Greenland Oil Rush Looms as Exxon Eyes Cairn's Bet

Photographer: F. Carter Smith/Bloomberg

Helge Lund, president and chief executive officer of Statoil ASA, speaks in Texas last month. Close

Helge Lund, president and chief executive officer of Statoil ASA, speaks in Texas last month.

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Photographer: F. Carter Smith/Bloomberg

Helge Lund, president and chief executive officer of Statoil ASA, speaks in Texas last month.

Cairn Energy Plc is betting $400 million this year on striking oil off Greenland, a campaign that will be closely watched by producers such as Exxon Mobil Corp. and Chevron Corp. that hold rights off the island.

The potential rewards may justify the cost of Arctic drilling: Greenland’s waters could hold 50 billion barrels of crude and gas, the U.S. Geological Survey estimates, enough to meet Europe’s energy demand for almost two years. More companies are on the way. Royal Dutch Shell Plc and Statoil ASA were among bidders in this week’s auction of offshore drilling rights.

After six failed attempts by explorers in Greenland over the past 30 years the rush is on as global warming eases Arctic exploration and because of dwindling resources in areas such as the North Sea. For Greenland’s 56,000 inhabitants, largely dependent on shrimp exports, petroleum may also bring wealth and allow more independence from Denmark, which has held sway over the world’s largest island since 1721.

“It’s an enormous acreage area and you’ve got to have stamina to see this through properly,” Simon Thomson, legal and commercial director at Cairn, which holds eight Greenland licenses, said in an interview. “Obviously we’re hoping for success, but the blocks are 10,000 square kilometers each.”

‘Serious Threats’

The far north’s potential is spurring exploration from Russia to Alaska. The Arctic may hold 27 percent of the world’s undiscovered gas and 13 percent of the oil, the USGS said in 2008. Areas off Greenland, including some shared with Canada, may hold 17 billion barrels of oil, 148 trillion cubic feet of gas and 9.3 billion barrels of gas liquids, the USGS said.

Highlighted by the unfolding disaster in the U.S. Gulf of Mexico from a BP Plc oil spill, exploring in untouched, environmentally fragile waters home to whales and walruses isn’t without risk. According to the WWF, development and transport are “already serious threats” to the Arctic and has met opposition and kept areas off limits from Alaska to Norway.

“Oil exploration in Greenland is very closely tied to independence, so there’s enormous local support,” said Truls Gullowsen, head of Greenpeace in Norway. “The area of the 2010 licensing round is very complicated, it’s very far up north, there’s lots of ice, lots of natural resources and very far away from any form of support should things go wrong.”

Fishing, Hunting

Greenland will in August announce the winners of 14 blocks in a 150,000-square-kilometer area in Baffin Bay, more than doubling its available acreage after holding regular rounds since 2002. The areas are north of the 67th parallel, where oil has been seen seeping out of rocks along the shoreline. The government has financed seismic surveys to attract explorers.

It has handed out 13 licenses since 2002 to Cairn, Exxon, Chevron, EnCana Corp., Husky Energy Inc., Dong Energy A/S, PA Resources AB and Nunaoil A/S, the state-owned company. There was “fierce” competition in the latest round, Greenland’s Bureau of Minerals and Petroleum said in a statement on May 3.

“We’re a fishing and hunting economy, just like Norway used to be,” Oil Minister Ove Karl Berthelsen said by phone from Nuuk, drawing a comparison with the world’s sixth-biggest crude exporter. “We want our industry to stand on several legs and oil is very important. The next 20 years will be vital.”

Greenland gets about $600 million a year, or $10,700 a person, from Denmark. It was granted home rule in 1979 and increased local powers in 2009. The island’s $2 billion economy derives about half its exports from shrimp, according to Greenland’s statistics agency. With planned taxes and royalties, and the 12.5 percent stake held in each license by Nunaoil, the government will get about 59 percent of the revenue, according to Joern Skov Nielsen, head of the petroleum agency.

Oil Seeps

In November, seven companies including Chevron, Exxon and Dong Energy A/S formed the Greenland Oil Industry Association, to share data and hold talks with the local government on environmental and safety issues.

For companies like Norwegian Energy Co., the licensing round this year and in 2012 may be the right time to get a share of the potential windfall, Chief Executive Officer Scott Kerr said in an interview.

“A small company like us we need to go in now, because if someone goes in and a discovery is made, we immediately get priced out of the market If Cairn has success, there are going to be a lot of people looking at Greenland,” he said.

Statoil Returns

Spokespeople at Statoil, Shell, Norwegian Energy and Cairn confirmed they applied for licenses in this year’s round. Of companies with current licenses, Exxon, PA Resources and EnCana decided not to bid, according to spokespeople. “We’re still considering other Greenland opportunities,” said Patrick McGinn, an Exxon spokesman.

Spokespeople at Chevron, Dong, BP, Total SA and Tullow Oil Plc all declined to comment. Heritage Oil Plc didn’t bid, according to a spokesman.

For Statoil it will be a comeback to Greenland after drilling a dry well off Nuuk in 2000, the first for any explorer since the late 1970s. “Arctic projects are very close to the capabilities of Statoil,” Helge Lund, chief executive of Norway’s largest oil company, said on April 26. “We are interested in Greenland and the prospects there.”

Cairn, based in Edinburgh, is preparing to drill as many as four wells off Disko Island, a whaling and hunting community where icebergs and humpback whales can be spotted offshore. The company expects to invest $1 billion over three years. Cairn acquired “a large amount of seismic data” in the past two years and plans four more wells next year, Thomson said. Cairn is assuming a 10 percent chance of success.

Investments Needed

As many as 20 wells may be drilled in the next 10 years with potential production in a decade, said Skov Nielsen. Exxon, Chevron and Dong must decide on drilling in their licenses off Disko over the next four years. The costs per well is about $100 million and eventual production facilities may need investments of $5 billion to $6 billion, he said.

“The first discovery has to be at least 250-300 million barrels but any subsequent discoveries could be smaller because then you have the infrastructure,” he said.

Companies drilling in the area will be able to build upon experience from other Arctic exploration, said Cairn’s Thomson. Still, icebergs, water depths that reach 1,500 meters toward the sea border with Canada, and months of darkness are challenges, said Hans Kristian Olsen, chief executive at Nunaoil.

The island will also need to build up the industry, said Olsen. “We are starting from scratch in terms of developing an exploration and production industry.”

-- With assistance by Christian Wienberg in Copenhagen and Eduard Gismatullin in London. Editors: Jonas Bergman, Will Kennedy.

To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net.

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