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Oil Exploration in Iceland?

So far Iceland has had no oil industry and imports all its petroleum products (equilvalent to almost 18,000 barrels of crude oil per day). However, there are certain areas on the Icelandic continental shelf that are thought to have potential for hydrocarbon accumulations.

In recent years the main focus regarding possible oil exploration within Icelandic jurisdiction has been on the Dreki Area (dreki means dragon in Icelandic). The area is part of the Jan Mayen Ridge micro-continent on the northeastern Icelandic continental shelf.

The Dreki Area has geological similarities to neighbouring hydrocarbon basins close to Greenland and Norway. Seismic surveys and other geophysical measurements indicate that oil and gas could possibly be found in the area.

Hydrocarbon accumulations on the Icelandic continental shelf are owned by the Icelandic State. Licence from the Icelandic National Energy Authority (NEA) is required for prospecting, exploration and production of hydrocarbons. The legislation has provisions for two types of licences: a prospecting licence, and an exploration and production licence.

Earlier this year (2012) the NEA offered blocks for exploration and production licences on the Dreki Area. The area covers 42,700 square kilometres with water depths ranging from 800 to 2,000 metres. This was Iceland’s second licensing round ;the first round in 2009 attracted no serious applicants.

This time three groups of companies submitted their applications. They are (in alphabetical order) Eykon Energy (an unregistered Icelandic company), Faroe Petroleum and Íslenskt kolvetni ehf., and Valiant Petroleum and Kolvetni ehf. Íslenskt kolvetni ehf. and Kolvetni ehf. are Icelandic firms with well known Icelandic companies and businessmen as shareholders. Faroe Petroleum and Valiant Petroleum are well known exploration companies for example in the North Sea.

In the media the Director General for the NEA has said that the applications this time were beyond his brightest hopes. The NEA will be evaluating the applications during the summer in accordance with the legislative criteria. Possibly we may see the first hydrocarbon exploration and production licences on the Icelandic continental shelf awarded early this autumn.

In he coming weeks we will be adding more information on about hydrocarbon potentials in Icelandic jurisdiction.

Strong Icelandic Electricity Growth

The recent growth in electricity generation and transmission in Iceland has been impressive.

Between 2005 and 2010 the Icelandic electricity generation doubled. It is important to keep in mind that all this increase was in low cost renewable generation (mostly hydropower). And remember that almost 100% of all electricity generated in Iceland comes from renewable sources (hydro- and geothermal power).

This rapid increase in Iceland’s green electricity generation is shown on the histogram at left / above. Most of the increased production is supplied to new industries and services. One of the main explanation behind this growth is the competitive electricity price Iceland offers.

The abundant natural hydro- and high temperature geothermal resources make the Icelandic power industry able to offer electricity at substantially lower prices than for example can be found in any other European country. Even the present low spot-price for electricity in the USA (due to extremely low price of natural gas) are no threat to the Icelandic electricity industry. Companies that need substantial quantity of electricity and wish to operate within the OECD, will hardly find better long-term agreements than offered at the Icelandic market (43 USD/MWh in 12 year contracts are being offered by the Icelandic power company Landsvirkjun).

It is expected that demand for Icelandic renewable electricity will grow quite fast over the next few years. The fact that Iceland still has numerous very competitive unharnessed hydro- and geothermal options, makes the country an interesting location for all kinds of energy intensive industries and services. This may for example apply to data centers, aluminum foils production, several silicon production facilities etc.

When having in mind the probable high growth in Icelandic electricity generation in the forthcoming years, it is not surprising that Landsnet (the Icelandic Transmission System Operator; TSO) is considering major investments in the electricity transmission system. The diagram at left is from Landsnet. It is interesting that even the major increase in transmission investments during 2005-2010 is fairly small compared to what may be expected in the next 10-15 years.

This plan for new transmission projects is not final yet. But it gives a clear view of the opportunities Iceland has regarding new and competitive green energy projects. No other western country enjoys similar economic possibilities based on 100% renewable energy.

Búðarháls Power Station

The glacial river system of Þjórsá and Tungnaá rivers in South Iceland is a major source for Icelandic hydropower.

Current capacity of the five power stations in those two rivers is 840 MW, with an annual generation of more than 5,000 GWh. The sixth power station in Þjórsá-Tungnaá, Búðarháls Station, will start operating in late 2013. It will have an installed power capacity of 95 MW and every year it will be generating 585 GWh. Then, the total annual generation in Þjorsá-Tungnaá will be close to 5,600 GWh.

All these six hydropower stations are owned and operated by Iceland’s largest power company; Landsvirkjun. In addition, Landsvirkjun is considering to construct three more power stations in Þjórsá river. Those three stations would have a combined capacity of 265 MW, adding more than 2,000 GWh of power generation per annum.

The Búðarháls Power Station received a positive assessment of environmental impact already in 2001 and construction commenced in November 2010. The electricity from the Búðarháls Station has already been sold to the aluminum smelter of Rio Tinto Alcan in Straumsvík in Southwest Iceland. The smelter in Straumsvík has 40 years successful operating history and the electricity from Búðarháls Station will be used for substantial increase in its aluminum production.

The project at Búðarháls includes a new 6 km² intake reservoir, Sporðöldulón, created with a 2.1 km long dam just below the Hrauneyjarfoss Power Station. A 7 km long 220 kW transmission line will be erected from the new power station to the Hrauneyjafoss line to connect Búðarháls Station with the National Grid.

It is worth having in mind that besides the three additional power stations Landsvirkjun is preparing in Þjórsá, as mentioned above, the company is considering several other attractive hydro- and geothermal power projects. Currently, Landsvirkjun is offering new power contracts that probably are the best offer available in all Europe. The company is offering a fixed real rate of $43/MWh in 12 year contracts.

