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Devon Wildcats Beneath the Arctic's Sea Ice

Posted on: Wednesday, 21 December 2005, 15:00 CST

By Adam Wilmoth, The Daily Oklahoman, The Daily Oklahoman

Dec. 21--The search for new supplies of natural gas has led Oklahoma City-based Devon Energy Corp. near the top of the world to Canada's Arctic Beaufort Sea.

Devon earlier this month became the first company in 15 years to drill in the icy northern waters. Few drilling service companies are in the area, and currently there is no way to get any produced gas to market. Despite the challenges, Devon President John Richels said the promise of about a trillion cubic feet of natural gas is worth the more than $50 million effort.

"Several years ago, we made a conscious decision as a company to not only focus on the nearer-term growth we get out of most of our North American asset base but also to pursue some projects that would have higher impact and expose our shareholders to much larger reserves and impact opportunities," Richels said.

Because of environmental regulations, drilling in the area can only take place in the winter when the sea is frozen over. That way if there is a spill, it can be more easily cleaned up without contaminating the sea.

To be able to drill in the winter, Devon had to get its drilling ship in position in August and wait for the water to freeze around it. With such a system, a drilling rig can be used for only one well per winter.

"It's a very harsh environment," Richels said. "It requires long-term planning."

The Beaufort Sea was bristling with action in the 1970s and early 1980s, but interest waned in the treacherous environment after commodity prices collapsed and the United States came to believe natural gas was abundant and almost endless.

Now, however, soaring commodity prices and talks of short supplies have revitalized the area. Devon and several other companies have been drilling onshore in the area for about five years.

Rebuilding the infrastructure and attracting service companies back to the region has been a slow process, Richels said.

"It's not like we can pick up the phone and get some kind of well-drilling service," he said. "We have to provide all of that in advance."

Devon did get service companies and other equipment and suppliers lined up. Drilling began earlier this month and is expected to be completed in late January. Devon teams will then spend 30 to 40 days testing the well and collecting results.

Industry analyst David Khani said the relatively small cost compared with Devon's $3.3 billion annual capital spending budget is worth the investment.

"I would view it more as a research and development project," said Khani, an industry analyst with Friedman, Billings, Ramsey in Arlington, Va. "We know there's gas up there, but the question is how much gas is there."

While the Oklahoma City company hopes to spend the next few years drilling to prove commercial quantities of natural gas lie trapped far beneath the seabed, production likely will have to wait at least until 2011.

At present, there's no way to transport the natural gas to market. A coalition of energy companies including ExxonMobil, ConocoPhillips and Royal Dutch Shell plans to build a pipeline to be completed by 2011. Until then, Devon and the other producers in the area will be unable to sell natural gas they find.

Devon project leader Ian Freeland said the delay will allow his teams time to complete their preparatory work on the area. "What we are doing here is truly wildcat exploration," Freeland said. "The timing fits that. We're going to drill as many exploration wells as we feel we can drill. Then we'll look at what it's going to take to develop the area."

Despite the high risk of exploration activities, Khani said the discovery work is likely to become increasingly important to both the industry and the broader economy in the next few years.

Recently, it has been more popular for larger companies to buy assets from smaller companies and simply increase the drilling budgets on the known fields.

"It's becoming harder and harder to buy known resources, and it's becoming more and more expensive," Khani said. "Exploration has been out of vogue because it has had a lower rate of return. But I think there is going to be an increasing focus on it because companies that have exploration can rely less and less on acquisitions in this high-price environment."

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Source: The Daily Oklahoman

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