Oil returns to Canadian Arctic

Imperial Oil Ltd and Exxon Mobil Corp turned heads in the oil industry in July with a nearly $600 million bid that won them a big exploration block in Canada's Beaufort Sea.

The hefty sum surprised observers. After all, it's been 17 years since Imperial, Canada's biggest oil producer and refiner, drilled a well in the icy Arctic waters.

In fact, only one other company, Oklahoma City-based Devon Energy Corp, has ventured back to Beaufort since the end of the Arctic exploration heyday in the 1970s and 1980s.

"Obviously, we wouldn't have bid the work program that we did if we didn't see some long-term exploration potential," Imperial spokesman Pius Rolheiser said.

"But it's highly exploratory in nature, high cost, high risk and lot of work needs to be done."

Record oil prices and growing struggles securing reserves in traditional producing regions have the world's oil industry starting to gaze north once again. But it's no stampede yet.

The prize is huge. Previous wells in the Beaufort and Arctic Islands found 25 trillion cubic feet of natural gas and 1.7 billion barrels of oil, according to government figures. Only a tiny fraction was ever produced.

Other, more recent, factors have put the Far North, where many companies made finds in the past by constructing artificial islands from gravel and ice, back into focus.

MORE OPEN WATER

Receding ice, blamed on global warming, means longer drilling seasons in areas requiring open water, like the Imperial-Exxon block, 120 km (75 miles) north of the mainland.

Such conditions allow more summer traveling time in the waters that make up the Northwest Passage, which means workers, equipment and supplies can be ferried about more freely.

"It's one fewer impediment against exploring for oil and gas in the north. Climate and ice have always been formidable foes for anyone who has wanted to do exploration," said Benoit Beauchamp, a geologist and executive director of the Arctic Institute of North America.

Also, the race to establish sovereignty at the North Pole has brought the untapped resources locked deep beneath Canada's ice back into national consciousness.

Prime Minister Stephen Harper announced in August an increased Arctic military presence after a Russian submarine planted a flag on the North Pole seabed amid increasing energy development in Russia's own North.

Oil bosses are not fretting though; any development is likely decades off, said Greg Stringham, vice-president of the Canadian Association of Petroleum Producers.

"I think that becomes more of a geopolitical question. It's not resource-driven," Stringham said. "There's potentially some resource under there but it's a long way into the future and we've got a lot more that's closer to development."

The major stumbling block for the closer Arctic reserves, oil officials and politicians say, is the lack of a pipeline to ship gas to consuming markets in Canada and the United States.

PIPELINE DELAYS

Imperial is leader of the industry consortium planning the C$16.2 billion Mackenzie Valley Pipeline, a project that has been hit with surging costs, lengthy regulatory delays and opposition from some Northwest Territories native groups.

The pipeline is aimed at tapping three large gas fields in the Mackenzie Delta that makes up part of the Beaufort coast. Those three, all discovered in the early 1970s, have reserves of 6 trillion cubic feet. The most optimistic predictions have the line in service by the middle of the next decade.

"Once you have this conduit in the ground to get gas to market, you'll see renewed interest in the Arctic," said Brendan Bell, former Northwest Territories' industry minister.

"Companies obviously recognize much of the world's energy resources are stored in the Arctic and they haven't been able to monetize that to date."

Partly fueled by government subsidies, companies drilled more than 400 wells North of Canada's mainland in the 1960s, '70s and '80s. According to the National Energy Board, the region contains 25 percent of Canada's gas reserves and 21 percent of conventional oil reserves.

Activity dried up in the 1990s when energy prices fell, then companies redoubled efforts to develop reserves in western Canada, off the East Coast and in Alberta's oil sands region.

Then in 2005 and 2006, Devon Energy drilled the $60-million Paktoa well in the shallow waters of the Beaufort, 180 km (112 miles) north of Inuvik, Northwest Territories, using a drill ship anchored to the seabed and surrounded by ice.

Devon found 240 million barrels of oil but not the trillions of cubic feet of gas it had targeted and there are no current plans to drill in the region again soon, company officials said.

Imperial and Exxon are still plotting where and when to drill. They committed to a well in the first five years of the nine-year license for the block, 120 km (75 miles) north of the mainland in water depths of 60-1,200 meters (200-3,900 feet).

Petro-Canada has stakes in one third of the significant discovery licenses in the Arctic Islands, including the Drake and Hecla fields on Melville Island. Reserves at the two are pegged at 6 trillion cubic feet.

But it has no plans to develop the assets any time soon, given the years of negotiations expected with government authorities, aboriginal groups and environmentalists.

"Not mention the costs and engineering challenges expected when operating in a climate known for long hours of darkness and extreme cold," Petro-Canada spokesman Kyle Happy said.