The region that lies north of the Arctic Circle accounts for only about 6% of the Earth’s surface area but could account for as much as 20% of the world’s undiscovered recoverable oil and natural gas resources.
The existence of these hydrocarbon resources has been known for decades, but only recently has the opening to full-scale resource development and navigation become technically and economically feasible.
In 2008, the US Geological Survey (USGS) released the first wide-ranging assessment of Arctic oil and gas resources, estimating the region’s undiscovered and technically recoverable conventional oil and natural gas resources.
The USGS assessment concluded that approximately 90billion barrels of oil, 1,669trillion cu.ft of gas, and 44billion barrels of natural gas liquids (NGLs) may remain to be found in the Arctic.
Most critically, these high-cost and high-risk resources are increasingly commercially exploitable and affordable, given the current and expected prices of oil.
Challenges to Arctic resource recovery
Arctic resource development is both high-cost and high risk. More specifically, the major challenges include:
o Harsh climate: The intense cold for much of the year will take a huge toll on equipment and personnel.
o Limited existing infrastructure: New “greenfield” development will be very expensive and carry large environmental risks.
o Gas-on-gas competition: The booming global gas supply, both from conventional and unconventional sources, will challenge Arctic gas development.
o Exceptionally long project lead times: With the drawn-out timelines, the risk of cost overruns increases dramatically.
o Spill containment/spill recovery: Both from a planning and equipment perspective, containment/recovery contingencies will be both different and more difficult compared with “conventional” as well as other “frontier” develop projects, due to both climatic and logistical considerations.
o Overlapping/competing economic sovereignty claims: There are substantial political and jurisdictional issues with the 1982 UN Convention on the Law of the Sea which set seemingly conflicting rules for sovereignty claims, particularly for the Arctic seabed that may or may not be an extension of a continental shelf.
o Country-specific environmental laws/regulations: Country-specific action may restrain or constrain Arctic development and/or further complicate the economic sovereignty issues (for example, the US ban on Arctic National Wildlife Refuge development, or the environmental challenges to Arctic drilling plans). There are also increasing protests and objections from NGOs, noting that the Arctic environment is a unique ecosystem and warning of potential irreversible ecological chain reactions.
Recent area activity and perspectives
Russia
Russian Arctic opportunities may in fact be the big prize. Over the last few years, Russia has intensified the development of the vast hydrocarbon resources of its continental shelf, through state incentives aimed at stimulating offshore oil and gas production.
Moscow is also completing development of the state programme on exploration and development of mineral resources of the Arctic continental shelf for 2012-30.
20 major hydrocarbons provinces and basins have been discovered on the Russian shelf, 10 of which have proved reserves.
The only companies currently allowed to receive new licences to explore Russia’s continental shelf are Gazprom and Rosneft who hold the majority of licences (29 and 16 respectively), mainly located in the Okhotsk, Kara and Barents Seas.
Canada
Canadian geologists long believed that the Arctic north had significant potential for petroleum discoveries and exploration interest in the Canadian Arctic offshore has increased in recent years.
Six significant discovery licences were issued in 2007 and 2008 to three companies exploring in the Beaufort Sea, and there has also been an increase in the number of active exploration licences issued in the Mackenzie Delta-Beaufort Sea region.
Following a regulatory update on oil and gas drilling regulation in the Canadian part of the Arctic Beaufort Sea, industry heavyweights Chevron and Statoil have joined forces to explore leases in the area this year.
Greenland
Sparsely populated Greenland is geographically part of the North American continent, but geopolitically, part of Europe. Nationally, Greenland is part of Denmark, but is a self-governing colony following 300 years of Danish rule.
Oil exploration in Greenland dates back to the late 1970s, but when Cairn Energy discovered hydrocarbons in 2010, Greenland awarded its first offshore oil and gas exploration licences to oil companies, opening up this Arctic frontier to future oil and gas production.
While the Greenlandic Government welcomed the Cairn discovery and the results of its first licensing round, Greenpeace, the international environmental group, embarked upon an aggressive campaign to stop any more exploration in the area dubbed “Iceberg Alley.”
Norway
The Norwegian Government’s overall aim for the oil and gas sector is to ensure full exploitation of NCS resources within acceptable environmental limits.
The Norwegian authorities opened the Barents Sea in the Arctic for exploration in 1981, and Statoil discovered the huge Snøhvit gas fields that same year.
Expansion of the Barents Sea province is set to be a key focus in the coming years; Norway’s 21st licensing round saw 12 production licences awarded in the Barents Sea, on equal footing with Norwegian Sea licences and confirming significant levels of interest in the area. The resolved border delineation between Russia and Norway will see more Barents Sea acreage become available in 2013-14, pending parliamentary approval.
United States
The Alaskan Arctic is estimated to hold about 65% of the undiscovered Arctic oil and 26% of the undiscovered Arctic natural gas.
In mid-February 2012, after approval of its spill contingency plan was received from the Department of the Interior’s Bureau of Safety and Environmental Enforcement, Shell planned to begin drilling in the summer of 2012, but drilling has been postponed to summer 2013.
Future Operations?
There is huge potential as well as risk associated with operations in the Arctic and the industry must prove that the Arctic can be drilled and developed safely. These operations are clearly on the outer limits of the both safety and commercial viability and a spill or accident there would be catastrophic. The economics of Arctic development are also looking forward to even higher oil prices which may or may not happen in the near term.
Geopolitics will play a critical role, as countries with varying interests seek control through regulation as opposed to diplomatic co-operation. In such an environment, the massive long-term investments and commitments required to develop these resources are unlikely to be forthcoming, or at least limited.
Colin Pearson is a tax partner at Ernst & Young, Aberdeen
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