Hammerfest, Norway: For a quarter century, energy executives were tantalized by vast quantities of natural gas in one of the world’s most inhospitable places—off Norway’s northern coast, beneath the Arctic Ocean.
Bitter winds and fierce snowstorms lash the region, located 90 miles, or 145 km, from the country’s shoreline. The sun disappears for two months a year. No oil company knew how to operate in such a harsh environment. But Norway has finally solved the problem. The other day, on an island just offshore, a giant yellow flame illuminated the sky. It was just a temporary flare for excess gas, but it signalled a new era in energy production.
Polar energy quest: A view of Statoil’s natural gas plant on Melkoya Island off the coast of Norway. The first commercial energy production from waters north of the Arctic Circle will start here later this year.
Across the bay from this small fishing village, where reindeer wander the streets, one of the world’s most advanced natural gas plants is coming to life. Within weeks, natural gas will start crossing the ocean in specially designed ships, feeding into the pipeline network for the eastern coast of the US. Before Christmas, furnaces in New York and stoves in Washington, DC will be burning the fuel. It will be the first commercial energy production from waters north of the Arctic Circle.
As global demand soars and prices climb, energy companies are going to the ends of the earth to find new supplies.
In Kazakhstan, petroleum engineers are braving wild temperature swings in the shallow waters of the Caspian Sea to tap the biggest oil discovery of the past 30 years. They are drilling wells six miles deep in the Gulf of Mexico. And on the island of Sakhalin, in eastern Russia, they have drilled horizontal wells through miles of rock to produce oil from a stretch of ocean littered with giant icebergs. But as the industry extends its reach, the quest is becoming more arduous. The cost of producing new oil and gas is rising fast, and companies are plagued by worsening delays. Drilling rigs are scarce. Engineers, geologists, and petroleum specialists are in critical short supply and the politics of oil and gas are getting trickier, with hydrocarbon-rich countries demanding a bigger share of revenues and growing angry about project delays that postpone payments.
Industry executives said their ability to keep up with global demand is badly strained. “We’re facing bigger risks and bigger difficulties when we go into new frontier regions,” said Odd Mosbergvik, a senior manager at the Norwegian state energy company, Statoil-Hydro. “But this is why the oil industry is for big boys. It’s a big gamble.”
The industry’s new reach is shifting the economics of energy extraction. According to a recent study, discovery and development costs—a leading indicator for the industry—tripled between 1999 and 2006, to nearly $15 (Rs594) a barrel. Last year alone, companies spent $200 billion developing new energy projects worldwide, according to the study by two consulting firms, John S. Herold Inc. and Harrison Lovegrove & Co. That sum is bigger than the economies of 147 countries. These higher costs mean the industry needs higher energy prices to finance new projects. They are also constraining its ability to expand quickly.
“As the CEO of a major oil company told me, ‘This is an industry in crisis masked by high prices,’” said J. Robinson West, chairman of PFC Energy, an oil industry consulting firm in Washington, DC. “There are no easy barrels left. The only barrels are going to be the tough barrels.”
There is plenty of oil and gas still in the ground, energy executives said. But global consumption is rising so fast they must keep looking for new sources.
Despite concerns around the world about global warming and the role of fossil fuels in causing it, government specialists project that global oil and gas demand will jump about 50% in the next 25 years. At the same time, the big discoveries of the past three decades, such as the North Sea and Alaska’s North Slope, are drying up. That is leading oil companies to remote places such as Hammerfest.
“We’re not pushing anything on an unwitting public,” said Bill Cooper, executive director of the Center for Liquefied Natural Gas, an industry group.
“Consumers demand gas and we have to secure the supplies, even if it’s from the end of the world.”
Producing oil and gas in polar regions is not entirely new. In Siberia, Russian engineers have been doing it for decades, with mixed results, and Alaska’s North Slope was long the most important US oil field. But those fields are on land. The Norwegian field is the first Arctic project to tap oil and gas reserves far offshore, in water depths exceeding 1,000 ft, or 305m, and where traditional exploration methods would be too costly. The natural gas field, 340 miles north of the Arctic Circle beneath a stretch of ocean known as the Barents Sea, is called Snow White—Snøhvit in Norwegian, where energy projects are named after mythical characters. Though it was discovered in 1981, oil executives long considered Snøhvit out of reach, because of the Barents Sea’s shifting ice packs, brutal waves and extreme cold.
“This is considered an unfriendly place, even by Norwegian standards,” Mosbergvik said. Another big problem the engineers faced here was that Snøhvit was located hundreds of miles from Norway’s traditional pipeline network.
Over the years, Statoil considered many ways to get at the natural gas, including massive offshore platforms armoured against the waves, but discarded them as too costly. Building a huge undersea pipeline that would take the natural gas south along the country’s long coastline was also out of the question.
Statoil engineers eventually came up with an ingenious solution. They installed production equipment directly on the seafloor, with no rigs breaking the surface. The wellheads are linked by 90 miles of pipe to a small island just off the coastal town of Hammerfest. An antifreeze is injected into the pipes to prevent the natural gas from clogging on its way to shore.
On the island, called Melkoya, Statoil built a processing facility to separate the brew of natural gas, oil, water and carbon dioxide that flows out of the field. The natural gas is then cooled to minus 260 degrees Fahrenheit (minus 162 Celsius), shrinking it 600 times and turning it into a liquid that can be shipped in tankers.
The carbon dioxide that is collected is pumped back into the field. Once the plant becomes fully operational, later this year, a tanker will load here every five to six days. Most of the plant was built in Spain, Germany and Italy and assembled, like a giant puzzle, on the island.
It then takes about 20 days to reach the US and come back, and about 12 days for a return voyage to markets in southern Europe.
Construction of the liquefaction plant over the last several years involved 22,000 workers—one of the largest industrial projects in Europe. Two years ago, Statoil and its foreign partners, including the French energy company Total, said that costs had soared to nearly $10 billion—up from $6 billion when the project was sanctioned in 2002. It was also delayed by a year.
“We did not have the experience to operate in an environment like this,” Mosbergvik said.
The field is so large that it is expected to supply as much as 10% of the natural gas demand on the US East Coast by late next year.
Dominion, an energy company based in Richmond, Virginia, has expanded a natural gas import terminal at Cove Point, Maryland, to accommodate the Arctic gas, said Donald Raikes, the company’s vice-president for marketing and customer services.
By the end of October, Statoil’s natural gas will flow through a network of pipes to a vast stretch of the country from Maryland and Massachusetts, representing the largest consumer market in the US.
With the plant nearly ready, the company believes that the Barents Sea could turn into a major oil and gas region in coming decades.
Indeed, by its contribution to global warming, the world’s fast-rising use of fossil fuels could eventually make the Arctic more accessible.
©2007/The New York Times