Tucked away among the Arctic’s ever-shifting jags of ice, hidden from the naked eye, are billions upon billions of dollars in black gold. The Arctic landscape, spanning the Barents to the Beaufort Sea and beyond, is home to a reported 30 percent of the world’s undiscovered natural gas reserves and 13 percent of its oil. Whoever conquers it will lay claim to 1,669 trillion cubic feet of natural gas and 90 billion barrels of oil – almost three times the annual global consumption.
Cubic feet of natural gas
Barrels of oil
Much of the prospective total, according to the US Geological Survey, sits offshore and is up for the taking, provided that those with suitably high ambitions come equipped with the necessary tools, know-how and – most importantly – resources to do so. Although the region accounts for as little as six percent of the Earth’s surface, it accounts for a disproportionately large amount of its resources, and it is this supposed abundance of hydrocarbons that has seen energy companies clamour for the rights to the region’s many opportunities.
“It is only in the last five years that hydrocarbon development has actually been contemplated as a possibility, principally due to technological and navigational advances,” says Trevor Slack, Senior Analyst at risk analysis company Maplecroft. “To varying degrees, Russia, Canada, the US, Norway and Greenland have all increased exploration and development activity on their relevant portions of the Arctic continental shelf.”
The majority of the Arctic countries have granted energy companies licenses to explore offshore reserves, however, the exploration phase is only a fraction of the overall effort required to reap the region’s riches. The difficulties companies face while working in the region can perhaps best be seen in the case of Royal Dutch Shell and the crisis that befell the Kulluk drilling rig late last year.
“What is failure but a bump on the road to triumph?” asked the company on its website soon after the 266ft barge ran aground off the Alaskan coast: circumstances that later incurred an impairment charge of $200m.
The failed expedition constitutes only a slither of the oil giant’s overall Arctic spending, which has so far amassed upwards of $5bn and yielded very little in the way of returns. Despite having introduced an armada of 20 support vessels, chartered well over a thousand dedicated flights, and exhausted $1bn on the project through the last year alone, the Anglo-Dutch powerhouse is yet to complete a single well in the region.
While these circumstances could well be considered a failure of sorts, they could just as easily be seen as par for the course, as the extraction of Arctic oil and gas ranks among the most expensive business opportunities in the world.
“Oil spill risks, high extraction costs, doubts over the amount of commercially recoverable reserves, and a precedent of cost overruns and delays combine to raise questions about the commercial viability of some proposed Arctic projects,” reads a Greenpeace report into Arctic exploration risks. “The drilling conditions facing oil companies operating in the Arctic are some of the most challenging on Earth.”
Risk and reward
The challenges of tapping the Arctic’s resources are quite plain to see, these being a harsh climate, underdeveloped infrastructure, long project cycles, spill containment and recovery risks, and conflicting sovereignty claims, to name but a few. All things considered, the complications have caused some to question whether the investment is actually worth the costs, whether they be financial or environmental.
Total is the first major oil company to publicly denounce offshore exploration in the Arctic, with the company’s CEO Christophe de Margerie expressing fears about the potential damages of a spill: “Oil on Greenland would be a disaster,” he told the Financial Times. “A leak would do too much damage to the image of the company.”
Total’s stance on the matter is very much the exception, however, with various competitors such as ExxonMobil, Rosneft, Eni, Statoil and, of course, Shell, having committed a great deal of time and money to the Arctic endeavour.
Despite previous problems, Shell hopes to resume its work in the Arctic at some point this year, with CFO Simon Henry believing the region to be the “most attractive single opportunity for the future,” as stated in The Telegraph.
However, the company will be subject to far closer scrutiny than before in light of its previous failings. Shell’s return to the Arctic – however delayed – will be watched by environmentalists, whose concerns for the surrounding environment need not be explained, as well as industry rivals, who will be keen to know whether or not the
region’s treasures can be extracted.
