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China Gets Hungry for Arctic Oil

By , Contributing Writer, Money Morning •

China is the world's second-biggest importer of crude oil and its companies are on the prowl for oil all over the world.

By 2015, its oil companies are expected to produce more oil outside of China's borders than Kuwait pumps, according to the International Energy Agency.

The global Chinese search for energy has put a new region on the top of its agenda: Arctic oil.

The Arctic oil race is heating up as more countries look for paths in to this new hot source of energy profits.

You see, with the warming and melting of the Arctic ice cap, it is becoming easier to possibly exploit the energy riches that lie beneath the cold waters.

Money Morning Global Energy Strategist Dr. Kent Moors discussed the search for Arctic oil and gas in a recent article. Moors said the long-awaited U.S. Geological Survey's Circum-Arctic Resource Appraisal study found that 84% of the total undiscovered oil and gas left on the planet is located above the Arctic Circle. The oil and gas are mainly offshore and in three large basins that lie under shallow seas.

The vast potential of the Arctic for oil and gas piqued the interest of nations with territory north of the Arctic Circle such as the United States, Canada, Russia and Norway.

But it also got the attention of countries - like China - with no direct claim there, but with an increasing appetite for energy.

The Race for Arctic Oil: China and Iceland

China's leadership made a smart tactical move by cozying up to Iceland after Europe turned its back on the country during its financial crisis in 2008. Iceland's three largest banks failed and it defaulted on $85 billion of debt.

China recently opened its largest embassy in Iceland's capital, Reykjavik, emphasizing the importance it places on the region. Additionally, the China Development Bank recently inked a cooperation agreement between it and one of Iceland's biggest banks, Arion Bank.

The Chinese now also have a free trade agreement with the country - signed in April - and, most importantly, a direct gateway to the Arctic.

In May, China was successful in its attempt to become a permanent observer at the Arctic Council. This is the key decision making body in the region and will have a major influence on any oil development in the area. Its founding members are the United States, Canada, Russia, Norway, Finland, Sweden, Denmark (Greenland) and Iceland.

And now apparently the Chinese government has given the go-ahead to Chinese oil companies to push into the Arctic.

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The first Chinese oil company to make a move into the region is CNOOC Limited (NYSE ADR: CEO).

It recently announced that it is teaming up with Eykon Energy, a small Icelandic oil company, to make a bid for an exploration license on a block off the northeastern coast of Iceland.

Russia and Norway in the Lead

But it will not be easy for CNOOC or any other oil company to extract oil from the Arctic. Even with the ice melting somewhat, it is still cold there. Not to mention often dark and stormy.

The leaders at the moment in developing the Arctic oil riches are Russia and Norway.

Russia, anxious to develop its northern tier riches, is moving ahead with several projects.

Its major oil company is Rosneft (RNFTF). After recent deals, it now controls about 40% of Russia's oil production.

But the problem is that it has little experience in finding and developing oil offshore, which is where the Arctic oil lies. So it has partnered up in a bevy of deals with western energy firms that have the necessary expertise.

The list of companies includes ExxonMobil, Italy's Eni and Norway's Statoil ASA (NYSE ADR: STO).

This brings us to the area of the Arctic that is already under development...

I'm talking about the largely ice-free Barents Sea. The Barents is ice-free because of the warm waters of the Gulf Stream.

The Nordic part of the Barents Sea is estimated to hold at least 6 billion barrels of oil and gas. Statoil is drilling at least 12 wells in the Norwegian part of the Barents this year. This matches the total number of wells drilled there the past two years.

The prospects for the Barents are exciting. Jarand Rystad, managing partner of Rystad Energy in Oslo, told Bloomberg "There's oil and gas everywhere. It's just a matter of finding thick enough sands, good enough traps for the resources to be commercial."

This makes Statoil the premier play at the moment in the Arctic with its already discovered Skugard and Havis fields, which contain 600 million barrels of recoverable oil.

But don't overlook the ambitious Chinese with their moves into Iceland. They are well aware that Iceland's climate is much milder than one would expect thanks to a branch of the Gulf Stream called the Irminger Current, which flows along the country's southern and western coasts.

Look for further deals involving Iceland not only from CNOOC (China's leading offshore oil company), but also from China's other major oil companies Petrochina ADR (NYSE: PTR) and Sinopec (NYSE ADR: SNP). Sinopec already has a working agreement with Icelandic company Orka Energy to develop geothermal energy.

China's move into the Arctic will continue via Iceland. The real question for the Chinese will be whether Iceland's waters contain commercial amounts of oil and gas.

China's hunger for the world's resources has already brought them to many U.S. cities whose struggling businesses could now thrive with foreign investment. Check out where this massive wave of Chinese investment is happening - it could be a city near you...

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