The Arctic Oil Race is On: Who’s Winning?

by Wall St. Daily
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The U.S. Geological Survey estimates that the Arctic holds as much as 90 billion barrels of oil – or 13% of the world’s total recoverable supply.

In the past, these reserves weren’t worth tapping. The cost of extraction far exceeded the price of oil. But now, oil prices have soared and most of the planet’s easy-to-reach wells are running dry.

As a result, global oil majors are scrambling to lock up Arctic oil reserves.

ConocoPhillips (NYSE: COP), Chevron Corp. (NYSE: CVX), Total SA (NYSE: TOT) and Eni SpA (NYSE: E) are among the Western oil majors rushing to the remote region.

But right now, they’re all trailing Exxon Mobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS.A, RDS.B). Here’s why…

Exxon Inks Key Partnership

Exxon got its big break earlier this year when it entered a partnership with Russia’s Rosneft (PINK: RNFTF).

The multi-billion-dollar deal gave Exxon first-mover rights to Russia’s vast arctic deposits, which account for as much as 70% of the country’s total hydrocarbon reserves. In return, Rosneft got access to Exxon’s technological expertise and the rights to explore at least six unconventional deposits in Texas and the Gulf of Mexico.

Exxon and Rosneft will develop three fields in the Arctic with recoverable hydrocarbon reserves estimated at 85 billion barrels of oil equivalent. Just one of the areas, the Kara Sea off the Siberian coast, may hold more than 37 billion barrels of oil.

Geological studies and exploratory drilling are expected to get under way by 2013.

Now, in the past, many partnerships between state-owned Russian oil companies and Western majors have been somewhat precarious. But this one looks built to last.

You see, the companies have long-term plans to extract natural gas reserves from Russia’s challenging Siberian landscape. That will take a mutual understanding of hydraulic fracturing and horizontal drilling, as well as managerial cooperation.

To top it off, in a separate deal, the two companies agreed to establish a joint Arctic Research Center to facilitate all stages of oil and gas development in the region.

Ultimately, the deal gives Exxon some powerful leverage in one of the world’s few remaining undeveloped regions.

But Exxon and Rosneft won’t be alone in the Arctic…

Shell’s Arctic Expedition

The U.S. government just approved Shell’s plan to drill five wells in the Chukchi and Beaufort seas off the coast of Alaska this summer. The fields are estimated to contain 26.6 billion barrels of recoverable oil and 130 trillion cubic feet of natural gas.

The only setback here is that the Deepwater Horizon accident in the Gulf of Mexico has resulted in a level of government regulation and scrutiny in the United States that’s absent in Russia. Additionally, environmental groups are looking to stand in the way of Shell’s Arctic endeavor.

Still, Shell has taken a proactive approach to dealing with potential hurdles and should be able to start drilling by the first week of August.

The company’s proposed cleanup plan for a hypothetical spill was enough to win the blessing of Interior Secretary, Ken Salazar. It’s already dispatched the capping stack, skimmers, boom and a containment dome (which would be used in the event of a spill), along with two drill ships.

The capping stack is based on the device BP plc (NYSE: BP) used to cap its spill, which leaked about 53,000 barrels of oil per day into the Gulf of Mexico. So the cap is actually overkill for Shell’s drilling operation, which would only be capable of spilling 25,000 barrels per day.

Additionally, Shell has taken pre-emptive legal action in federal court in Alaska, seeking a definitive ruling on an array of potential challenges to its upcoming drilling operations, including the oil spill response plans.

Pulling off this Arctic drilling expedition would be a coup for Shell, which trampled its first-quarter expectations.

Shell was one of the few oil majors to increase oil and gas production, which rose 1.4% to 3.55 million barrels a day. And the company is on track to pump out four million barrels per day by 2018.

In all, earnings from upstream operations rose 16% to $6.71 billion, and downstream profits rose 13% to $1.32 billion. Not to mention the stock yields 5%.

Still, if you’re looking for an Arctic investment of your own, you could do even better than Shell or Exxon.

In fact, in our July issue of WSD Insider we recommend a company that has virtually everything working in its favor: A big deal with a Russian oil major, a friendly home government, long-term growth potential and a hefty dividend payout.

Better still, it’s currently trading at a huge discount.

But since we’ve given this pick out to paid subscribers, you’ll have to sign up for a risk-free trial of WSD Insider to get it.

If you have reservations, remember: The trial is free, you’ll get immediate access to the stock report and you’re under no obligation to stay subscribed.

So you really have everything to gain and nothing to lose.

But you have to do this now. If you wait until the rebound hits full swing, it’ll be too late.

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