How could a little-known British firm with two employees and no producing assets end up owning the largest oil lease ever issued in the Canadian Arctic? Last month it happened, though, and it sends a troubling message about the viability of northern development: that the major energy companies that have done the bulk of the exploration thus far are losing interest.
Over the past five years, Imperial Oil, ExxonMobil, BP and Chevron have all pledged hundreds of millions of dollars for drilling rights to parcels of the Beaufort Sea. This year, the largest piece of the Beaufort yet was put to auction. The winning firm was Franklin Petroleum, a junior with no experience drilling in the Far North. Franklin promised to spend $7.5 million on projects over the next five years for exclusive rights to more than 900,000 hectares of the Arctic sea floor, where the cost of a single well can range from $50 million at shallow depths to many multiples of that in the deepest waters.
“You can’t do any serious work in the Beaufort for that, if it even gets you through the regulatory process,” says Doug Matthews, a northern energy consultant. That such a lowball bid was unmatched indicates major oil companies are unwilling to put more money into the region.
The north’s energy bounty is not in question. New evidence of vast crude reserves has fed hype for the Mackenzie Delta, which one seismic-analysis company recently called a “world-class play.” Realizing the Beaufort’s potential is another matter. Oil companies have advanced the technology for deep-water drilling elsewhere in the world, but those operations are unfit to contend with Arctic conditions. Custom-built vessels are probably required just to drill, and there are extraordinary environmental concerns. A spill beneath the ice could be catastrophic for the ecologically fragile region.
All of which should have disqualified Franklin from winning exploration rights, critics say. “What we have is a loss of control over a very large part of the Beaufort Sea,” New Democrat MP Dennis Bevington said in Parliament. Previous auctions proved prohibitively expensive for all but the biggest players. Now some are calling for minimum qualifying requirements in future rights auctions.
The same problem could arise when leases change hands. For now, the Beaufort’s lessees are occupied figuring out how to drill in their existing parcels. Those efforts were further set back by a federal safety review.
Still, with easily accessible oil plays dwindling globally, the industry has no choice but to expand into more challenging regions. “There are very few places in the world where the independent oil companies can go and explore these days,” Matthews says. “The Canadian Beaufort happens to be one of those places.”