BP oil spill: Canada suspends licenses for deepwater drilling

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7825220/BP-oil-spill-Canada-suspends-licenses-for-deepwater-drilling.html

Just weeks before the Gulf of Mexico oil spill disaster BP was actively lobbying the Canadian government to ease some of the planned rules for Arctic Ocean oil and gas exploration.

BP argued they would add significantly to already heady drilling costs and a sympathetic Canadian National Energy Board was ready to be accommodating.

No longer. The Gulf episode has sent alarm bells ringing for governments anxious to play host to oil companies wanting to move into the industry's final exploration frontiers – deep water offshore exploration.

Tony Hayward, BP's embattled chief executive, understated the fall-out when he talked about the impact on the "global oil and gas industry" in the immediate aftermath of the Deepwater Horizon explosion.

President Obama's decision to freeze the rapidly developing momentum of exploration around the US coastline until the Gulf catastrophe has been contained and lessons learnt has had the inevitable knock-on effect.

Canada has called a halt to issuing more licences for Arctic drilling and other countries bordering the vast white waste are taking a closer look at environmental regulations.

The Arctic, after the Gulf and offshore Brazil, was in line to become the next big battleground for Big Oil in the search for the world's remaining accessible oil and gas fields before the US reacted to the risks linked to drilling more than three miles below the surface of the Gulf.

Shell, BP, Exxon Mobil, Chevron and the rest of the club have been queuing for US and Canadian licences to extend the search in a region that could contain 50bn barrels of oil and up to 1,000 trillion cubic feet of gas. The US Geological Survey estimates there could be a quarter of the world's undiscovered oil and gas under the vast Arctic area and Russia is claiming ownership of most of it.

Climate change has made the region more inviting while raising environmental concern about the risks of a Gulf-type disaster once the rigs start moving among the ice floes. The disappearing polar ice cap and the ability of tankers to negotiate the once impossible North West passage has changed the exploration dimension as well as offering the prospect of improving trade links between Europe and the Far East.

The US, Russia, Canada, Norway and Denmark have been jockeying for position in the division of territorial spoils. The provisions of the UN Law of the Sea provides the framework for settling boundary disputes but the US failure to ratify the treaty on the grounds that it poses sovereignty problems has left the Obama administration without a seat at the negotiating table.

Russia even went to the extraordinary lengths of planting a flag on the seabed to stake its claim but has peacefully reached an agreement with Norway to end a long-running dispute covering 175,000 sq kilometres of boundaries embracing the Barents Sea and the Arctic.

Canada plans a military base on its Arctic frontiers to safeguard its interests.

There are others on the fringe of the Arctic act. Greenland has exercised its freedom from Denmark by giving the go-ahead to Cairn Energy to drill two wells in its Arctic territory, in Baffin Bay close to its border with Canada, despite the Gulf gusher.

China has demonstrated its ambitions with a $500m currency swap deal with beleagured Iceland to achieve two objectives, geothermal power and the prospect of a faster east-west trade route through a bigger ice-free zone.

The US has already achieved substantial benefits from the Arctic fringe. BP laid the foundations for the creation of the Alaskan oil industry with the development of Prudhoe Bay, the biggest field in the US.

There have been setbacks. BP found water instead of oil after drilling what appeared a promising structure, the appropriately named Mukluk.

Shell has invested heavily in the US Arctic, picking up almost 700 leases in the Beaufort and Chukchi Seas and was all set to start drilling next month before the Deepwater Horizon rig explosion sent President Obama pushing the 'freeze' button.

"There is now considerable uncertainty over the future of deep water exploration both in the US and elsewhere," said Helen Henton, at Standard Chartered Bank.

There are certainties. The oil price will rise at a faster rate, the cost of drilling offshore will be greater and OPEC will be in a stronger position to use its muscle. It is estimated that there could be a quarter of the world's undiscovered oil and gas under the Arctic and Russia claims it owns most of it.