The exploitation of oil and gas reserves in the Arctic is not new. Onshore exploration started around a century ago when geologists from Shell first examined Alaska’s potential for oil extraction. Since then, more than 400 exploration wells have been drilled in Arctic waters, while combined onshore and offshore projects have produced more than 25 billion barrels of liquids and 550 trillion cubic feet of natural gas. That includes developments in far north areas of Alaska, Canada, Norway and Russia.
Over that period, Arctic onshore projects have largely dominated. However, in the past three decades, interest in expanding operations into the Arctic offshore has grown significantly. That interest has been driven by several factors: improvements in technology, increased industry experience (e.g. from operating in the sub-Arctic yet still icy waters around Sakhalin and Labrador), new geological assessments (in 2008, the US Geological Society estimated that 13% of the world’s undiscovered oil and 30% of the world’s undiscovered gas deposits lie north of the Arctic Circle), and a rising oil price.
Given that potential, the Arctic is not easily ignored, and indeed, several oil majors (e.g. BP, ExxonMobil, Shell, ConocoPhillips) and some state oil and gas companies (e.g. Gazprom and Statoil) were, for more than a decade, all building-up their Arctic exploration portfolios by acquiring licences and entering into joint ventures.
Moreover, wider public interest in the competition to secure acreage produced hyperbolic commentary in the media about a ‘race for resources’ and the perceived possibility of violent inter-state conflict – commentary which largely ignored the prevailing international legal order, as well as the fact that most of the accessible resources lie within the existing national jurisdictions of the eight Arctic states.
However, more recent events suggest that the massive potential of offshore Arctic oil and gas is something which will be difficult (and perhaps even impossible) to realise in an environmentally sustainable and cost-effective manner.
Today, Arctic oil and gas prospects are caught up in what Robert Blaauw described as a ‘perfect storm’ of economic and political forces. Between March 2012 and January 2016, the global price of Brent Crude fell from a post-global financial crash peak of $128 per barrel to less than $40 per barrel, before stabilising at around $50-60 per barrel. That has had enormous implications for many Arctic offshore oil and gas projects, which generally require a price of
$60-$100 per barrel to be worthwhile. The industry expectation is that the oil price is unlikely to rebound any time soon.
In 2014, economic sanctions imposed on Russia by the United States and European Union deliberately targeted Russia’s ability to develop new Arctic offshore oil and gas fields, instantly blocking further progress of an Exxon-Mobil/Rosneft Joint Venture, that had just made a large discovery in the Kara Sea.
In 2015, the international community reached the first-ever universal and legally binding global climate agreement in Paris. That agreement set out a global plan to put the world on track to avoid dangerous climate change by limiting global warming to below 2°C, primarily through rapid reductions of greenhouse gas emissions. That in turn has brought into question long-term demand for fossil fuels, especially coal but also oil. New Arctic projects are likely to have an end production horizon well beyond 2050 meaning their full value may never be realised if global climate targets are to be met.
In 2016, then-US President Barack Obama, and Prime Minister Justin Trudeau of Canada announced drilling moratoria in Arctic waters.
These developments have only exacerbated existing difficulties relating to the costs of operating in extremely hostile environmental conditions, and under strict government regulation and public scrutiny. Carole Nakhle and Michael
Bradshaw also emphasised the game-changing effects of the shale gas revolution in North America, which preceded the above events by some years, driving down the global gas price and putting an end to at least one Arctic LNG megaproject (the Shtokman field in the Russian sector of the Barents Sea).
One exception to the trends outlined above is Norway. While Norway has long been recognised as an Arctic state, the ice-free waters of the north Norwegian Sea and the Barents Sea, combined with the maturity and experience of Norwegian operators, and preponderance of existing infrastructure, means that the prospects of oil and gas development there must be situated in a different context to much of the rest of the Arctic. As Geir Seljeseth noted, one of the challenges facing Norwegian Arctic oil and gas projects is that they tend to be included in decisions about the ‘Arctic-as-a-whole’ which are relevant mostly to the ‘white’ Arctic, rather than the ‘blue’ (i.e. ice-free) Arctic.
Consequently, while projects in other parts of the Arctic struggle to break even if the global oil price is below $60-$100 per barrel, there are projects in the Norwegian Arctic which have a lower break-even point. For example, Statoil has recently claimed that the break-even point for the Johan Castberg oil field in the Barents Sea could be below $35 per barrel, although others are sceptical of that claim. That’s largely because the production conditions in the ice-free waters of the Norwegian High North are no more challenging than those faced further south in the Norwegian Sea and the North Sea. Oil and gas development is also generously supported by the Norwegian Government tax system, which encourages investors to take on the exploration risk that is shared by the Government. Furthermore, Norway has established, predictable, and long-term markets in the UK (to which Norway provides 30% of primary energy imports) and the rest of the EU, although for Norway to sustain current levels of supply it has to be producing from new acreage in the Barents Sea after 2025.
Under current market conditions, there appear to be few commercial reasons to invest in oil and gas projects across much of the Arctic offshore, especially the so-called ‘white Arctic’ where the ongoing presence of sea-ice poses particularly expensive challenges. Moreover, although fossil fuels will continue to play a dominant role in the global energy mix over the next couple of decades. In line with the below 2°C climate target, the share of fossil fuels in the energy mix must, according to the International Energy Agency’s 450 Scenario, fall to around 58% by 2040. Within that, the onus will be on reducing primarily the use of oil and coal, which, when burned, release more carbon dioxide than gas.
Barring any significant technological breakthrough, much of the offshore Arctic is likely to remain the most expensive place to develop oil and gas reserves. Even in Russia, where the continental shelf is seen as vital to the future of the Russian economy, the offshore Arctic is ‘last in line’ for investment, as a global oil price of at least $80 per barrel is needed to break even. As Carole Nakhle observed, there is a long history of investor interest in the Arctic being undercut by cheaper and more easily accessible alternatives, and with new shale and other low cost projects (e.g. Iran, Iraq, Mexico) coming on stream, major companies are again bypassing the Arctic offshore.
Yet some niche opportunities will remain, especially in the onshore Arctic. Russia has already switched its attention from the Russian continental shelf to frontier projects onshore and it has significant untapped tight oil reserves. The massive onshore Yamal LNG project is due to commence production later this year, with the potential to supplement both European and Asian gas markets. In Alaska, there have been several significant discoveries by smaller operators onshore, development of which faces fewer restrictions. Some strategic investment might also be seen, driven by concerns about energy security (much of the cheap oil and gas is being developed in geopolitically fragile or conflict-ridden parts of the world), especially if supply lines are tested. New Arctic offshore projects are likely to be developed in Norway, the only Arctic state currently where such activities are economically feasible.
Overall though, given the socio-economic and political realities, the challenges facing large projects in much of the Arctic look insurmountable, at least for the foreseeable future. That in turn could diminish longer-term prospects for oil and gas development in much of the Arctic, especially if cheaper oil and gas continues to be produced in other parts of the world, and if the international community remains committed to the low carbon energy transition needed to meet its climate change targets agreed in Paris in 2016.
This briefing paper was prepared by Dr Duncan Depledge for the All-Party Parliamentary Group for Polar Regions.
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This is not an official publication of the House of Commons or the House of Lords. It has not been approved by either House or its committees, nor does it represent the views of the All-Party Parliamentary Group for Polar Regions.