Race to the Arctic

31 March 2008 (Last Updated March 31st, 2008 18:30)

In August 2007, two mini-subs Mir-1 and Mir-2, planted a Russian flag on the Lomonosov Ridge, beneath the Arctic Ocean. This symbolic gesture was the latest development in a five-way tussle to assert territorial rights in the Arctic region. Yet, as Russia and other countries that possess and lay claim to territory in the Arctic know, tapping into energy resources is likely to prove a significant challenge. Steve Coomber investigates.

Race to the Arctic

The world is facing an energy crisis. Rapid economic expansion in countries like China and India means a dramatic increase in energy use. As a billion Chinese residents trade bicycles for cars, demand for oil is rising. Between 1970 and 2006, oil consumption increased from 48 million to 84 million barrels a day (bpd).

Yet, many oil-producing countries are in the net depletion phase of their current oil resources. In Alaska, for example, the Trans-Alaska Pipeline System (TAPS) is operating well below capacity. It peaked at two million barrels a day in the late 1980s, but is now down to about 700,000bpd as production at Prudhoe Bay's major oilfields declines.

"Many oil-producing countries are in the net depletion phase of their current oil resources."

Production from Saudi Arabia and other OPEC countries is predicted to plateau around 2015. Increased time from oil reserves to production, from 29 years in 1970 to 40.6 years in 2005, bears out a scenario of declining resources.

And, as fossil fuel resources decline, unit price increases. In just four years the global oil price has risen from the $20 a barrel range to the $80 a barrel range. In January 2008, US light crude broke through the $100 a barrel psychological barrier.

OIL AND GAS IN THE ARCTIC

No wonder that attention has turned to the extreme north. While the true extent of resources in the Arctic is unknown, an assessment of worldwide, undiscovered oil and gas resources by the US Geological Survey (USGS) estimated that as much as 14% of the world's undiscovered oil and gas is contained in the region – and that study ignored vast tracts of the Arctic, due to lack of data.

The Arctic can be defined as everything above the Arctic Circle (66° 33'N). Five states border the offshore Arctic region: Canada, the US (Alaska), Denmark (including Greenland), Norway and Russia. A particularly harsh environment, much of the Arctic is ice-covered ocean, and treeless frozen tundra. During the winter months when much of the onshore exploration takes place, there is no daylight and temperatures can be as low as -35°C.

Oil and natural gas production began in the Arctic in the 1920s. By the 1960s large reserves had been discovered on Alaska's North Slope, in the Mackenzie Delta, Canada, and the Yamalo-Nenets Autonomous Okrug and Nenets Autonomous Okrug in Russia. The completion of TAPS in 1977 made production viable in the Prudhoe Bay area in North America.

Today, oil and gas activity is widely distributed around the states that border the Arctic.

"Five states border the offshore Arctic region."

Areas with identified or potential reserves include the North Slope in Alaska, the Beaufort-Mackenzie area north of Canada and Alaska, the Barents Sea, East Siberia, Timan-Pechora, West Siberian Basin, the Karia-Yumal Basin, the North Kara Sea, the more offshore continental shelf areas of the Laptev Sea and East Siberian seas and North Chukchi.

"There is a renewed emphasis on exploration and exploitation," says David Parkinson, an upstream consultant for Wood Mackenzie, the energy consultancy and research firm. "For example, across the North Slope in Alaska, the Beaufort Sea and the adjoining Mackenzie Delta, Beaufort Basin in Canada, there are large amounts of stranded gas reserves. Putting transportation in to get that gas to market is one of the key issues of the moment for those areas."

The Shtokman field, in the centre of the Russian Barents Sea shelf, illustrates the potential in the region. Discovered in 1988, 550km from land, in 350ft of water, covering an area of 1,400m², Shtokman has estimated reserves of 3.7 trillion cubic metres of gas.

Following an appraisal drilling programme, a production sharing system was signed by the Russian government in 2000. The license for gas and gas condensate exploration and production is held by Sevmorneftegaz, owned by Gazprom, with Total and StatoilHydro as project partners.

WHO OWNS THE ARCTIC?

The prospect of abundant untapped reserves in the Arctic is enticing, but exploiting these resources is far from straightforward. Notwithstanding the challenge of remoteness and getting the product to markets, there is the question of who has the right to engage in exploration and exploitation.

The law regarding territorial rights in the Arctic is complex. "The Arctic itself, the Arctic Ocean and the ice covered areas, has for some time been regarded as an area of conflicting claims," says Sergei Vinogradov, senior lecturer at the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee, UK.

"Russia has claims on the Lomonosov Ridge, said to contain ten billion tons of deposits."

Vinogradov explains how in the early part of the 20th century the Soviet and Canadian position was based on a sectoral approach. More recently, though, states have applied the principles set out in the United Nations Convention on the Law of the Sea (UNCLOS) in 1994 (although the US has yet to ratify the convention).

"UNCLOS establishes several areas of national jurisdiction," says Vinogradov.

"There are the territorial seas after 12nm, the contiguous zone up to 24nm, and the Exclusive Economic Zone up to 200nm; and it also gives the continental states a right to claim their continental shelf." The continental shelf is defined at 200nm from the coastal state's baseline.