Although Shell appears quite intent on exploiting the Arctic’s natural resources, a US appeals court has recently ruled that the Alaskan government acted illegally in granting Shell exploration rights to Arctic waters controlled by the US, which has, in effect, curbed the company’s oil ambitions further still.
The extraction site was sold for $2.66bn in 2008, of which $2.1bn was paid for by Shell, and has since been hotly contested by local and environmental groups, who claim the consequences were ill conceived and its environmental impact sorely underplayed.
Another major player whose progress has been hindered by development costs and other such obstacles is Norway’s Statoil, which late last year expressed concerns about the challenges of exploring and extracting Arctic hydrocarbon reserves.
“Logistical difficulties, regulatory hurdles, jurisdictional tensions, environmental opposition and above all extremely inhospitable climatic conditions will ensure that oil and gas activity in the region remains problematic, complex and expensive,” says Slack.
Many believe the inadequate infrastructure and tumultuous weather conditions, combined with the falling price of oil and gas, to be the perfect storm when it comes to
“Cost is probably the most important factor, with Statoil estimating that the cost of drilling one oil well in the Arctic could be as much as $500m. This is likely to be prohibitive for most companies in the current climate, with some analysts predicting that the price of crude could drop in the medium term.”
Statoil’s Exploration Chief Tim Dodson spoke at a climate change conference last year about some of the issues facing oil companies in the Arctic. “We don’t envisage production from several of these areas before 2030 at the earliest; more likely 2040, probably not until 2050,” he said. “I think what we have to realise is that the challenges our industry faces in the Arctic are at least as significant as we thought they were just a couple of years back, but they’re not insurmountable.”
Edinburgh-based Cairn Energy, meanwhile, has announced that, regardless of having spent over $1bn in the region, it is deprioritising its Greenland operations after not having made a single commercial find as of yet.
Many believe the inadequate infrastructure and tumultuous weather conditions, combined with the falling price of oil and gas, to be the perfect storm when it comes to Arctic exploration. These circumstances mean that short-term financial benefits can only be marginal at best, until stratospheric sums of capital are poured into developing the region.
Charlie Kronick, Senior Climate Advisor at Greenpeace UK, is sceptical. “[It] is impossible to drill safely for oil in the ice covered waters of the Arctic – the potential impacts on local livelihoods and biodiversity are uncostable. It would be literally impossible – for both technical and environmental reasons – to clean up after the inevitable spill, while the level of climate change that would result from successful (in economic terms) drilling there would be catastrophic.”
A report conducted by Lloyd’s and Chatham House found that investment in the Arctic could reach $100bn by 2022, as companies scramble to gain a foothold. “Business activity in the Arctic region is undeniably increasing, and the impact of climate change means that this is likely to grow significantly in the future. But as new opportunities open up, decisions on exploiting them need to be made on the basis of as full an understanding of the risks as possible,” said Richard Ward, Chief Executive at Lloyd’s.
At present, any areas of the Arctic that are unrepresented are being hotly contested by the bordering countries. Regardless, it is crucial that businesses granted permission to work in the region align their goals with those of local governments, communities and the environment, as the territory proceeds to transform. In addition, those partaking in Arctic exploration should put in place strict measures to avoid any environmental disasters, and have procedures in place should the worst case scenario occur.
“The businesses which will succeed will be those which take their responsibilities to the region’s communities and environment seriously, working with other stakeholders to manage the wide range of Arctic risks and ensuring that future development is sustainable,” says Ward.
The Battle for Ownership
The Arctic Circle’s surrounding seas are, according to the 2008 United States Geological Survey, home to about 20 percent of the world’s undiscovered oil and natural gas resources. Ownership of the region has been an ongoing issue for the best part of a century, with Canada first extending its maritime boundaries in 1925, shortly followed by Russia in 1926.
Since then an array of peculiar tactics have been used to assert ownership of the offshore continental shelves which could be stowing away masses of lucrative fuel – from Canada sending Inuit families to the High Arctic in what has been described as the use of ‘human flagpoles’, to Russia sending a submarine to the ocean bed of the North Pole to plant its national flag.
