $45.70 a barrel, deepening losses from the lowest closing price since March 2009. Statoil declined 1.4 percent to 127.3 kroner at 9:50 a.m. in Oslo, extending losses to 35 percent since a June high.

As oil companies cut spending to cope with falling prices, already costly and risky Arctic projects will fall down the priority list even if crude is expected to recover by the time production starts, Henderson said. Global capital expenditure will probably drop by more than 20 percent this year, according to a Jan. 9 note from Sanford C. Bernstein.