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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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Should Arctic Oil Be Kept Underground?

Unless the remaining days of December surprise us with a world-beating hydrocarbon discovery, 2019 will go down as one of the weakest years on record in terms of new oil additions. Conventional oil and gas discoveries have fallen to a 70-year low and unconventional failed to impress, too. Under circumstances like this, oil companies continue to focus on the low-hanging fruits – focus on drilling in acreage adjacent to existing infrastructure or prioritize short-term low-reserve shale reserves which do not necessitate such long-term commitments. The Arctic, reported to contain around 1/6 of the world’s undiscovered oil reserves, might provide the solution – if only Arctic countries were not bound to turn away from it.

As Norwegian oilmen celebrate the successful commissioning of the Johan Sverdrup field, truly a milestone in the country’s turbulent 21st century path, there several signs which foretell a much more troublesome future for anyone who would like to drill in cold Arctic waters. As deliberation within the United States rage on whether the Alaska National Wildlife Refuge should be opened up for drilling, thus reenergizing the state’s waning output, other countries with their continental shelf extending into the Arctic seems to move in the opposite direction. Canada has a drilling moratorium in place until 2021 and most probably will extend it by another 5 years, Iceland has given up after some initial advances, whilst external conditions compel Norway and Russia to shift their focus elsewhere.

It is one thing to find a commercially viable solution for the far northern powerful winds, sea ice, drifting icebergs and complex geology, yet Norway’s exploration prospects took a heavy blow even before oilmen could start cracking the Arctic’s code. Despite the Norwegian part of the Barents Sea remaining the most active zone of the Arctic in terms of drilling and appraisal, new projects will find it ever-harded to come onstream. Take the Lofoten archipelago, believed to contain some 3.4 Bbbls of oil equivalent – first the Conservative Party and now the Norwegian Labour Party have forgone their support for drilling around the islands as public support for Arctic drilling recedes among the Norwegian populace.

Alright, one might say, Norway still ought to have ample reserves in the Barents Sea, which thanks to the warming of the Barents Sea might be easier to extract than previously expected. Yet 2019 witnessed repeated rounds of public protests against drilling in the Barents Sea, fortified by the Norwegian government announcing its intent to hold another licensing round which would involve as much as 46 exploration licenses in the above maritime zone. Climate change has also sparked discussions whether the “ice edge”, i.e. a virtual threshold beyond which companies should refrain from oil drilling, should be moved northwards as the Arctic’s ice cover melts at an increasingly higher pace or whether the government should fix the current no-go zone for everyone. Related: Oil Rises On Large Crude Draw

The bad reputation of Arctic exploration and production was to a significant extent boosted by the travails of Goliat, one of the first major projects in the Barents Sea. Although a pioneer in its field, Goliat was not the first Barents Sea field per se as the Snøhvit gas field was brought onstream 10 years before, however the latter’s focus on LNG has shielded it from several problems that the oil-centered Goliat continues to experience. The 190Mmbbl field, located some 50 miles northwest from Hammerfest, has seen a string of false alarms and subsequent evacuations, deficiencies in the field’s electricity grid etc., fueling concerns that oil production in the Arctic is inevitably linked to some sort of operational danger.

Given Russia’s somewhat ambivalent stance on the environmental impact of Arctic drilling, other factors come into the foreground – among others the arguably most important one, cost efficiency. When Russia’s 2035 Energy strategy was drafted, hope was still high that Arctic will become one of the nascent oil frontiers; the Arctic offshore was expected to wield 660kbpd of oil by 2035, ten times more than currently. Yet today that prospect seems to be as far from reality as possible, with the costs of Arctic drilling still hovering above $100 per barrel. This irks Russian energy officials – at the end of the day it is very bad politics to renounce the commercialization of some 130 billion barrels of oil and condensate in the Arctic. Related: Russia’s Latest Energy Power Play

Why should Russia give up on it, you ask? A triple whammy of problems – international sanctions, no consensus on who should lead the Arctic drive and availability of other options. Solving the sanctions issue might turn out to be the easiest factor in the end – the Arctic partnerships with ExxonMobil, Equinor and ENI were not ground to a halt because the relevant companies wanted but because governments insisted so. As the geopolitical scene tires itself of all the confrontation along the Washington-Moscow axis, change might not be that unrealistic. Yet than the other factors come into play – non-state companies are disallowed from drilling in the Russian Arctic as it is deemed a strategic object (the last state attempt to assess the Arctic’s hydrocarbon bounty was in 2012, the companies have been shying away from the task since).

This summer the Russian oil sector has seen a sudden flare-up of polemic after Deputy Prime Minister Yuri Trutnev proposed to create a new state oil and gas company that would be focusing exclusively on Arctic objects. The argument went that Rosneft and Gazprom clearly do not care about the Arctic’s timely development, having only drilled 5 exploration wells this decade (i.e. 13% of what was promised). However, the idea was quickly put aside – there are no top-ranking officials to lobby it and thus square off against the state companies, moreover the costs of lifting and especially importing foreign (oftentimes US-sanctioned) drilling equipment is unduly high. Thus, the future of Russia’s upstream will lie in enhanced oil recovery and shale.

Climate change seems to bring about a permanent shrinkage of Arctic ice covers and might also make wind conditions more moderate, effectively alleviating some of the main concerns that drillers confront today. On the other hand, our current possibilities in terms of risk mitigation remain limited – as most of any oil spill recovery would be generally done by oil-eating bacteria, the Arctic does not allow for a standard clean-up operation. There are virtually no waves under the ice, therefore oil dispersion is a much bigger issue than under normal conditions, not to speak of the low sea nutrient levels and increased viscosity levels in icy water. Despite all the ice melting, this will not change anytime soon, plaguing new Arctic projects in the future.

By Viktor Katona for Oilprice.com

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  • Mamdouh Salameh on December 29 2019 said:
    The one essential factor that will determine whether Arctic oil resources be kept underground or developed is the oil price. The Arctic is one of the very last frontiers for oil with an estimated 130 billion barrels (bb) of oil and condensate under its ice.

    Horrendous weather conditions in the Arctic make it a very harsh environment for oil companies to operate and costly to produce oil once found.

    With Arctic drilling hovering around $100 a barrel, oil prices have to rise beyond $100 to make it worthwhile for drillers. However, the Arctic's vast oil and gas reserves are expected to become more accessible as climate change melts the ice and technology advances.

    Yet, Russian oil and gas companies are already operating in the Arctic. For Russia the Arctic is where it hopes to discover enough oil reserves to be able to replenish depleting oil reserves in Siberia. Only state-controlled Gazprom and Rosneft are currently authorized to operate on Russia's Arctic shelf.

    Russia is reported to have more than $8 trillion worth of untapped oil and gas in its sector of the Arctic. It could, in a few years, add more than 1.5 million barrels of oil a day (mbd) to Russia’s current oil production of 11.2 mbd thus consolidating Russia’s position as the top oil producer in the world.

    Still, the Russian energy giant Novatek has achieved spectacular success by producing LNG in its northernmost industrial facility on the globe: Yamal LNG, a $27-billion liquefied natural gas (LNG) plant in the middle of frozen nowhere.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Lee James on December 29 2019 said:
    Thank you for this article on the prospects of Arctic oil extraction. I've wondered how difficult it is to mount oil operations in the Arctic. Sounds challenging, and as much as Russia has wanted to go there, maybe Arctic operations will be deferred.

    Hopefully the cleanest oil will be the world's focus, and the dirtiest oil will wait, in some cases, forever.

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