Greenland: the new new oil frontier

The hunt for oil off the coast of Greenland was given a significant boost yesterday when Cairn Energy, the London-listed independent that hit big in India, agreed a farm-in deal with Petronas of Malaysia.

It was not that the sums involved were very large: Petronas is paying $70m for 10 per cent of Cairn’s six operated blocks in Greenland’s waters. But the deal does for the first time give an insight into the value that a serious industry player, not previously involved in the region, places on acreage there.

The world has seen quite a few “new frontiers” open up in the past year or two: the Brazilian sub-salt, Iraq – both the Kurdish region and, more tentatively, the rest of the country – and west Africa from Ghana round to Sierra Leone. Will Greenland be the next? It certainly could be.

The US Geological Survey has estimated that the Arctic as a whole – which is much bigger than just the area round Greenland, of course – could hold 90bn barrels of oil. That is the equivalent of three times the proved reserves of the US.

We cannot know for sure, though, until there has been a lot more exploration. Cairn has been carrying out seismic and other surveys on its blocks, and other companies have done similar work, but only six wells have ever been sunk in offshore Greenland: five in the mid-1970s and one in 2000.

Until more are drilled, Greenland’s potential will remain just that, and Cairn does not expect to begin its programme until 2011. The water depths are typically 300-400 metres, not particularly deep by today’s standards, but the wells are still expected to cost about $100m a time, and drilling is likely to be confined to the summer months.

Nevertheless, interest in Greenland is clearly growing. The industry minister reported “overwhelming” interest in the next licensing round, due next year, with 13 international groups applying for pre-qualification.

Oswald Clint of Bernstein Research wrote in a note today:

across all the global exploration hotspots it appears to us that Greenland has attracted a higher percentage of larger energy peers than any other, which included regions such as the Falklands Islands and East Africa currently gathering interest. We view this positively as these companies have all completed independent assessment of the prospectivity of the West Greenland regional geology and are (albeit slowly) coming to the same conclusion as Cairn.

As Sir Bill Gammell, Cairn’s chief executive and a former Scotland rugby international, put it: “I have never been someone who diversifies risk… I get into things that, if successful, have a big impact.”

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