The Strategist

Italian Eni Company Launched Oil Production in the Arctic

03/14/2016 - 15:05

Italian Eni company, together with Norway's Statoil have begun oil production in the Arctic waters of Norway for the first time in the history. Prior to this, developments had been carried out only in the lower latitudes with much less stringent climate.

Cipiota via creative commons
Cipiota via creative commons
According to exploration, reserves of the Arctic shelf field ‘Goliat’ comprise at least 180 million barrels of oil. First production was delayed for more than 2 years, and the original budget had to be increased by 50% - to $ 5.6 billion. Eni itself admit that quotes around 40 dollars a barrel are not the most favorable for the production in the harsh Arctic waters.

Italians and their Norwegian partners, in contrast to the US shale drillers, are oriented to the future. Standard shale wells are designed for 2-3 years of production, not more. After that, oil recovery falls by 70-80%. Goliat’s reserves, on the other hand, will last for at least 15 years of production. As a representative of Eni put it, beginning of work on Goliat field is a historically important moment. Prior to this, only natural gas has been extracted in the Arctic waters of Norway (on Snoehvit field).

Eni had first invested in the Goliat back in 2009, but the project turned to be very challenging. New problems constantly arose on the Italians’ way to the Arctic. One of the last was an electrics failure due to extremely low temperatures. Eric Reiso, Rystad company’s partner believes that Eni would not have started the project, had it known in advance about all the difficulties and the budget increase by 50%.

According to Rystad’s estimates, the Italians now need an average oil price around 95-100 dollars per barrel over the next 15 years. In this case, Goliat will bring to Eni 10 percent profit. Rystad experts’ calculations include investment and operating costs.

Eni itself believes that the Norwegian independent analysts shot from the hip: according to the company’s calculations, the project will be available to bring a reasonable profit even if the average price of oil is below 50 dollars per barrel.

However, Rystad is not trying to stigmatize the Arctic project of Italians. According to the analyst firm, Eni will be able to generate sufficient cash flow to maintain the normal operation of the field with production level of 100 thousand barrels per day. When you have already gone so far, there’s no sence to stop the production - says Eric Reiso.

Since 2000, oil production in Norway decreased by two times. Intensive production has been carried out in the North Sea for several decades. Besides, the British competitors are not lagging behind the Norwegians - as a result, the depletion has reached extreme levels. Thus, Norway has no other choice but to develop the Arctic (in particular, the Barents Sea).

The harsh region hides another promising hydrocarbon deposits - Johan Castberg. Statoil announced that it was able to reduce the cost of development of the project by 50%. This year, 26 companies have already submitted an application to the Government of Norway for a license to operate in the Norwegian sector of the Arctic, even despite the currently low oil quotes.