Massive cost, forbidden terrain and unimaginable reward—this is the Arctic, where interest has waxed and waned over the past decade, but a flurry of activity from unexpected quarters is bringing back online. This time we can expect a coordinated, multi-national interest.
For all intents and purposes, we have global warming to thank for the renewed interest that has catapulted the Arctic to the top of a handful of national oil and gas agendas. But there is also the fact that the Arctic is estimated to hold around 13% of the world’s undiscovered oil and 30% of its undiscovered natural gas—all buried in frozen, forbidden terrain.
The list of countries interested is not what one would expect: Aside from the obvious, it includes India, China, Japan, Singapore, South Korea and Italy.
This has all culminated in the formation of what is now called the Arctic Council, which serves as an intergovernmental body to address oil and gas exploration and exploitation and includes all of the above-mentioned countries as either members or with observer status.
The European Union, desperate to become less dependent on Russia, is also eyeing a seat on the Arctic Council, but hasn’t been granted one yet.
US interest is also picking up—but it’s a “quiet” subject in Washington compared with the power corridors of other countries on the Council. There have been a number of high-level meetings on the Arctic. In fact, the Council will be chaired by the US for two years from 2015. The result of US interest has turned out a 66-page report outlining a coordinated approach to managing the oil and gas assets of the Arctic, from homeland security to scientific research. Even the US Coast Guard is gearing up for intervention with plans in the works to build more ice breakers.
For Russia, this is a major agenda-topper and numerous conferences on the issue are addressed personally by Russian President Vladimir Putin—it’s not left to the lower ranks. And Russia is the clear leader in ice breakers, without which nothing can proceed.
And for the more surprising Arctic Council board members, the competition to see who is paying more attention to Arctic potential is stiff. Singapore has its own Arctic ambassador, who is very busy these days lobbying for space to set up a “global harbor”. China is furiously building ice breakers to compete with Russian numbers, and is gearing up to challenge Russia in terms of the pace of scientific research.
What has intrigued us most in the past couple of months is the effort by Russia, Finland and Norway to create a fund for investment in the Arctic Barents in order to tap into all that oil and gas, in accordance with the long-standing “Barents Euro-Arctic Cooperation Agreement.” The money for the common fund would come from Russia, the European Investment Bank and the Nordic Investment Bank.
This is the first time we have heard talk about coordinated financing.
The Frozen Potential
Let’s break down the overall estimate that the Arctic holds 13% of the world’s undiscovered oil and 30% of its undiscovered gas …
The Barents Sea has been estimated to hold as much as 7.9 billion barrels of oil equivalent. Norway’s portion of the Barents Sea alone is believed to have around 6 billion barrels of oil and gas.
The real movers here are Norway and Russia, and they are largely undaunted by the massive challenges.
On the northern coast of Siberia, Russia is working on a 16.5 million ton/year LNG facility (Yamal), in partnership with Novatek and Total. They are hoping for year-round transportation on an ice-heavy sea route. Russia’s Rosneft and ExxonMobil are also planning to jointly explore 150 million acres off Russia’s northern coast.
The technical challenges are daunting, but increasingly possible to surmount if the funds are there. Russia’s Shtokman project, for instance, is 600 kilometers offshore and getting at the assets means traversing waters littered with massive icebergs.
For Norway’s Arctic Barents Sea exploration is a bit easier because it’s primarily free of ice, though that’s not a certainty. But Statoil and its partners are hitting this hard. Companies will drill some 12 (or more) wells in Norway’s Barents this year alone. That’s as many or more than the past two years combined. Statoil will spend $13.8 billion to develop only two of its finds in the Barents Sea—Skrugard and Havis—including an oil terminal and a 280-kilometer pipeline connecting its fields.
The past few months have seen Norway become particularly ambitious.
We will now see the Norwegian government open up exploration in the southeast Barents that may hold another 1.9 billion barrels of oil equivalent, thanks to the 2010 resolution of a territorial dispute with Russia.
