Shell's Arctic Oil Disaster
Arctic Oil Crisis
They had until next week to drill into oil reservoirs in the Chukchi Sea.
But Shell's offshore oil drillers are packing it up early after losing their race against time to strike oil before the Arctic winter sets in.
So far, the company's ponied up $4.5 billion to get at this Arctic prize. But after yet another setback, the most Shell will accomplish this year is the drilling of a few wells in preparation for the 2013 season...
Turns out the company's containment dome, a massive metal box that sits on standby to help contain oil spills, was damaged during routine testing last week.
As a result, Shell was forced to unhook its drilling vessel.
Of course, Shell will be back next year. Eventually, they'll tap that oil — that much is inevitable.
But it doesn't change the fact that the economics of Arctic oil remain shaky.
As Common as Rigs in the Gulf
Earlier this year, BP suspended a $1.5 billion Arctic oil project in Alaska after a long series of technical issues and cost overruns.
Back in August, Gazprom put the kibosh on a massive gas field in the Barents Sea after deciding the economics simply didn't work. And ConocoPhillips CEO Ryan Lance has made no secret of his thoughts on Arctic oil, saying the region has a high cost of supply, and it can only be competitive if oil prices stay high and costs come down.
The latter will happen, but the timing is still questionable. And the former? Well, Lance need not worry about oil prices staying high...
Despite a few hiccups along the way, the dual threats of Peak Oil and the coming implosion of the Middle East will continue to create significant wealth for oil and gas investors.
And despite my gut feeling that one of these Arctic drilling operations is going to cause a massive ecological disaster that simply won't be able to be contained due to extreme Arctic conditions, I have no doubt that eventually, Arctic oil production will be as common as the rigs we see out in the Gulf of Mexico today.
The question is: Who will be the first to truly capitalize?
Russians Love Ice
During the Cold War, the Soviet navy positioned its massive fleet of nuclear subs below the ice of the Arctic.
It was a brilliant move ensuring U.S. submarines looking to tail the Soviets in the frigid depths of the Barents Sea would have a very difficult time when trying to navigate beneath a sheet of ice. Most of the U.S. fleet was simply unprepared to effectively enter those mazes of ice without being damaged or spotted.
But the Soviets? Well, this was their home turf. It always has been, really.
So it should come as no surprise that little has deterred the Russians from dominating Arctic oil and gas development today...
In fact, just two months ago, Gazprom set up Russia's first fixed platform in the Arctic. Eventually, this thing will operate throughout the year and ship crude back up to Murmansk.
Now, I'm not an expert on Arctic drilling operations, nor do I know how the economics look on this particular rig.
Timofei Krylov, a high-level Russian oil analyst, has said it's not cost-effective to build ice-resistant fixed oil platforms in Arctic waters. Yet Vladimir Rozhankovsky, the head of research at Nord Capital in Moscow, has argued Arctic oil exploration is vital to sustaining Russia's long-term status as a top oil producer.
Truth is, while it may not make economic sense today, that doesn't mean it won't ten years from now. After all, it wasn't so long ago that the economics of domestic shale didn't make sense either...
Or look at the evolution of enhanced oil recovery technology: What was once little more than an afterthought is now high-priority for oil producers.
Today, the carbon dioxide enhanced oil recovery market is valued at about $4.2 billion. And new technologies that are upping the ante on efficiency and cost reductions are taking center stage for oil producers all across the globe.
Take this one particular technology that's now being utilized by BP, Chevron, and Halliburton...
With the ability to actually triple U.S. oil production, the company behind this one has actually been one of our most lucrative plays this year. And it's only going to get better.
Bottom line: For less than a buck, you can pick up shares of one of the most technologically-advanced enhanced oil recovery companies on the planet.
And considering a recent BP memo that clearly stated a 5% increase in recovery using enhanced oil recovery technology could yield an additional 300 to 600 billion barrels of oil, this is not something to sleep on.
It may not be as exciting as Arctic oil.
And quite frankly, that's all that really matters.
To a new way of life and a new generation of wealth...
@JeffSiegel on Twitter
Jeff is the founder and managing editor of Green Chip Stocks, a private investment community that capitalizes on opportunities in alternative energy, organic food markets, legal cannabis, and socially responsible investing. He has been a featured guest on Fox, CNBC, and Bloomberg Asia, and is the author of the best-selling book, Investing in Renewable Energy: Making Money on Green Chip Stocks. For more on Jeff, go to his editor's page.
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