OPPORTUNITIES and CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT Eurasia Group report for The Wilson Center, Washington, D.C. LIST OF ACRONYMS ANWR: Arctic National Wildlife Refuge bbl: barrel boe: barrels of oil equivalent ENGO: environmental non-governmental organization IEA: International Energy Agency IOC: international oil company LNG: liquefied natural gas mtoe: million tons of oil equivalent NGL: natural gas liquids NGO: non-governmental organization NOC: national oil company NPR-A: National Petroleum Reserve in Alaska NSR: Northern Sea Route PADD: Petroleum Administration for Defense District RAIPON: Russian Association of Indigenous Peoples of the North, Siberia and Far East SDL: significant discovery license SSRW: same-season relief well TAPS: Trans-Alaska Pipeline System TCF: trillion cubic feet UNCLOS: United Nations Convention on the Law of the Sea USGS: United States Geological Survey VAT: value-added tax 2 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT I INTRODUCTION OVERVIEW As climate change renders the Arctic increas- Regulators, as well as social and environ- ingly accessible, there has been a substantial mental groups, have been outspoken about uptick in industry interest in the region; it is the dangers and risks linked to Arctic energy believed an estimated $100 billion could be development. Bearing in mind the enormous invested in the Arctic over the next decade.1 challenges of cleaning up an oil spill in icy The Arctic contains vast oil and natural gas re- conditions, the greatest concern is what kind serves—the U.S. Geological Survey estimates of impact such a disaster would have on the the Arctic could contain 1,670 trillion cubic fragile Arctic ecosystem. In an effort to hedge feet (tcf) of natural gas and 90 billion barrels of against such an event, national regulators are oil, or 30 percent of the world’s undiscovered assessing additional safety and environmental gas and 13 percent of oil. Energy companies protection measures that have the potential to are certain to be at the forefront of Arctic de- add considerable additional time and financial velopment and investment. costs and reduce access to resource opportu- nities. Considering these heavy costs, tech- Climate change has played an important role nology requirements, and potential financial in expanding access to the Arctic region, liabilities, the players best suited to exploring although there have been fewer opportunities and developing these resources are interna- to access lower cost oil and gas plays. As tional oil companies (IOCs). Those with strong conventional production has declined, industry balance sheets and significant offshore ex- has had to focus more on difficult-to-access ploration experience will be favored; in fewer and unconventional oil and gas plays through- cases, well-funded and experienced national out the world, including those in the Arctic. oil companies (NOCs) may also participate. In Exploration and development in the Arctic a number of cases, cooperation agreements requires expensive, tailored technologies as have been struck between NOCs and IOCs. well as safeguards adapted to the extreme climatic conditions. In the wake of the 2010 The Arctic represents the final frontier of Deepwater Horizon incident, there have been conventional hydrocarbon development. Ac- additional costs associated with emergency cessing these resources and bringing them response and containment requirements. 3 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT to market could require another 20 years or HISTORY OF ARCTIC EXPLORATION AND more. Lining up these resources as the next DEVELOPMENT major source of global energy supply — notably after the shale oil and shale gas boom — will require substantial investment Recent high-profile forays by Shell into the and relatively immediate and extensive Alaskan Beaufort and Chukchi Seas, by Cairn expansion of exploration activity. Energy with exploration drilling offshore in Greenland, and by Gazprom, Rosneft, and In this paper, the Arctic will be defined broadly Statoil in far north and Arctic Russian and as not just the area north of the Arctic Circle, Norwegian waters, have raised global aware- but any territory with Arctic-like conditions, ness of hydrocarbon development. These such as permafrost, icebergs, and seasonal well-publicized exploration efforts in the Arctic pack ice. This paper will focus largely on the have led to the popular misconception that Arctic offshore experience in North America. It the energy industry is entering these waters will also consider the best practices that can for the first time. In fact, numerous producing be derived from the experience of countries onshore and offshore Arctic fields have been such as Norway and Russia that have been successfully developed since the late 1960s successful in early hydrocarbon exploration with no significant adverse incidents. and development efforts in their respective far northern and Arctic territories. It should In 1968, ARCO and Standard Oil drilled a be noted that while important lessons can well that tapped the