On 12 June, Norway granted 29 companies 24 new licenses to explore and drill off its coast, largely targeting the Barents Sea area. Statoil, Royal Dutch Shell, Total, BP and ConocoPhillips were among the heavyweights that won these licenses. Statoil won seven exploration licenses and 3 operational licenses. This comes on the heels of a major discovery for Statoil in the North Sea of between 40 and 150 million barrels of oil (recoverable). The company is increasingly ambitious in the Arctic, having completed six exploration wells in the first quarter of this year alone. (This licensing frenzy, though, is somewhat dulled by Norway’s plans to increase oil taxes).
The second week of June saw Norway get even more ambitious, moving to allow offshore exploration in another massive offshore border zone that is about the size of Switzerland. This is a particularly sensitive area for Norway and the environmental opposition is high because it’s moving even closer to the North Pole. But the government is willing to take the risk for the potential here. The problem is that this area is largely covered by ice and Norway has traditionally not allowed drilling in ice-covered waters due to the potential for accidents. The legislation that would allow drilling has moved passed the drafting stage and is being submitted by a parliamentary committee. If all goes as planned, the legislation will be adopted the third week of June. While the ice has largely melted since a deep freeze in 2003, the concern is that another rough winter could see it return. According to the draft legislation, limits would require that drilling take place at least 50 kilometers from the edge of the ice.
Overall though, there have been some very expensive and very promising stops and starts over the past decade:
• ConocoPhillips puts it plans to develop a landmark ice-class Arctic rig with Keppel on hold and has also shelved plans to drill in the Chukchi Sea in 2014
• Russia’s Gazprom has seen a series of delays in its offshore Shtokman project in the Russian Barents
• Shell’s Alaska plans have been put on hold since its rig ran aground late last year
• Statoil and Total shelved expansion plans for the Snohvit field last year due to lack of gas
Interest in the Arctic will continue its ups and downs for the foreseeable future. The Arctic is a sensitive place, and it only takes one upset to set things in temporary reverse motion.
When Shell’s drillship ran aground in Alaskan waters on 31 December 2012, we saw an immediate panic over the Arctic and a snowball effect. The first thing it did was shine the spotlight on Shell’s massive Arctic expenditures of $4.5 billion, with nothing to show for it. It also saw Shell postpone its plans to drill off the coast of Alaska this year. Whether it will return to Alaska as planned next year is still unclear. This affected investor confidence in the entire Arctic, not just Alaska, even though there was no oil spill and no real damage.
This is part of the reason why the Arctic is not high on the US national agenda, and why Washington is avoiding the burden.
So while the issue is one that no one wants to talk about openly in the US, it’s gaining ground elsewhere in the world now that the Shell incident has faded into the background a bit.
While global warming is unblocking some of the ice that will make accessing the Arctic’s oil and gas largesse more feasible—and open up transportation routes--it is also global warming that will be an eternal problem for exploration and development. So climate change in the Arctic will be both a bonanza and a burden, as unanswered questions remain about how oil drilling could potentially hasten this. The pace of climate change is amplified in the Arctic.
Bottom Line: The Game is Still On, but Don’t Expect an Oil Boom Yet
Quite simply, global warming and new technology are causing a re-think about Arctic potential, just as new drilling technology did for the US shale boom. All of the Arctic’s sea ice is expected to melt completely, every summer, beginning around 2050 or sooner. This will pave the way for full-on oil and gas drilling—but it won’t happen without a major legal battle.
That the US has not put the Arctic on the top of its agenda and seems to be sitting back while other countries pursue this aggressively can largely be attributed to the domestic shale boom that makes the prohibitive costs of the Arctic less appealing. While the Arctic countries have an obvious interest in developing this forbidden territory, it’s the shale have-nots who comprise the other flank in this game. For the US, we shouldn’t expect any major uptick in Arctic interest while there is still believed to be many shale plays that have not even been pinned down. Of course, should anyone start making significant progress in the Arctic, strategic positioning will force Washington to re-evaluate the forbidden territory.
Companies such as Shell, BP, Rosneft, ExxonMobil and others are venturing into the Arctic. Countries are sending ships, for the first time, through the newly opened central route, linking Asia with markets in Europe, the US and beyond.