Within the continental shelf, states have the right to harvest mineral and non-living material in the subsoil to the exclusion of others. However, much of the Arctic region lies beyond 200nm of the five states surrounding the Arctic. Under Article 76 of UNCLOS, however, ratifying states are provided with an opportunity to apply to extend their continental shelf beyond 200nm, to a limit of 350nm, or 100nm beyond where the seabed reaches a depth of 2,500m.

Russia claims, for example, that the Lomonosov Ridge, which extends across the Arctic Ocean seabed, is geologically linked to the Russian continental shelf. The claimed triangular extension of territory, some 460,000 square miles, is said to contain ten billion tons of gas and oil deposits. Denmark, Norway and Canada are claiming extensions to their continental shelf. America will probably ratify UNCLOS shortly, and has also been conducting sea bed geological surveys in the Arctic.

"Rapid economic expansion means a dramatic increase in energy use."

In the Barents Sea, Russia and Norway disagree over the demarcation of their zones, due to the special status of the international territory of Svalbard, under Norwegian stewardship. The dispute is expected to be resolved by bilateral agreements.

Other disputes in the region include those between the US and Canada over rights in the Northwest Passage.

CLIMATE CHANGE AND ENVIRONMENTAL IMPACT

Another factor in the race to develop energy resources in the Arctic is climate change. Most scientists agree that the ice cap at the North Pole is retreating. Over the last 20 years, 40% of the ice cap has melted with the average thickness reduced by 50% from 3m to 1.5m.

This shrinkage does result in easier access to the ocean. When a recent US-led geological expedition ventured into the Arctic, for example, it did not encounter any significant pack ice, as in previous journeys. Even a customary stop off allowing passengers to clamber over the Arctic ice had to be abandoned when no piece of ice large enough could be found.

If opening up the northern sea route and Northwest Passage helps access by sea, elsewhere climate change may have a detrimental effect on onshore oil and gas extraction.

For example, the number of travel days allowed on the tundra of the North Slope in Alaska, under standards set down by the Alaska Department of Natural Resources, has halved in the last 30 years. This is due to the effect of climate warming on the tundra hardness and snow conditions. In addition, any substantial melting of the permafrost will impact on the stability of structures built in the Arctic.

Another challenge is minimising the impact of exploration and exploitation on the Arctic ecosystem. The Arctic is the natural habit of polar bears, caribou, Arctic hares, lemmings, bowhead whales and many other animals, as well as the indigenous peoples who live in the region.

"Environmental factors are an important aspect of the exploration of oil and gas resources in the Arctic."

It is impossible to extract oil and gas without having an impact on the environment and any impact must be measured against the positive benefits that flow from the oil and gas extracted.

Fortunately, companies and states are keenly aware of the environmental consequences of their operations and take many measures to minimise any negative impact. However, continued resistance to Arctic oil and gas development on environmental grounds from a range of bodies is likely.

In January 2008, the World Wildlife Fund called for a moratorium on new oil and gas development in the Arctic. A recent announcement by the US Interior Department's Minerals Management Service, that it planned to hold bidding for drilling leases in February 2008 for the Chukchi Sea resulted in a lawsuit challenging the plans, filed by a coalition of Alaskan natives and conservation groups.

PROSPECTS

Despite the challenges, a combination of increasing demand for energy, dwindling supplies, better technology, easier access and increasing economic viability is likely to lead to substantial development in the Arctic.

The recent report 'Future of the Arctic – a New Dawn for Exploration' by energy consultants Wood Mackenzie and Fugro Robertson noted that the Arctic region is not a single uniform frontier, and identified three distinct approaches for companies seeking opportunities in the area: major resource capture, niche operations and frontier exploration.

"Major resource capture," says Parkinson, "means gaining access to high volumes through licensing rights in under explored basins with high potential, such as the offshore portions of the South Kara / Yamal and East Barents basins. With significant investment and cutting edge technologies required, this type of opportunity suits joint venturing between Russian companies and some of the majors and super majors around the world."

"The information is far from conclusive on some of these areas. They are high-risk, potentially high-reward areas."

Niche operations involve leveraging existing infrastructure to maximise development of a particular area, moving into smaller fields close by, as is currently happening on the North Slope. The Prirazlomnoye field in the Pechora Sea in Russia and the Mackenzie Delta, Canada, once the Mackenzie Valley Pipeline has been constructed, offer similar opportunities.

Finally, there is frontier exploration. "The information is far from conclusive on some of these areas," says Parkinson. "'They are high-risk, potentially high-reward areas for companies."

Although there is little seismic data, attractive areas include the Kronprins Christian basin to the east of Greenland, and the Laptev Sea north of Eastern Siberia.

In 1906, after a three-year voyage, Roald Amundsen became the first person to traverse the Northwest Passage. He may not have realised at the time, but in doing so he paved the way for future oil and gas exploration in the Arctic region. Today there are more than 500 oil and gas fields in the Arctic basins, and known hydrocarbon resources of some 350 billion barrels of oil equivalent.

With the race on to exploit these resources and discover yet more, 2008 could be another significant year in the history of the Arctic.