In Search of Arctic Energy

We would like to thank ExxonMobil Corporation for its contribution to In Search of Arctic Energy. 

with

Charles Emmerson, senior research fellow, Energy, Environment and Development Programme, Chatham House

Zachary Hamilla, principal Arctic analyst, Office of Naval Intelligence

Jed Hamilton, senior Arctic consultant, ExxonMobil Upstream Research Company

Robert Johnston, director, Eurasia Group

Julia Nanay, senior director, PFC Energy

and moderator

Jim Slutz, president and managing director, Global Energy Strategies LLC

Oil and gas companies have been searching for energy resources in the Arctic for more than 80 years, said Jim Slutz of Global Energy Strategies. The United States Geological Survey estimates that the Arctic contains 30 percent of the world’s natural gas and 13 percent of the world’s oil. As traditional oil supplies dwindle across the globe, demand for Arctic energy will increase exponentially. In order to navigate the numerous Arctic challenges, energy companies must assess community impact, social issues, local benefits and concerns in addition to applying the latest technology to reduce the environmental risks to ensure the productive and responsible extraction of Arctic energy resources.

Shrinking oil supplies in traditional fields, coupled with major leaps in drilling techniques and technology, have pushed an increased Arctic energy exploration and production, said Charles Emmerson of Chatham House. However, to more accurately assess Arctic energy development observers must recognize a number of factors unique to the region. First, Emmerson said, there is not one “Arctic” but rather many “Arctics,” and each has different topographies, environments, and varying levels of infrastructure investment. In the past, these factors, combined with unpredictable government intervention, abundant conventional oil reserves, and primitive technology, made Arctic energy development a dangerous and unprofitable proposition. However, diminished sea ice due to climate change, technological advances in extraction techniques, and skyrocketing crude prices have turned oil companies’ focus towards the Arctic. While the physical and financial environment has improved for Arctic energy extraction, the severe conditions still entail exceptionally high costs on companies, barring all but the largest oil and gas producers from investing.

Emmerson dismissed the idea that 2012 is the “tipping point” of true energy development in the Arctic. However, he noted that the current trends of energy consumption and improved exploratory conditions will quickly accelerate Arctic energy development over the next few years, pushing any “tipping point” into the future. Most countries and corporations involved in Arctic energy exploration are in agreement regarding their rights and social responsibilities, noting the reputational and political risk, should there be an accident, could kill off the industry in the Arctic. More informal cooperation between Arctic countries could include the sharing of operable ice breakers, which could ensure a peaceful and rapid expansion in Arctic energy development.

Russia, with its Arctic reserves, and Saudi Arabia are the two largest oil producers in the world, said Julia Nanay of PFC Energy. While it still produces more than 10 million barrels of oil a day, Russia must increase its drilling operations in the Arctic if it wishes to remain one of the world’s largest energy producing countries. Russia’s exploration of the Arctic is not only driven by oil but all types of resources, including precious metals and natural gas. Increased activity will require massive investment in new infrastructure in both Siberia and the Arctic offshore plays. This presents a challenge for Russian companies, which are inexperienced in offshore operations and lack the critical technology to exploit its resources. To increase the size and sophistication of its offshore developments, the Russian government has given financial incentives and tax breaks to foreign oil and gas companies, with some new developments receiving full exemptions of export duties. Trading partners in the East, such as Japan (with the Fukushima accident well in mind), will become larger importers of Russian energy supplies. This will lead to export diversification, which will help calm the often volatile Russian economy. Finally, Nanay concluded that due to the friction of multiple countries operating in a common space, the rush for resources could create additional geo-political tensions, affecting both prices and markets for Arctic energy.

ExxonMobil defines its Arctic territory as any place where sea ice affects oil production, said Jed Hamilton from ExxonMobil Upstream Research. He said that all offshore development has been in shallow seas, and that the real challenge will be exploiting reserves in deep water. Thus ExxonMobil’s new floating deep-water rigs must be able to navigate the numerous icebergs that drift through drilling areas, making development all the more difficult. Hamilton said that oil will be the driving force of Arctic exploration while gas extraction remains on the mainland. However, even when compared to cheaper gas, there must be at least 500 million barrels of high priced oil in a play for a well to become financially viable for development. The profitability of Arctic wells also depends on the type of oil found there. The process used to refine heavy and extra heavy oil would make Arctic production economically unfeasible. Associated costs, such as building icebreakers, also figure into the premium for Arctic oil, along with extra infrastructure, environmental, and shipping costs. While the price of development is high, market forces indicate that the rush for Arctic oil will not abate in the near future.



While many feel that competition for Arctic energy resources could create new geopolitical friction in the region, Zac Hamilla of the Office of Naval Intelligence sees more opportunities for nations to work together to achieve their goals in the Arctic. He said that the Arctic is already spoken for, and nation-states need to maintain a stable environment in the Arctic in order to develop oil and gas resources. Even with the notable increase in activity in recent years, the overall volume of traffic in the Arctic remains meager; last year, only 35 ships passed through Arctic shipping lanes, compared to the 17,000 ships that passed through the Suez Canal the same year. While that number will rise as energy production increases, Hamilla said, there was little chance of shipping causing a rise in Arctic tension. When traffic does reach more significant levels, Hamilla said that current legal norms, not including the United Nations Charter on the Law of the Sea, will be a sturdy enough framework to ensure peaceful expansion of resource exploration. While energy development will increase traffic in the Arctic, Hamilla does not see the Northwest Passage as a viable shipping alternative to the Panama Canal due to its harsh environmental conditions and great distance from Asian markets. There will be energy related shipping, but the Northwest Passage will have little impact on international trade.



While the price of oil remains at elevated levels, companies will increase their efforts to drill in increasingly complex Arctic fields, said Robert Johnston of the Eurasia Group. In order to ensure that these resources are extracted in a timely and responsible manner, governments and energy companies with Arctic interests must work together to develop these resources. However, Arctic development will only be available to the very largest players in the industry as the capital outlays required for drilling these wells are prohibitively high. The large scale necessary for Arctic operations makes progress slow, with well development measured in years rather than months. The more difficult wells can take more than a decade to produce oil in large quantities. These logistical challenges give companies very little margin for error in the harsh Arctic environment. Johnston questioned whether the United States and Europe have the appetite to engage in long-term governance of the Arctic.