In addition to the very competitive price, all the electricity Landsvirkjun produces comes from harnessing renewable power sources. No less important is the fact that all the Icelandic power stations are known for their excellent reliability – and the same applies to the Icelandic transmission system. This has been confirmed in numerous international reports, where Iceland’s electricity supply is ranked among world’s most secure (see for example IMD’s and WEF’s World Competitiveness reports).

New Development at Landsnet

The Icelandic electricity grid is highly modern and extraordinarily reliable and the Icelandic Transmission System Operator, Landsnet, is world-renown for its secure electricity supply to its customers. This fact has been confirmed in numerous international reports, where Iceland’s electricity supply is ranked among world’s most secure (see for example IMD’s and WEF’s World Competitiveness reports).

Landsnet owns and operates all bulk electricity transmission lines as well as all main substations in Iceland. The company is owned by four electricity generating companies, where the state-owned power company Landsvirkjun has almost a 65% share.

The total length of the transmission lines is currently close to 3,200 km. The power flow is always illustrated in real time on Landsnet’s website. To meet growing demand, the grid is constantly being developed and maintained at a high standard, which includes rebuilding older lines and adding new ones. The grid is free of serious bottlenecks and there are no permanent system constraints in Landsnet’s grid.

Although Iceland is already the world’s largest electricity producer per capita, the country has substantial hydro- and geothermal resources unharnessed. This includes numerous very economical options, with minimum environmental effects.

According to a special governmental plan for energy (Master Plan for Hydro and Geothermal Energy Resources) several new renewable energy projects can be expected in Iceland in the forthcoming years. This will call for major investments, not only in electricity generation but also in the construction of new transmission lines.

Recently, Landsnet introduced its vision or ideas towards strengthening the grid (as shown on the map above, with the title Next generation grid). However, this is a plan that the company will develop in full accordance with the Icelandic government and its energy policy. It is expected that the Icelandic parliament (Alþingi) will soon vote on the Master Plan, making it clear which new energy- and transmission projects will be emphasized in the coming years.

In addition to the expected build up in the Icelandic transmission system, a high voltage direct current cable (HVDC) is currently being considered between Iceland and Europe. Such a cable would obviously affect the Icelandic TSO. In early July (2012) the Icelandic Minister for Industry, Ms. Oddný Harðardóttir, appointed a working group to scrutinize the feasibility of such a interconnection. Of course Landsnet has a representative in this group, which will look carefully at all the relevant issues, such as the technical, financial, legal and social aspects.

However, the next major step for Landsnet is not regarding the transmission system, but has to do with the electricity market. Within a couple of months, Landnet will be establishing a new efficient electronic market for electricity trading. We at Askja Energy will soon be taking a closer look at this new Icelandic electricity market, that will have strong similarities to for example the Elbas Intraday Market at Nord Pool Spot.

The Iceland-Europe Interconnector

Iceland is currently a closed electricity market with no cable connections to other markets. This may soon change. Technology advancement, strong demand for more renewable energy, and high electricity prices in Europe are making a submarine high voltage direct current (HVDC) cable between Iceland and Europe more feasible than ever before.

Unharnessed Renewable Energy

Iceland can substantially increase its green electric power production at a reasonable cost. Iceland is the only country in Western Europe that still has several large unharnessed hydro power options. Also, Iceland’s geophysical conditions offer numerous possibilities for low cost utilization of geothermal power, and Iceland has stronger and more stable winds than most of Europe.

Some of this natural energy will be harnessed for varied domestic industries, such as new data centers, metallurgical-grade silicon production, etc. Iceland also has the possibility to do business with electric power through a submarine cable to Europe. Such a connection would not only be based on Icelandic hydro- and geothermal power, but would open up the possibility of large-scale harnessing of Icelandic wind power.

Choosing the best Business Model

So far the longest submarine HVDC-cable is the NorNed between Norway and the Netherlands (580 km / 369 miles). The interconnector between Iceland and Europe would be at least double that length, so it will definitely be a challenging project.

Such an  interconnector would not only enable sales of renewable electricity at high prices but also have various other benefits for the Icelandic electricity system, such as more efficient use of the generation capacity and enhance the security of supply. Currently, three scenarios are being studied. The first concerns an interconnector that would be used for export/import only, based on market prices.  The second involves a cable used for export only, and the third assumes an interconnector used in part for export/import and in part for export.

Green AND Competitively Priced

The main drivers behind an electric cable between Iceland and Europe are high electricity prices in Western Europe and the growing demand in Europe for more renewable energy.

According to engineering and management firm Parsons Brinckerhoff and consultancy firm  Mott MacDonald Group, as presented by Landsvirkjun, Iceland’s electricity prices are much lower than can possible be offered by new electricity generation projects in the United Kingdom (UK). This is especially interesting when having in mind UK’s energy policy, with the goal of increasing its renewable energy consumption from the present 54 TWh to 234 TWh no later than 2020.

This goal, which is based on European Union’s (EU) and UK’s energy policy, will only be achieved with major investments in new green energy projects. Those projects will for example include very expensive and controversial onshore and offshore wind farms in the UK. For example, the minimum cost for offshore wind electricity in the UK is equivalent to 233 USD/MWh.

When comparing this to Icelandic renewable energy cost, it is quite obvious that an electric cable between Iceland and UK is an exciting option (Icelandic Landsvirkjun is currently offering long-term electricity contracts at 43 USD/MWh). Thus, it is not surprising that Mr. Hörður Arnarson, CEO of Landsvirkjun, has described the laying of a submarine cable to Europe, together with vigorous industrial development in Iceland, as probably being “one of the biggest business opportunities Iceland has faced”.

The two charts above are from a presentation by Landsvirkjun, given at an energy seminar in Reykjavik in last May (2012).