Arctic Drilling May Never Heat Up

The oil and gas industry has changed dramatically since the 20th century, when offshore exploration typically meant there were rigs sitting in a few hundred feet of water drilling into the Gulf of Mexico's outer continental shelf. Today, despite the 2010 catastrophe that befell the deepwater Gulf, there's increasing activity there, as well as in Brazil's Santos Basin and the waters off Africa.

But with big new finds becoming scarce, the industry is expanding into the icy and technically challenging -- but promising -- waters of the Arcitic, where it's already facing a host of obstacles. In addition to obviously frigid temperatures, the impediments include disruptions from environmental groups, loggerheads that increasingly are characterizing the relationship between the U.S. and Russia, and pokiness on the part of the U.S. government relative to drilling offshore Alaska.

No peace from Greenpeace
Temperatures dozens of degrees below zero and otherwise unfamiliar conditions aren't the only conditions thatRoyal Dutch Shell (NYS: RDS.B) , ExxonMobil (NYS: XOM) , and Statoil (NYS: STO) will face in the Arctic's waters as they begin exploring there. As the Associated Press pointed out recently, the environmental group Greenpeace has already begun a campaign to thwart the industry's efforts in the northern climes.

More than two years ago, a Greenpeace foursome attached themselves to a drilling rig being operated by Scotland's Cairn Energy off Greenland's coast. Then, six months ago, a half-dozen members of the group scurried onto a drilling rig that Shell was about to move to Alaska as part of its effort to explore in the Chukchi and Beaufort seas. And as the AP article also noted, a Greenpeace ship, the Esperanza, has tailed Shell vessels that are similarly heading for Alaska to participate in the company's efforts there.

Even more interestingly, not long ago, six Greenpeace activists dangled from Russia'sPrirazlomnaya platform in the country's Pechora Sea. And a few days thereafter, a number of activists interrupted the passage of a ship that was transporting Russian oil workers to that same platform.

Putin's no pushover
Perhaps the salient word in the prior paragraph is "interestingly," since the environmental group's challenges are being leveled at the same Putin-led Russia that is hardly taking challenges to its authority in stride. Two weeks ago, for instance, three women who were members of a punk band were sentenced to two years in a penal colony for "hooligansim," after they staged an anti-Putin stunt in Moscow's main Orthodox cathedral.

On that basis it'll be, yes, interesting to discover the degree of leniency the Putin government displays toward Greenpeace interruptions of the efforts of the ExxonMobil and its new Russian partner, state-controlled Rosneft, once they're initiated a few years hence. That is, assuming vast differences in loyalties between Russia and the U.S. regarding the likes of Iran and Syria don't intervene to dismantle the partnership.

A year ago, a deal was cut between Russia and Exxon for the two companies to jointly explore the Kara Sea portion of the Russian Arctic. The unexplored, typically ice-clogged, area is considered a potential site of huge reserves of oil and gas. And while the deal will place Exxon in the midst of Russia's often dicey business climate, Rosneft will gain ownership in a portion of Exxon's assets in the deepwater Gulf of Mexico and onshore Texas.

The pact between Rosneft and the biggest of the international oil companies essentially replaces an arrangement between the same Russian company and London-basedBP (NYS: BP) . That deal, which was halted by objections from BP's Russian oligarch partners in TNK-BP, a big -- but contentious -- joint venture, would have had the companies swapping stakes in one another.

A rig owned by whom?
Obviously, in addition to investments in their exploratory efforts, the Russians are seeking to benefit from the technological sophistication of the Western companies. That's a phenomenon that was glossed over in AP's article, which noted, "Fears that the oil industry is ill prepared to operate in the hostile conditions of the high north were reinforced last December when a floating oil rig capsized off eastern Russia, killing more than 50 workers."

In reality, the accident wasn't reflective of the preparedness of "the oil industry." The rig in question was a Russian jack-up, the Kolskaya, owned by (are you ready for this?) Arktikmorneftegazrazvedka, itself a unit of state-controlled Zarubezhneft. It was being towed across the Sea of Okhotsk through dangerous winter storm conditions toward Sakhalin Island. Its ill-timed passage clearly represented the type of domestic ineptness the Russians are seeking to obviate by teaming up with the more sophisticated Western companies.

And then there's Shell's seven-year, $5 billion effort to gain permission to drill in Alaska's Chukchi and Beaufort seas. The Interior Department's dawdling pace in issuing the myriad of permits the company needs has been in part a response to indigenous environmental groups. Nevertheless, despite Interior's issuing permission to the company Friday to begin "preliminary" work, as long as it doesn't yet drill into any oil-bearing rocks, I wouldn't bet the farm on the European company's ultimate ability to mount a full-scale exploratory effort off our largest state.

The best way to gird against the cold
The dicey situation across the Arctic is yet another reason I tend to lean toward the geographically flexible oil-field services portion of the energy industry. As such, I'd again urge Fools to keep close tabs on Schlumberger (NYS: SLB) , an excellent proxy for the group. The ideal way to do that is to add the company to your version of The Motley Fool's My Watchlist.

The article Arctic Drilling May Never Heat Up originally appeared on Fool.com.

Fool contributorDavid Lee Smithdoesn't have financial interests in any of the companies named in this article. The Motley Fool owns shares of ExxonMobil.Motley Fool newsletter serviceshave recommended buying shares of Statoil ASA. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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