China National Offshore Oil Corp., or CNOOC, is partnering with Iceland's Eykon Energy in an application for a license to explore and produce oil and gas in Arctic waters offshore Iceland, the country's hydrocarbon licensing manager told Dow Jones Newswires Wednesday.
If the application is successful and a license is awarded, it would mark the Chinese company's first foray into offshore Arctic oil drilling, a new area the industry's biggest players are scrambling to enter in efforts to replenish reserves, but which has become increasingly controversial.
While believed to hold vast petroleum reserves, green groups are opposed to drilling in the pristine Arctic environment and investors are concerned about the risks and potential costs to a company in the event of an accident.
CNOOC said in an emailed statement that the government of Iceland and Eykon Energy have invited CNOOC to take part in its offshore oil and gas exploration activity and the project is currently under negotiation.
Chinese oil companies have long been seeking an offshore Arctic oil deal as part of Beijing's efforts to secure supplies for the energy hungry nation. Earlier this year, CNOOC and other Chinese oil companies held talks with Igor Sechin, the head of Russia's state-controlled OAO Rosneft, during his visit to China about potential offshore projects in the Russian Arctic.
In April, Iceland and China signed the first free trade pact between Beijing and a European country soon after a visit to Iceland by former premier Wen Jiabao. In May, following intensive lobbying, China became an observer on the Arctic Council, a body whose members hope to shape growing prospects for resource development and trade, underscoring the country's interest in the Arctic region.
CNOOC's participation in the project would also mark the first entry of a major oil company into Iceland's nascent oil sector. Earlier this year, it awarded two licenses from its first successful round for acreage in the Dreki area, northeast of Iceland and neighboring coastal waters in oil producing Norway.
Eykon Energy applied for a license in the tender round, but was unable to move forward without a partner, said Thorarinn Sveinn Arnarson, hydrocarbon licensing manager at Iceland's National Energy Authority.
"Now we can evaluate the technical merits of the application and the qualifications of the companies, both technical and financial, before we make our decision," he said.
If the companies qualify, the license would be awarded in the autumn, he said. The size of Eykon's and CNOOC's stakes in the partnership and the exact location of the offshore Arctic license area would be announced then, he added.
Big oil companies are keen to tap some of the 90 billion barrels of oil the U.S. Geological Survey estimates the entire Arctic region may hold, but progress has been slow and exploration is still at a very early stage.
Earlier this year, Royal Dutch Shell PLC, which has spent over $5 billion on its Arctic drilling program offshore Alaska, said it would pause its campaign following bad weather, mechanical failures and regulatory challenges.
Shell's Arctic oil drilling experience is viewed as critical for other companies seeking to drill and highlights the huge risks, costs and challenges involved.
ConocoPhillips is set to drill in the Alaskan Arctic next year. Elsewhere, Exxon Mobil Corp., Italy's Eni SpA and Norway's Statoil ASA have partnership agreements with Rosneft to develop Arctic blocks. BP PLC is close to securing a long-coveted Arctic oil deal in Russia.