Energy spotlight falls on the
Arctic By Michael Piskur
The recent decision by energy company BP
temporarily to halve its output from Alaska's
Prudhoe Bay field has brought to attention the
risks and rewards of Arctic oil production.
The sudden reduction by 200,000 barrels
per day reflects the difficulty of extracting
Arctic oil and gas. US markets have withstood the
cut without major repercussions, but with
crude-oil prices moving toward US$80 per barrel,
gasoline averaging more than $3 per gallon (about
80 cents a liter) in the US and no sign that costs
will decrease, the United States continues to look
for ways to diversify its energy sources.
Meanwhile, Canada, Russia and the US have
sparred over territorial claims in the Arctic
region, and record energy prices are
creating renewed interest in
projects that had not been considered
cost-effective.
The Arctic region holds
vast energy resources, possibly greater than 25%
of global reserves, most of which is offshore
beneath thick ice and deep water. The oil and gas
contained in this area had been unreachable or far
too costly and dangerous to extract. Rising global
temperatures, however, are causing formerly
impenetrable ice sheets to melt and access to
Arctic energy resources is increasing.
Despite some national claims to ownership,
the North Pole was traditionally considered
international territory. Increased access to
Arctic oil and gas has brought several territorial
disputes. These include disagreements between
Russia and Norway over the Barents Sea; Canada and
the US on several matters; Russia and the US over
the Bering Sea; and Canada and Denmark over Hans
Island. Additionally, Denmark has gone so far as
to claim the North Pole under the pretense that it
lies on a natural continuation of Greenland. Thus
far, these countries have looked to independent
third parties for solutions.
Canada and
the US clash The Northwest Passage
connects the Atlantic and Pacific Oceans by way of
waters around the Arctic Archipelago. During the
next 20-30 years, continually melting Arctic ice
will increase access to what will become a vital
shipping lane.
Climate studies have shown
that temperatures are rising faster at the Earth's
poles than the rest of the planet, which will
increase annual navigation via the Northwest
Passage from approximately 30 days to 120 days by
century's end. As such, the Northwest Passage
could reduce the trip from London to Tokyo by some
5,000 kilometers compared with traveling through
the Suez Canal, or by nearly 8,000km when going
through the Panama Canal.
While the United
States and the European Union designate the
Northwest Passage as international waters, Canada
claims it as an internal strait. Last year,
Canadian Prime Minister Stephen Harper reprimanded
the US ambassador for criticizing his government's
intent to establish Canada's ownership of the
region. Likewise, after several instances in
which US commercial and military vessels passed
through the disputed area without informing
Canada, the Canadian military stated it will no
longer refer to it as the Northwest Passage, but
rather as Canadian internal waters. Another point
of contention is over the Beaufort Sea, which
contains significant energy resources. While it
currently remains frozen year-around, increasing
temperatures are expected to open the Beaufort Sea
to oil and gas exploration in the future.
Alaska and ANWR BP's shutdown
of 26km of pipeline has returned attention to the
issue of oil-drilling in the Arctic National
Wildlife Refuge (ANWR), a matter that has been
debated since the 1979 oil crisis. Proponents of
drilling in ANWR look to the area as a way to
reduce US dependence on foreign oil, citing US
Geological Survey estimates of 10.4 billion
barrels of oil in the region.
However,
other US agencies and private firms have performed
surveys of ANWR that found only 4.3 billion to 7.7
billion barrels of recoverable oil. Opponents
focus on environmental concerns and question the
impact oil from ANWR will have on reducing import
needs, as the US consumes in excess of 7 billion
barrels of oil annually.
The US Geological
Survey also estimates that 200,000 trillion cubic
feet of methane hydrate gas exists under Alaskan
territory outside of ANWR. While only a fraction
of this amount is extractable, to recover even 1%
would double proven US gas reserves. As such, the
US Interior Department announced last Wednesday
plans to open the National Petroleum
Reserve-Alaska (NPRA) to drilling. Positioned west
of Prudhoe Bay, NPRA is a 9-million-hectare area
that was earmarked for oil and gas exploration in
1923. Bidding for leases in the area will begin
this year.
Russia and Norway look to
settle differences The 32nd Group of Eight
summit in St Petersburg saw Russia seemingly
indicate that the US would be left out of efforts
to develop the Shtokman gas field, which
represents the potential of Arctic energy
reserves.
The Shtokman field lies under
Russia's portion of the Barents Sea and holds 3.2
trillion to 3.7 trillion cubic meters of gas. It
was discovered in 1988, but harsh conditions and
extreme sea depth hindered development until now.
A short-list of five firms to develop the Shtokman
field with Russian state-owned Gazprom includes US
companies Chevron Corp and ConocoPhillips,
Norway's Statoil and Norsk Hydro ASA, and France's
Total SA.
While the official announcement
will come no earlier than the end of the year,
Russian President Vladimir Putin seemed to favor
the Norwegian firms when he stated, "They don't go
around with their noses in the air. They work
objectively, very professionally."
This
barb aimed at the US came after the Kremlin
announced in April that the opportunity to
participate in the project was directly connected
to Russia's bid for World Trade Organization
membership, which the White House blocked. Russia,
however, intends to sell 40 billion to 50 billion
cubic feet of gas from Shtokman to the US annually
by 2010.
To that end, Gazprom recently
created Gazprom Marketing and Trading USA, which
will allow the world's largest oil company to
supply gas directly to US consumers. Politics
aside, Statoil and Norsk Hydro also have the
advantage of experience in developing gas and oil
fields in Arctic conditions, particularly in the
Barents Sea. As such, Putin has made overtures to
settle the boundary dispute so as to increase
cooperation between Oslo and Moscow. With 45
billion barrels of offshore oil, Sakhalin Island
is another key to Russia's future wealth. In
conjunction with Gazprom, Russia has contracted
Royal Dutch Shell, BP and ExxonMobil to manage the
Sakhalin II project that requires building a
complete production facility in an area with
extreme conditions and little or no preexisting
energy infrastructure. Costs for this program,
considered "a vanguard project for all of Russia"
and maybe the most ambitious energy recovery plan
to date, have already exceeded $20 billion.
Conclusion While extensive
access to energy supplies and transportation
routes in the Arctic will not come about for
decades, the legal and political battle will only
escalate in the near future. The countries
involved seem content to settle their disputes
through the United Nations and other international
bodies. As Arctic oil and gas become readily
available, however, it is likely that territorial
claims and tension between states will increase.
The move toward increasingly expensive and
dangerous projects highlights the changing
approach that states and oil companies are taking
to secure energy resources. Projects such as
Sakhalin II and New Zealand's Great South Basin,
once seen as exceptional, will surely become the
norm.
Short-term issues such as
development of the Shtokman field will be resolved
in coming months. Even if Moscow selects Norwegian
firms that are uniquely suited for the project,
expect the United States, as the world's largest
energy consumer, to create opportunities for US
firms in the Russian project.
Meanwhile,
the politically loaded matter of drilling in ANWR
will be passed on to the next US administration,
as has been the case for nearly three decades.
Published with permission of thePower and Interest News
Report, an analysis-based
publication that seeks to provide insight into
various conflicts, regions and points of interest
around the globe. All comments should be directed
tocontent@pinr.com
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