largest oil field in North be extracted from Norway’s experience with America, the Prudhoe Bay field on Alaska’s offshore production and exploration, the con- North Slope. Production began in 1977 after ditions in Norway cannot be classified as truly the completion of the Trans-Alaska Pipeline “Arctic” because there is neither pack ice nor System (TAPS) from Prudhoe Bay to Valdez, permafrost. Alaska. Over time, companies including Shell in the 1980s, and BP in 2012 at its Liberty Although the pace of Arctic exploration activity oil field in the Beaufort Sea, have success- in Alaska, Canada, and Greenland is pick- fully found oil; yet each has failed to extract ing up, viable commercial production is still the resource and abandoned the projects decades away. In the meantime, produc- due to excessively high production costs. A ers can raise the profile of the industry and debate recently has emerged between federal increase support for Arctic resource extraction authorities and local Alaska legislators over by exercising caution, applying the highest allowing drilling in the National Petroleum safety standards to exploration activities, and Reserve in Alaska (NPR-A). Alaskans generally continuing to consult with and incorporate the favor extensive resource development in the interests of the many different stakeholders in 23.5 million acre reserve, but the sentiment is the region. not the same at the national level; the Obama administration approved only a limited drilling plan in the NPR-A. There is now concern that drilling in the NPR-A will become as politically charged as the debate over resource develop- 4 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT ment in the 19.3 million acre Arctic National optimistic about the opportunities available Wildlife Refuge (ANWR), where a Congres- there. Interest continues and in October 2012, sional moratorium has banned drilling since Tullow Oil agreed to purchase a 40 percent 1982. stake in an exploration block in Baffin Bay. In the Canadian Arctic, oil seeps were dis- These finds have shown that hydrocarbon covered in the northern onshore in the 18th development can successfully take place in century. Imperial Oil began early exploratory the delicate Arctic ecosystem. New technolo- drilling in the 1920s, which led to the discov- gies can help ensure more extensive and safer ery of the Norman Wells field in the Northwest resource development in one of the world’s Territories. Throughout the 1940s and 1950s, most extreme climates. Sakhalin and Hiber- exploration activity increased in the south- nia in offshore Russian and Canadian Arctic ern portion of the Northwest Territories, and waters respectively are two of the largest eventually moved north above the Arctic Circle resource development projects in the Arctic to the Mackenzie Delta, the Arctic Islands, and region2; each took roughly 20 years to achieve the Sverdrup Basin in the 1960s, and offshore commercial production. Given the lengthy into the Canadian Beaufort in 1972. Although timeline to move from exploration to produc- activity in the region started to subside in the tion, large-scale Arctic resource development late 1980s, higher energy prices renewed has to begin now to guarantee that these interest in exploration in the region by 2004. resources will be able to provide the global The exception during this slow period was energy supply needed to meet demand by the 20-year development of the Hibernia field mid-century. off the coast of Newfoundland, which began production in 1997; it remains by far Canada’s largest offshore oil project. Given the large waves and icebergs prevalent in the area, the field remains an important test case along the Arctic learning curve. Greenland has had a more complicated his- tory with hydrocarbon exploration and devel- opment, in part because the majority of its territory lies north of the Arctic Circle and is characterized by extreme ice conditions. The first substantial seismic surveys were con- ducted and exploratory wells drilled in off- shore West Greenland in the 1970s, with little success. No discoveries of great commercial significance have yet been made, even after the most recent exploration efforts by Cairn Energy in the offshore off Western Green- land in 2011. Given the potential of Green- land’s offshore reserves, the industry remains 5 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT II NORTH AMERICAN ARCTIC: HYDROCARBON SUPPLY AND MARKET DEMAND Technological, climatic, and environmental SUPPLY SCENARIOS4 considerations are critical to the development of Arctic hydrocarbons; at the same time, The Arctic’s western hemisphere has sig- profitability is perhaps the one variable that nificant medium- to long-term hydrocarbon has the strongest bearing on the speed and resource potential, but the likely development extent at which resource development takes timeframe will be from 2025 and beyond due place. According to the International Energy to current limitations. Insufficient infrastructure Agency (IEA), global oil and gas demand could is possibly the most critical limiting factor.