Investing in Arctic Oil

Jeff Siegel

Written By Jeff Siegel

Posted April 8, 2013

They figured out the key to Arctic oil drilling.

But it took a long time.

The suits over at Shell (NYSE: RDS-A) have been in the hot seat over the past year or so after burning through more than $5 billion to tap Arctic oil reservoirs in the Chukchi Sea.

As I’ve discussed in these pages before, the risk-versus-reward scenario for Shell’s Chukchi Sea adventure never made much sense. The independent oil producer simply had too little experience in Arctic oil production and too many mishaps last year (including a damaged containment dome that was crushed by the weight of unforgiving Arctic waters) to make it a particularly profitable venture…

Moreover, after two of President Obama’s advisors called for a permanent halt to oil exploration in the Arctic, long-time investors got skittish.

Truth is — and I’ve said this time and time again — Shell would’ve been better off working with the Russians to tap Arctic oil treasures, as producers have more experience in those climates and the regulatory environment is less stringent.

Certainly this is what Exxon (NYSE: XOM) did a couple of months ago after signing a deal with Russian petroleum giant Rosneft (PINK SHEETS: RNFTF). Back in February, the two companies approved a deal that resulted in some easy money for Russia and an additional 234,000 square miles of oil exploration for Exxon in the Russian Arctic.

It looks like Shell is now heading down the same path…

Russia Runs the Show

Last week we learned Shell inked a deal with Russia’s Gazprom Neft (PINK SHEETS: GZPFY) to jointly drill in the frigid waters of the Russian Arctic.

Finally, Shell strikes Arctic oil!

This was the best decision Shell could’ve made in regards to its quest for Arctic oil.

After all, Russia is the gatekeeper to about 70% of all Arctic oil. And the truth is it’s really up to Mother Russia as to who gets what and how much.

Now, while Exxon and Shell are actively holding hands with Russian roughnecks, Mao’s descendants are also siphoning off the Russian teat. Last month Vladimir Putin handed over a share of its Arctic exploration licenses to China — a near perfect deal for the world’s largest oil and gas producer and the world’s biggest energy consumer.

Under a new agreement that was signed on March 22, China will now have the opportunity to double its oil imports from Rosneft as well as begin construction on a pipeline that’ll run Russian gas to the Middle Kingdom.

But for the big score, China’s foaming at the mouth over its chance to explore three new offshore Arctic regions with Rosneft…

This, by the way, is all part of deal that involves Exxon, EniSpA (NYSE: E), and Statoil ASA (NYSE: STO) ponying up to help finance the drilling.

A Domestic Shale Revolution

Some people in the States have been bellyaching about the restrictive nature of Arctic drilling in domestic waters.

The truth is it doesn’t matter.

Compared to what we’re pulling out of shale right now, that which remains locked below the surface of the icy Arctic is neither economically competitive, nor even particularly necessary…

Sure, the folks in Alaska are sure to take issue with this, but the bottom line is that the fracking boom in the lower 48 is a behemoth. And offshore Arctic oil production in the United States remains too costly to pursue aggressively.

Moreover, the technology we’re now using to produce more efficiently, is making the case for Arctic oil a much less urgent one. That’s not to say those dynamics won’t change; but for now and for the foreseeable future, shale is a much better play on domestic oil production than the fragile hopes and dreams of an Arctic treasure.

Some of the latest production technologies actively being deployed today — like the Octopus — are actually producing more while saving production companies as much as $2 million per drilling pad.

And believe it or not, the Octopus method is actually appeasing environmentalists, as this particular technology is less environmentally-damaging than previous methods. And that has resulted in less of a regulatory burden.

So as you can see, with so many advantages to modern production technologies on American soil, the rush to develop Arctic oil in American waters seems to be something better suited for a couple of decades from now… which, of course, means your investment dollars will be put to better use on what’s working now.

And that, without a shadow of a doubt, is the domestic shale revolution.

To a new way of life and a new generation of wealth…

Jeff Siegel Signature

Jeff Siegel

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Jeff is the founder and managing editor of Green Chip Stocks. For more on Jeff, go to his editor’s page.

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