The Arctic Circle borders with eight countries: Canada, Iceland, Denmark/Greenland, Norway, Sweden, Finland, Russia, and the US, and current EEZ boundaries (exclusive economic zones that determine the limits of a country’s exploration rights) already account for possession of the majority of the region, with the disputed area being primarily the North Pole and the continental shelves which surround it.
Only five of the eight countries dispute this area. The responsibility for which continental shelf belongs to which country – if any at all – lies with the United Nations Convention on the Law of the Sea (UNCLOS), an agreement set up by United Nations to determine activity within international waters.
Under rules instigated by UNCLOS, countries can only apply for an extended continental shelf after 10 years of signing up to the Convention. Norway made its extension application in 2006, Russia in 2007, Canada in 2013, Denmark will submit this year, and the US is unable to do so as it has not signed up to UNCLOS. Each country is fighting for ownership by ‘proving’ to the Convention – usually via land mapping – that it is the closest natural neighbour to the disputed areas.
Despite submitting only a preliminary claim in 2013, Canada says it has more to add, including outlining the North Pole as part of its legal territory, with Foreign Affairs Minister John Baird saying Canada needs more time to complete its scientific research.
Canada has the northernmost settlement, Alert, Nunavut, home to a Canadian Forces station and has spent $200m on icebreakers, helicopters, scientists and submarines to acquire the relevant data. It is currently in a long-running dispute with the US over the boundaries of the Beaufort Sea but has so far drilled 90 wells there, and has further experience in the Mackenzie Delta region.
Russia already owns more than half of the Arctic’s total resources, and in 2007 it filed a claim that includes the continental shelf under the North Pole, as well as the Lomonosov Ridge, as an extension of the Siberian continental shelf. In the same year it also sent mini-submarines to plant its national flag on the seabed, 14,000ft below sea level.
In retaliation to Canada’s assertion it would stake claim to the North Pole, in late 2013 President Putin ordered his leadership to increase its military presence in the Arctic as a point of priority, and has built the world’s most expensive ice-breaker, the ’50 years of Victory’ (pictured) for further exploration.
Denmark will file a claim in 2014, declaring it the legal owner of the Great Belt, the Little Belt, and the Danish part of the Sound. As Greenland falls under Danish sovereignty, it will claim the Lomonosov Ridge falls within Danish territory and has the closest coastline to the North Pole. It has spent the last 10 years garnering scientific data in an effort to expand its continental shelf status.
Despite being a part of Denmark, Greenland has been self-governing for 300 years and could use the development of its oil industry to gain full independence from Denmark. It has formed relationships with Cairn Energy, Shell and Statoil as part of this process.
In 2006, Norway filed a claim to extend its EEZ in three areas, the Barents Sea, the Western Nansen Basin and the ‘Banana Hole’ in the Norwegian Sea, and states that it will make an additional submission once it has finished mapping its continental shelf.
In 2010 Norway won a long-running dispute with Russia over ownership of the Barents Sea, with Norway recently acquiring its twelfth production licence, with more acreage becoming available in 2013-2014. Norway has arguably the best infrastructure in place for Arctic drilling, with Statoil operating the world’s most northerly LNG production plant near Hammerfest.
The US has not ratified UNCLOS and therefore isn’t eligible to file a claim. Regardless, the US Coast Guard has sent a team to map the sea floor of Alaska in order to determine its continental shelf. The fact it has not ratified the UN agreement is perhaps the biggest cloud hanging over the dispute, as the US may not recognise any conclusions made by UNCLOS, which could lead to widespread conflict.
With oil exploration already taking place in North Alaska, notably in Prudhoe Bay (pictured), it already has the infrastructure to drill in such conditions. It is estimated that 65 percent of undiscovered oil lies on the North American side of the Arctic.