High commodity prices, receding ice and better
technology are spurring a hunt for Arctic resources
Jun 16th 2012 | from the print edition
IN WAINWRIGHT, A tiny village on the Alaskan shore of the Chukchi
Sea, scientists from Royal Dutch Shell recently drew a small crowd of
Eskimos to the school gymnasium to hear about the company’s
summer plans. Between July and October, Shell hopes to drill three
exploratory wells in its Burger prospect, 100km offshore of
Wainwright. Having found oil and gas there in the 1980s, it is
confident it will do so again. Oilmen are usually cagey; the chances of
finding commercial oil in a well-charted prospect are around one in 20.
But Shell, which in 2005 and 2007 paid $2.2 billion for exploration
licences off the shore of Alaska, believes the Burger is a whopper.
“This is a big year for the Arctic,” says its regional chief, Robert
Blaauw.
That could breathe new life into Alaska’s flagging, mostly onshore, oil
industry. Merely to maintain pressure in the Trans-Alaska pipeline,
now operating at less than a third of its capacity, requires a big new
find. It would also affect Wainwright: to move crude from the Burger
prospect to the Trans-Alaska pipeline, Shell would build a 650-km
feeder pipe that might run close to the village. Hence the mission to
woo the locals.
Shell’s scientists described their precautions against oil spills, which
are far more stringent now than they were before the 2010 Deepwater
Horizon leak. Shell has a capping stack—the sort of bespoke metal
plug that stopped that giant spill—ready and waiting. It will also have
22 vessels in the Arctic. Yet the scientists talked more about their
extensive work on the local wildlife and archaeology, which involves
150 researchers and has cost the firm $60m so far. ConocoPhillips and
Statoil, which also plan to drill off Alaska, together have chipped in
another $30m or so. A good chunk of this spending is required by the
regulators, but the oil firms have gone beyond that, hoping to head off
legal challenges from Inuit hunters and greens.
Such suits have already played a part in holding up Shell’s plans by
several years, at enormous cost. So far Shell has sunk over $4 billion
into its Arctic venture without drilling a single well. Opposition from
President Barack Obama’s administration—which briefly imposed a
moratorium on offshore Arctic exploration—has added to the delay. So
has the bureaucracy involved in getting over 35 permits, at least two
of which the company has yet to secure.
Shell’s research is focused on species that the Eskimos hunt, including
bowhead whale. The company will halt its drilling season in the nearby
Beaufort Sea for around three weeks to allow the Eskimos there to kill
their quota of whales. But Wainwright’s mayor, Enoch Oktollik, was
unimpressed. “We have our subsistence culture, but what’s going to
happen to our future grandchildren if you have polluted our ocean?” he
asked.
The oil firm is wise to be patient. According to a 2008 study by the US
Geological Survey, the Arctic may hold 90 billion barrels of oil and
1,669 trillion cubic feet of natural gas, respectively 13% and 30% of
the world’s estimated undiscovered reserves. Over 84% of this is
thought to be offshore, with the continental shelves of the United
States, Canada and Greenland likeliest to hold oil and Russia’s and
Norway’s the best prospects for gas. Alaska may have 20% of the lot.
Oil has long been produced in the Arctic. The first onshore wells were
sunk in Canada’s Mackenzie River valley in 1920; since then over 400
Arctic oil and gas fields have been discovered. But, chiefly because of
the high cost of operating in the Arctic, their development has been
slow. The only big offshore Arctic production site is the Snohvit gas
field in the Norwegian Barents Sea, opened by Statoil in 2007. Half the
Arctic’s basins are unexplored. But this is now changing, with oil firms
increasingly heading north, nudged by high oil prices, better
technology, a dearth of easier opportunities and melting ice. When
Shell found oil and gas off Alaska in the late 1980s, the oil price was
around $15 a barrel. That was too low to make extraction profitable,
so it let its licences lapse. The price is now around $100. Progress in
horizontal drilling, which allows more oil to be produced from fewer
wells, is another boon for the Arctic.
Meanwhile the world’s most accessible oil fields, in the Middle East and
elsewhere, are being depleted. They are also increasingly controlled by
state-backed firms. This has left the big independent oil companies
scratching around for alternatives that play to their technological
prowess and their ability to secure long-term investment. The Arctic
requires plenty of both.
Oil companies are reluctant to admit that climate change plays a part
in their northward shift. Naturally they do not want to be seen to be
profiting from the environmental damage to which their activities have
contributed. Sometimes there is no such link: Norway’s southern
Barents Sea has had little ice to worry about for a long time. And Shell
plausibly argues that Alaska’s melting ice will make its operations
more difficult to plan by forcing it to prepare for a wider range of
conditions.
Yet it will eventually make it much easier to operate off Alaska, with
ever longer periods of open water. And elsewhere the retreat of the
sea ice is already a factor in new exploration. The boss of Greenland’s
Bureau of Minerals and Petroleum, Jorn Skolv Nielsen, describes it as a
big reason for the bureau’s decision to open Greenland’s western Disko
Bay, where Cairn Energy drilled in 2010-11.
The United States, Norway, Russia and Greenland have all opened
more of their Arctic offshore to exploration in recent years, leading to
several big discoveries. Canada’s Mackenzie river valley is again being
explored, as, more modestly, is its less promising Arctic offshore.
Statoil, having found two additional Barents Sea gas fields in the past
12 months, expects to produce up to 1m barrels a day of oil equivalent
from new Arctic wells by 2020. Norway, which awarded 26 licences for
the Barents and Norwegian Sea in January, plans to issue more for the
eastern Barents Sea early next year. According to a recent report for
Lloyd’s, the London insurance market, the Arctic could attract $100
billion of investment in the next decade, mostly in offshore energy.
