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Arctic Extraction Has Huge Potential but High Risks

The Arctic was once of interest only to polar scientists and adventurers, but this is rapidly changing as a warmer climate is making the region increasingly accessible for resource extraction. Some studies estimate that the region contains close to a quarter of global unexplored petroleum resources, as well as substantial mineral reserves, including massive deposits of crucial rare earth metals in Greenland. Most of the region is already carved up, with the exception of the area around the North Pole itself.

What is sometimes called a new “scramble for the Arctic” is rather a technological and logistical challenge of exploration, extraction and transportation. The harsh climate and remote location makes any polar venture expensive, commercially risky and technologically complicated, and contributes to profit margins that are highly dependent on marked prices and uninterrupted progress.

The interests at stake

As exploratory drilling on the Arctic seabed is costly, reliable estimates on the total energy reserves are rare and uncertain.

Related Article: This Under-Developed Coast is Energy's Next Thing

The region is already important for the petroleum industry. In 2010, 10% of global oil production and 22% of natural gas production came from here. Russia is predicted to have the largest unexplored reserves (41% of total arctic oil resources and 70% of total natural gas resources), ahead of Alaska (28% of oil and 14% of gas) and Greenland (18% of oil and 8% of gas), leaving smaller but still significant deposits in Canada and Norway. Importantly, most undiscovered resources are presumed to be offshore, necessitating huge investments for exploration, drilling and infrastructure to make the projects commercially viable.

The situation is equally uncertain for the mining industry. Norwegian and Russian miners have for decades extracted coal from Arctic islands, such as the Svalbard archipelago, but little serious development until now has taken place, hindered by freezing conditions, little infrastructure and massive operational costs.

Sustained high commodities prices have encouraged companies to pursue gold, diamonds, iron, lead, zinc and uranium deposits in Arctic regions. Northern Canada saw a boom in the last decade, with exploration investments in Nunavut increasing tenfold from U.S. $30 million in 1999 to U.S. $325 million in 2011. Development has already started on the huge Mary River iron ore deposit on remote Baffin Island, which is believed to be among the biggest iron ore deposits in the world, but large infrastructure requirements have hampered progress.

More attention has been given to the discovery in Greenland of massive deposits of rare earth metals, a crucial component for high-tech industries. The U.S. and other economic powers have long been troubled by Chinese near-total hegemony in this industry, controlling 95% of global supply. As Greenland is slowly thawing, prospectors from several countries are spending billions of dollars on potential mining projects on the island.

Technological and climatic challenges

The Arctic is arguably among the world’s most challenging places for commercial development. The harsh climate presents a key obstacle for any industrial activity, which requires special equipment to withstand the freezing conditions. The icepack is a key concern for offshore facilities and can prevent transportation of materials, personnel or fuel for long periods of time, adding to the operational costs. The lack of infrastructure – as good as non-existent in Northern Canada – creates long supply lanes and complicates the transportation of extracted resources to global market. Inhospitable conditions and lack of qualified local personnel forces companies to offer huge wages to recruit staff that are willing to work in the remote Arctic.

A warmer climate is also becoming increasingly problematic for land-based drilling operations by extending the summer season. The layer of soil above the soil turns the ground into marshes during the short summer, when expensive helicopter lifts are the only available means of transportations.

Large investments depends on stable market prices

Operations in the Arctic are highly dependent on global commodity prices in order to be profitable, underscored by the decision to postpone development of the significant Shtokman gas field in the Barents Sea. Unlike oil which can be pumped directly onto tanker ships, natural gas requires expensive pipelines or processing at LNG facilities for transportation to the global market. While global gas prices have fallen largely as a result of the shale gas revolution in the US, the Russian-owned project became unprofitable and was put on hold for an indeterminate time.

Related Article: Can the United States Rule the (Energy) World?

According to a recent Norwegian study, high capital and operational costs will seriously restrict development of potential projects for decades to come. While Arctic oil production will double by 2050, Arctic natural gas production declines until 2030 before reaching the current levels again in 2050. Not until after 2050 will extraction of undiscovered offshore gas reserves beneath the surface become economically viable and start to affect global energy supplies.

A very slow rush to the North

Natural resources in the Arctic could attract more than US $100 billion in investments within a few years. Yet while the far north has become a hot topic for investors and politicians alike, the rush to extract resources is likely to be a slow and unpredictable process. As the Deepwater Horizon accident showed the potential consequences of Arctic oil exploration, American officials are reviewing their policies for drilling off shore from Alaska. Global energy demand is guaranteed to undermine any environmental concerns, but for now, the Arctic is decades away from serious natural resource exploration.

By Havard Bergo

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