Oil and gas industry cautiously upbeat on Iceland

By Kristin Arna Bragadottir

REYKJAVIK, Sept 5 (Reuters) - Iceland's plans to offer its first oil and gas exploration licences in 2009 is meeting with cautious optimism from energy executives, even though technical challenges remain and production could be decades away.

At an exploration conference in the Icelandic capital this week, the remote Atlantic island published new seismic data suggesting oil and gas resources under its seabed and tried to gauge interest in an upcoming licensing round.

"This will be a technological challenge and will take quite some time until production begins... but I am more confident now that there is oil to be found," Kristinn Einarsson, oil search production manager at Iceland' energy authority, told Reuters.

Production could begin in the 2020s, said analysts, if further exploration is encouraging and the right technology is found to exploit oil and gas from the icy Arctic waters off Iceland, where about 100 exploration licences will be offered.

The licences will cover 40,000 square kilometres (15,000 sq miles) of seas in the Dreki area, some 330 km (205 miles) northeast of Iceland and south from Norway's Jan Mayen Islands.

Iceland hopes geological studies which suggest the region near Jan Mayen is similar to areas near Greenland, where hydrocarbons have been found, will trigger investor interest.

"The conference gave a very good image of the problems we faced here -- the main concern is probably to really understand ... the Jan Mayen and Greenland (connection)," a geologist from French major Total (TOTF.PA) told Reuters.

"If we manage to do that properly, I think there will be a lot of interest in this area from the bigger companies," said the geologist, who asked not to be named.

"It has to be discussed internally of course at Total if we will bid for licenses, especially with the technical problems we would be faced with," he added.

DEEP, HARSH WATERS

Norway's StatoilHydro (STL.OL), which has expertise in production in harsh Arctic conditions, also said it would need to evaluate Iceland's prospects before making a final decision, adding that there was a "good chance" of oil and gas deposits.

"We don't know how big these structures may be and that might be a problem because, if you're in deep water (and) in a remote location, you really want something big to go for," StatoilHydro Exploration manger for Europe, Gareth Allinson, told Reuters.

The salt layer under the seabed presented an additional problem for companies, as did the lack of infrastructure.

Potentially high exploration costs and technical challenges derailed Iceland's previous attempt to open its offshore waters to oil and gas activity, but oil prices were much lower in the 1980s and exploration know-how less advanced.

"A lot has to be done still before production drilling could be started... probably not be until 2020," Jan-Egil Arneberg, an executive from Bayerngas' Norwegian unit, told the conference.

Iceland seeks to start the licensing round on Jan. 15, 2009 and set a deadline for applications on April 15. The licences are expected to have a duration of 12 to 16 years and, following any successful exploration, production for up to 30 years.

Norway may participate with 25 percent share in exclusive licences in part of the offered areas near its waters.

Oil companies would pay Iceland's normal corporate income tax rate, set to fall to 15 percent in 2009, and a progressive tax depending on production and oil prices which would top out at 40 percent of total revenues, Icelandic authorities said. (Writing by Wojciech Moskwa in Oslo)