With the possible exception of the United States, where influential
greens oppose drilling in Alaska, all Arctic coastal countries want this
development. Norway is looking to the Barents Sea to compensate for
declining North Sea production. Russia, as Mr Putin has signalled by
announcing plans for a new investment regime for foreign oil firms, is
even keener. It needs Arctic production to offset the decline in its main
west Siberian oil fields. It also needs foreign capital and expertise to
help its state-owned firms pull it off. Shortly after the RosneftExxonMobil tie-up was finalised in April, Rosneft and Italy’s Eni
announced an agreement to explore the Kara Sea. Statoil and Total
have an agreement with Gazprom to invest up to $40 billion in
opening the massive Shtokman gas field in the eastern Barents Sea.
Foreign oil firms are aching to get into Russia; hence BP’s 2011 effort
to negotiate a deal with Rosneft, which fell through because of
objections from its existing Russian partners in TNK-BP, an oil firm.
But the enormous cost of operating in such a hostile and remote place
has made them dig in for more favourable terms than the Kremlin is
wont to provide. Exxon estimates that developing its three blocks of
the Kara Sea could require an investment of $500 billion over several
decades. Beginning production at Shtokman is expected to cost $15
billion.
The finalising of ExxonMobil’s tie-up with Rosneft suggests that the
notoriously hard-nosed firm got what it needed from Mr Putin’s
promised reform. Whether it will be enough for the Shtokman project
is unclear. It was designed to supply America with liquefied natural
gas, but this export market has disappeared as the country’s supplies
of domestic shale gas have boomed.
For Greenland, the prospect of oil revenue is tied to its aspirations to
independence. Cold, dark, remote and with little physical or regulatory
infrastructure to support an oil industry, it is the Arctic’s wildcat
energy frontier. In 2002 and 2004 it held auctions for offshore
exploration licences in the island’s south-east that each drew a single
bid, from Canada’s Encana. Between 2006 and 2010 it sold licences to
firms including ExxonMobil, Chevron and Cairn Energy, which recently
found traces of oil in western Disko Bay.
This is exciting stuff, but producing offshore Arctic hydrocarbons will
generally be a slow business. ExxonMobil and Rosneft will not make a
final investment decision on their joint exploration until late 2016 or
early 2017. In the best case Shell would hope to begin producing
offshore Alaskan oil in 10-15 years. It may be more like 20 years
before Greenlandic oil is produced, assuming it is even found.
The technical difficulties remain daunting. Exploratory drilling—from
floating rigs that can be towed away from icebergs—generally cannot
be done through ice, so the drilling season will be short. Producing
Arctic hydrocarbons, often through ice, will be complicated. One way
of doing it is to build production infrastructure on the seabed, below
the ice; another is to encase it in concrete that will withstand sea ice.
But both would be vulnerable to a very big iceberg that might scour
the seabed to a depth of several metres. Such problems are sufficient
to give some oil companies pause. Total, for instance, has invested
heavily in offshore Arctic gas, but “drilling for Arctic oil is not being
considered by us. Not at all. Our gas assets are enough for the
moment,” says Total’s head of development, Michel Hourcard. “There
are many technical challenges—there is too much ice, darkness and
stormy weather.”
Another technical risk is also a political one: the difficulty or—
depending whom you talk to—impossibility of cleaning up oil spills in
ice. That is why the United States and Greenland both require
exploratory drilling to stop in September, a month before the sea
freezes for the winter. But when production begins, such pauses will
no longer be possible. And a serious accident, such as a blowout under
sea ice, could be disastrous.
Ice-and-oil sandwiches, anyone?
Controlled oil spills in ice in and off Norway suggest that the oil would
coat the pitted underside of the sea ice and more ice would form under
it, making an ice-and-oil sandwich. As the sea ice moves, this would
be spread around the Arctic and gradually dispersed as the ice melts.
Shell, one of the most technologically advanced oil firms, admits it has
no satisfactory answer but suggests it could track the frozen oil and
burn it as it melts. The controlled oil spills have inspired little
confidence in such claims.
Shell’s return to Alaska was intended as a way to reduce its exposure
to political risk. Clearly this has not gone to plan. Even if the courts
permit it to drill off Alaska, it is likely to be disrupted by environmental
protesters, as Cairn was off Greenland. On May 1st Greenpeace
activists boarded an Alaska-bound icebreaker, hired by Shell, in
Helsinki harbour. Such conflicts are likely to come up everywhere in
the Arctic outside Russia—which presents other sorts of non-technical
risk.
The Arctic is rich in other minerals, too, some of which have long been
mined. The 1897-99 Klondike gold rush, in northern Canada, one
degree outside the Arctic Circle, was short-lived. The iron ore in
Swedish Lapland sustained Germany during the second world war and
helped to rebuild Europe after it. One of the world’s biggest zinc mines
is in Arctic Alaska, and the biggest nickel palladium mine is in the
Russian Arctic. Mining in the region is poised for growth, for much the
same reasons as energy production: high commodity prices, improved
technology and keen Arctic governments.
This is already obvious in the Canadian Arctic, where ArcelorMittal, a
big steelmaker, and a partner paid $590m for a large iron-ore deposit
in 2011. But its effects may be most dramatic in Greenland, which has
issued over 100 exploration permits to companies looking for metals
and gemstones. High operating costs and harsh conditions will limit
the rate of extraction, but Greenland will probably be mining lots of
iron, uranium, gold, rare earths, diamonds and rubies before it gets an
oil industry.