How a $600 Million Search for Arctic Oil Came Up Dry

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Oil companies are salivating at the prospect of prospecting for crude in the Arctic. Early tests have shown significant potential for oil in the cold waters of the far North, but there was always one slight problem: ice. The ice-choked seas of the Arctic presented serious technical challenges and dangers to offshore drilling, which is hard enough to do safely in warm waters like the Gulf of Mexico.

But climate change is taking care of that whole Arctic sea ice problem nicely -- albeit with some pretty worrying effects for the rest of us -- opening up vast new areas for oil exploration. Companies like Shell have begun testing the waters north of Alaska -- despite environmental opposition -- and other areas of the Arctic won't be far behind. One of the most promising territories has been the water off Greenland, the vast icy island -- still technically owned by Denmark -- that's home to 57,000 people, some military bases and not a whole lot else. That tantalizing possibility prompted the British wildcatter Cairn Energy to launch an expensive effort to drill exploratory wells with the hope of bringing billions of barrels of oil. That's not how it's worked out, though. (MORE: An Oil Spill Grows in the North Sea.)

After spending $600 million in a drilling campaign over the past two years, Cairn announced this week that it has come up with virtually nothing. From Bloomberg:

The AT7-1 well, which had encountered traces of oil and gas, has been plugged and abandoned, the Edinburgh-based company said today in a statement. The AT2-1 well, the last of five drilled this year, was also abandoned after reporting only "minor hydrocarbon shows." The company will evaluate its program next year and seek partners for investment. (PHOTOS: Greenland Odyssey)

"Effectively these are write-offs, though there were some encouraging signs," said Richard Rose, an oil analyst at Oriel Securities Ltd. "That's the end of the program. Rigs are going to disappear, and we won't see any drilling there next year."

Environmentalists -- who opposed drilling around Greenland for fear of a damaging spill -- saluted Cairn's failure. From Greenpeace, which took delight in tweaking Cairn:

Cairn's Greenland programme has been an unmitigated disaster from day one and as the Bureau of Minerals and Petroleum begins negotiations with oil companies interested in drilling off the Northeast coast of Greenland, Cairn's travails should send a clear warning that the incredible technical, economic and environmental risks of operating in the Arctic simply aren't worth it.

Greenpeace may well be right, but don't expect environmental hazards -- or Cairn's failure -- to discourage international oil companies from trying their luck in the Arctic. For one thing, those firms are increasingly being crowded out by state-owned oil companies, which have come to dominate the industry. Collectively, private international companies own just 10% of the world's oil and gas reserves, and state-owned companies -- like Saudi Arabia's Aramco or Brazil's Petrobras -- control more than 75% of global crude oil production. The Arctic is one of the few places left on the planet where international companies can still expand -- and where their technical expertise would give them an edge. But as Cairn's experience in Greenland has shown, nothing is certain -- aside from the fact that it won't be cheap.

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