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Norway shows the way for Arctic oil

With the oil industry struggling to recover from a global supply glut, even with substantial production cuts by OPEC and Russia, it seems unlikely that oil companies will relish taking on the challenges of Arctic drilling. In Norway, however, the Arctic oil industry is booming in the Barents Sea thanks to favourable conditions.

ExxonMobil, the maker of Mobil ATF LT 71141, has continued to lead the way in Arctic and sub-Arctic exploration, but many question the wisdom of this approach with the lower oil prices of recent years. Arctic areas such as Alaska and Greenland tend to have ice, causing technical challenges and increasing production costs to uneconomical levels.

In contrast, the Barents Sea is free from ice thanks to the Gulf Stream, and the relatively shallow waters also make drilling cheaper. Not only are the conditions favourable, though, there is also a huge potential prize up for grabs. According to the Norwegian Petroleum Directorate, there could be over 17 billion barrels of oil and gas under the Barents Sea, representing 65% of the country’s undiscovered reserves. This could provide some welcome relief to the Norwegian oil industry, which has seen oil and gas production halve since 2000 as the North Sea fields became depleted.

Despite the potential benefits, drilling for oil in the Arctic is still a controversial endeavour. Environmentalist groups point to how drilling operations are getting too close to the polar ice sheet. This delicate ecosystem supports a diverse range of species, and a large oil spill could have devastating consequences. Some people also question the need to explore for expensive arctic oil in a world that is increasingly embracing renewables in an effort to combat climate change.

Despite these criticisms, the Barents Sea is still an attractive exploration prospect. In return for a high tax rate on oil production, the Norwegian government provides a generous package of deductions and refunds to offset exploration and investment costs.

The Norwegian government and its state-owned company Statoil also dismiss the possibility that investments there will become stranded assets because of high production costs. Terje Soviknes, the Norwegian Petroleum and Energy Minister, said recently:

“It’s a bit of a myth, to be quite honest, that things are so much more costly up here.”

He quoted a break-even price of $35 a barrel for Statoil’s Castberg project, which would make it economical even if oil prices were to drop substantially.

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