The Arctic Awaits Energy Investors

by Aaron Levitt | March 6, 2012 9:12 am

The Arctic Awaits Energy Investors

As the planet’s thirst for energy continues to rise, a variety of unconventional oil and gas deposits are beginning to make economic sense. From offshore fields in Ghana, to oil shale deposits in Canada, exploration and production firms are now looking at these finds more closely to quench the growing demand.

Investors even have the direct opportunity to play these resources via a new fund[1], the Market Vectors Unconventional Oil & Gas ETF (NYSE:FRAK[2]). However, one unconventional area in which FRAK is lacking could be an oily bonanza for investors and E&P firms alike.

The Arctic Circle truly is one of the last frontiers for energy exploration. Blessed with an abundance of hydrocarbon resources, the region has the potential to become a game-changer for the industry. Most recently, as oil prices have remained elevated, the Arctic has begun to gain much attention from an assortment of governments and drillers. For investors willing to take on some risk, the frozen gamble could pay off in spades.

Let the Land Grab Begin

Spanning one-sixth of the world’s land mass and over 24 time zones, the Arctic Circle could be the next “big thing” within the energy industry. As global energy demands continue to grow within a constrained supply environment, analysts estimate that drilling activity in the expanse is expected to increase considerably during the next few years. There’s plenty of reason to be bullish on the Arctic. United States Geological Survey scientists estimate that the region contains about 90 billion barrels of undiscovered oil[3], or about 13% of the world’s undiscovered reserves.

More impressive is the Arctic’s plethora of natural gas reserves, estimated to be about 47.3 trillion cubic meters of gas and 44 billion barrels of liquefied petroleum gas. The USGS predicts that these natural gas and LPG assets represent 30% and 20% of world’s undiscovered reserves, respectively. However, these reserve estimates aren’t even including the methane hydrate extracted reserves or the abundance of cobalt and nickel found within the icy world. Analysts have pegged the total value of the Arctic’s vast natural resources at more than $1 trillion.

With the USGS calling the “extensive Arctic continental shelves may constitute the geographically largest unexplored prospective area for petroleum remaining on Earth,” the E&P land grab has begun. Similar to what has happened in America’s shale regions[4] and Africa’s fertile Rift Valley[5], a variety of energy firms have begun to look northward as they struggle to replace production from declining fields to feed the world’s growing appetite for energy. Advances in drilling methods — coupled with overall higher trending crude prices — have made Arctic projects more feasible.

Last summer, Exxon Mobil (NYSE:XOM[6]) might have won the Arctic exploration lottery when it signed a landmark deal[7] with Russia’s Rosneft (PINK:RNFTF[8]). The $3.2 billion joint venture will allow Exxon access to offshore finds in Russia’s Kara Sea. Once seen as an unreachable ice-covered waterway, the Kara now has the attention of many oil companies as its sea ice has been melting. This allows for easier drilling and extraction from its waters.

More recently, Chevron (NYSE:CVX[9]) has followed its integrated rival, meeting with Russian officials[10] to discuss tapping the nation’s rich arctic waters. Current Russian laws limit Arctic development to only the state-owned duo of Gazprom (PINK:OGZPY[11]) and Rosneft. However, these tentative deals could open Russia’s vast resources to a variety of E&P firms.

Elsewhere within the Arctic, activity has been heating up as well. In February, the Interior Department gave tentative approval to Royal Dutch Shell (NYSE:RDS.A[12], RDS.B[13]) to begin drilling in Alaska’s Chukchi and Beaufort Seas[14]. The potential here is equally as huge, as the USGS predicts that the Arctic Ocean’s outer continental shelf holds reserves of nearly 27 billion barrels of recoverable oil and 130 trillion cubic feet of natural gas.

Playing the Arctic Rush

A variety of nations, including the United States, Russia, Canada, Norway and Greenland, all have Arctic ambitions in mind, and drilling activity certainly will surge during the next few years as oil prices stay elevated. Nonetheless, investors have been slow to realize the region’s potential. For portfolios, the Arctic poses a unique high-risk/high-reward proposition. And two of the best ways to play the surge in icy water drilling come from Scandinavia.

Viking energy powerhouse Statoil (NYSE:STO[15]) already has a huge Arctic presence that’s getting bigger. The company continues to find mammoth-sized reserves in Norway’s Barents Sea[16]. Last April, Statoil announced a 250 million-barrel discovery called Skrugard in Northern Norwegian waters. Most recently, it announced its Havis prospect may hold up to 300 million barrels of recoverable oil equivalent. These major finds coupled will the firm’s continued earnings prospects make it a great way to play the future of Arctic drilling[17].

The more interesting route for investors could be in rig owner/operator SeaDrill (NYSE:SDRL[18]). The company’s rig fleet is basically a proxy for deep harsh-water drilling and has been seeing increased demand and day rates in recent years. Run by the Warren Buffett of Shipping, John Fredriksen, SeaDrill also maintains a 75% stake in Norwegian rig operator North Atlantic Drilling (PINK:NATDF[19]). North Atlantic focuses exclusively on drilling in the North Sea/Norwegian Continental Shelf and will be a direct beneficiary of Statoil’s mega-finds, and analysts at Barron’s predict a 50% upside[20] over the coming year for NATDF. Overall, the pair offers pure-play exposure to the rigs directly needed to tap into icy deep waters.

As energy demand and prices continue to rise, unconventional sources will see their fortunes rise as well. For investors willing to take the gamble, the Arctic offers great reward and the Scandinavian trio offer a great way to play that gamble.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. via a new fund: http://investorplace.com/2012/02/for-oil-gas-players-a-new-fracking-etf/
  2. FRAK: http://studio-5.financialcontent.com/investplace/quote?Symbol=FRAK
  3. contains about 90 billion barrels of undiscovered oil: http://www.spiegel.de/international/world/0,1518,648197,00.html
  4. America’s shale regions: http://investorplace.com/2012/01/playing-the-shale-energy-landgrab/
  5. Africa’s fertile Rift Valley: http://investorplace.com/2012/02/africa-energy-growth-story-tullow-oil-anadarko/
  6. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  7. when it signed a landmark deal: http://www.nytimes.com/2011/08/31/business/global/exxon-and-rosneft-partner-in-russian-oil-deal.html?_r=3&google_editors_picks=true
  8. RNFTF: http://studio-5.financialcontent.com/investplace/quote?Symbol=RNFTF
  9. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  10. meeting with Russian officials: http://uk.reuters.com/article/2012/03/01/russia-chevron-idUKL5E8E10YR20120301
  11. OGZPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=OGZPY
  12. RDS.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.A
  13. RDS.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.B
  14. drilling in Alaska’s Chukchi and Beaufort Seas: http://www.google.com/hostednews/ap/article/ALeqM5gyo4HTbiB5nyFcHVJpENhHgkEWDw?docId=b89ee4c743ab451fbf448d974f6bbef8
  15. STO: http://studio-5.financialcontent.com/investplace/quote?Symbol=STO
  16. in Norway’s Barents Sea: http://www.businessweek.com/news/2012-01-09/statoil-oil-field-is-twin-of-barents-sea-s-biggest-find.html
  17. great way to play the future of Arctic drilling: http://investorplace.com/2012/02/buy-this-viking-energy-powerhouse-statoil-sto/
  18. SDRL: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDRL
  19. NATDF: http://studio-5.financialcontent.com/investplace/quote?Symbol=NATDF
  20. predict a 50% upside: http://online.barrons.com/article/SB50001424052748704895604577179020234280452.html?ru=yahoo&mod=yahoobarrons

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