THE ARCTIC DRILLING FOOTBALL IN PLAY AGAIN

December 6, 2020 § 1 Comment

Outgoing Presidents are making a habit of throwing long passes with the Arctic football.  And like all long passes, the probability of being caught is low.  But they differ in character.  When President Obama issued an executive order about this time in 2016, it was to “permanently” ban future lease sales in US Arctic waters.  At the time I wrote that this was purely symbolic, with no real impact, because even if leases were offered for sale, this would be a party to which hardly anybody would come.  When President Trump assumed office, one of his first declarations was the intent to sell leases in the Alaska National Wildlife Refuge (ANWR).  While this was not a challenge to the President Obama executive order per se, ANWR being on a coastal plain and not offshore, it too was symbolic, as demonstrated by the fact that nothing happened for the rest of his term.  Until now.

The Bureau of Land Management (BLM) is rushing through the process of posting tracts for leasing*.  The timeline they are following is much shorter than normal, reportedly to receive the bids prior to the presidential handover.  A rushed process will not properly match up tracts with buyer priorities.  This alone does not auger well for a heavily subscribed sale.  But the primary reason for tepid interest is the market.  Oil prices are low and uncertain.  Gas prices are low and certain. This must be about oil alone.  Anybody buying ANWR leases in gas prone areas would have a whole lot of explaining to do.

The 2017 Bureau of Ocean Management lease sale in the Gulf of Mexico was strong.  Oil prices were low then and nearly as uncertain as now, not counting the Covid-19 induced depression.  An important measure of oil company stock value is reserves replacement.  Loosely, it is the ratio of new reserves booked to oil produced.  So, they are always looking to find new reserves.  But the Gulf of Mexico is well understood, with considerable seismic data and production experience.  In comparison, the Arctic has a paucity of seismic data.  And the results to date have been daunting.  Shell walked away from the Arctic after spending a reported USD 7 billion, with not much to show for it.  Admittedly, that was offshore in the Chukchi Sea, and ANWR would be different.  But the hurdles will remain numerous.  Environmental sensitivity and wells made expensive in part by the limited window of time for operations are just two. Financing will be hard to come by and legal challenges are almost certain to at least delay operations. This leaves just the very large oil companies with strong balance sheets and equally strong stomachs.  The European headquartered ones, especially BP and Royal Dutch Shell, are very unlikely to plan an Arctic venture.

The need to increase reserves could be addressed in an unconventional manner: increased focus on tertiary recovery of oil.  Simply put, conventional means usually can extract only about a third of the oil in place in the reservoir.  Tertiary recovery utilizes CO2to wring more out.  The gas is introduced into the formation in a supercritical state.  Supercritical CO2 enters pores effectively as if in a gas state but reacts with the oil as if in a liquid state. Being twice as soluble in oil as in water causes preferential combination with oil.  This mixture is pushed to the producing well due to high pressure in the injection well.  The CO2is separated and re-injected.  This process is repeated and each time more of the CO2 remains in the ground.  Eventually, about 95% of the CO2 is retained in the formation and subject to the same trap mechanisms that kept the original hydrocarbons in place.

Some estimates have that by this method 50 billion barrels could be recoverable in the US at a USD 70 price per barrel of oil.  By comparison, ANWR is estimated to hold 15 billion barrels, and I doubt those are economical at USD 70 oil price.  If the CO2 were to be priced at USD 50 per tonne, the amount needed would roughly cost USD 11 per barrel of oil recovered.  Since the finding, development and much of the lifting cost has already been incurred, this ought to be affordable at USD 70 oil.  Part of the current 45Q Federal Tax Credit, which is USD 35 per tonne CO2 for such sequestration, would also be available.  Since this is paid to the CO2 producer, who, together with the USD 50 paid by the oil company, would have USD 85 available for capture.  This is right in the range of feasibility of the latest capture technology.

A recent life cycle study concludes that a barrel of oil from tertiary recovery represents a 37% CO2 emissions reduction compared to oil from conventional production (see reference below), provided the CO2 is sourced industrially.  Arctic operations will, of course, have an additional layer of environmental risk associated with their location. 

In some senses, here then is the choice for oil company strategists.  On the one hand ANWR, costly and environmentally risky due to the location.  Data paucity adds a layer of exploration and development risk.  Uncertainty in the price of oil renders profitability in doubt.  On the other hand, tertiary recovery using industrially sourced CO2.  Negligible operational risk and you already own the lease.  At scale it makes a serious dent in industrial CO2 emissions, the marginal costs are low per barrel of oil produced, and the surface environmental footprint is much smaller compared to new areas explored and produced. 

Reason dictates that the Arctic ought to remain icy cold.

*Dream on in “Dream On” by Aerosmith (1973) written by Steven Tyler

Vikram Rao

December 6, 2020

Núñez-López V and Moskal E (2019) Potential of CO2-EOR for Near-Term Decarbonization. Front. Clim. 1:5. doi: 10.3389/fclim.2019.00005  

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