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OPPORTUNITIES and CHALLENGES FOR 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 Reserve in

NSR: Northern Route

PADD: Petroleum Administration for Defense District

RAIPON: Russian Association of Indigenous Peoples of the North, and

SDL: significant 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: 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 ; 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 ’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 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 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 , by Cairn expansion of exploration activity. Energy with exploration drilling offshore in , and by Gazprom, Rosneft, and In this paper, the Arctic will be defined broadly Statoil in and Arctic Russian and as not just the area north of the , 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 . This paper will focus largely on the have led to the popular misconception that Arctic offshore experience in . 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 and 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 , have success- in Alaska, , 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 .

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 , 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 , 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 : 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 has sig- profitability is perhaps 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. grow by more than 35 percent3 from 2010 to Especially in North America, the remote Arctic 2035. Meeting this demand will depend on the are less attractive investment desti- ability of energy companies to tap available nations for oil and gas companies, since the energy resources that can be accessed in a resources compete for market access with safe and cost-effective way, including the vast the abundant oil sands, shale oil, and gas energy resources in the Arctic. A combination reserves already being developed in Alberta, of variables, from supply and demand levels to elsewhere in Canada, and the U.S. lower 48. global energy prices, will be the determining And yet the North American Arctic contains factors in the development of Arctic energy. huge undeveloped discovered resources5 as These resources are well positioned to be- well as immense undiscovered resources6. come the next big source of supply following The U.S. and Canadian Arctic alone is esti- the unconventionals boom. mated to hold 45 percent of all undiscovered Arctic energy resources.

Northern governments and major interna- tional oil companies are seeking to expedite the exploration process in order to develop cost-effective ways to bring these resources to market from relatively remote and not easily accessible fields in offshore Alaska, Canada, and Greenland. Alaska’s northern coast and the Beaufort Sea. Experts estimate that the Canadian and American Arctic alone hold 45 percent of all undiscovered Arctic energy resources.

6 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT Alaska In June 2012, the Obama administration released a five-year drilling plan that pursued Alaska contains nearly 25 percent of the remain- a cautious approach to medium-term Arctic ing U.S. proved oil reserves and 13 percent leasing; the plan called for three potential lease of remaining proved gas reserves. About 10 sales in offshore Alaska by 2017. But the mixed percent of all domestic oil currently produced in experience of ’s 2012 explo- the United States comes from state-owned land ration and drilling efforts in Alaska’s offshore in the North Slope and state waters offshore. Beaufort and Chukchi Seas has prompted a Concern over the closure of the Trans-Alaska renewed assessment of further Arctic explora- Pipeline System (TAPS) during the next 20 to 30 tion and production by federal regulators. years because of declining production from North Slope fields has resulted in calls for an immedi- The best case scenario for the energy sec- ate expansion of Arctic exploration to achieve tor would be still more stringent review pro- production sufficient to keep the pipeline open. cesses and greater oversight. However, such As TAPS throughput falls, transportation costs a review would threaten to halt or significantly are distributed over smaller volumes, so the price scale back activity in the Alaska offshore. Not per barrel increases significantly. If the pipeline only would the review result in substantial were to close, 1 billion bbls of oil reserves could and more costly disruptions to Shell’s current be stranded onshore and offshore, which would drilling plans, but it could also push subse- pose significant problems for the United States to quent offshore lease sales beyond 2017. guarantee domestic supply security. There would undoubtedly be spillover effects for ConocoPhillips, which is planning to drill Alaska has considerable mean, risked, undis- exploratory wells in its Devil’s Paw Prospect covered resources in the Beaufort and Chukchi in the in 2014, and for Statoil, Seas, in state waters and on the onshore North which had intended to start drilling in 2014 but Slope, and in South and Central Alaska.7 has now postponed its Chukchi Sea drilling

7 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT program until at least 2015 following Shell’s awarded more than $600 million in oil and gas experience. According to federal officials, new exploration rights in ; total rules for drilling in the Outer Continental Shelf offshore commitment bids now total around off Alaska’s Arctic coasts could be released $1.9 billion. In a licensing round during the as soon as year-end 2013. Once in place, summer of 2012, Aboriginal Affairs and North- the rules will help companies better plan their ern Development Canada held an auction for drilling programs, which should provide some more than 900,000 hectares in the Beaufort clarification about the pace at which these Sea and Mackenzie Delta that followed the pending projects may be able to proceed. release of a National Energy Board review of offshore Arctic drilling. The Conservative gov- The industry was looking at Shell’s 2012 drill- ernment has also called for bids to develop ing program as a bellwether for how explora- a five-year strategic plan to conduct oil spill tion could be expected to progress in the off- research in the Canadian Arctic, in particular shore in the post-Macondo era of heightened in the Beaufort Sea. regulatory oversight. However, Shell experi- enced several conspicuous mishaps during Canada has lagged in its Arctic resource its first drilling season: the Noble Discoverer development; it does not have the advanced drillship slipped its anchor and nearly ran planning and major development projects al- aground in July 2012, and the Kulluk drillship ready underway in the United States, Norway, actually ran aground at the end of December and Russia. However, the Canadian Arctic is 2012. These accidents, and other equipment estimated to have considerable undiscovered problems and numerous delays that Shell encountered early on in this process¾such as obtaining air quality permits and approval for its oil spill containment barge, in addition to delays resulting from sea ice¾suggest the outlook for the offshore Arctic appears to be one of fairly slow progress. In the near term, development will likely be restricted to on- shore North Slope resources; industry is now interested in the exploration of unconventional oil in the onshore region as well. In order to spur such development, the State of Alaska introduced a series of tax incentives and ex- ploration credits intended to generate greater interest across its Arctic regions.

Canada

While development of Canada’s Arctic hydro- carbon resources has been constrained by high costs and competition for investment, there has nonetheless been an uptick in activ- ity. Since 2011, the Canadian government has Canadian

8 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT reserves in the Mackenzie Delta onshore, in ACCESS TO DEMAND MARKETS: the Canadian Beaufort offshore, in the Baffin INFRASTRUCTURE AND Bay offshore, in the Sverdrup Basin and Arctic Islands, and in the Newfoundland and Labra- TRANSPORTATION dor offshore.8 Energy demand is anticipated to grow over Greenland the coming decades, driven by growth in and other developing markets. To meet this Most of Greenland lies north of the Arctic Circle; demand, the energy industry has had to turn 80 percent of the island is covered by ice sheets. to unconventional and other difficult-to-access Greenland contains considerable oil, gas, and resources to ensure sufficient future supply. As NGL resources, mostly in the East Greenland Rift these new unconventional and remote fields Basin, the West Greenland Basin offshore, and come online, transportation and infrastructure the North Greenland Sheared Margin.9 remain important challenges to bring these No oil discoveries have yet been made in Green- products to market. Developers of these new land. Despite the disappointing 2010 drilling projects are looking for affordable options, program by Cairn Energy in which all three of its and year-round tanker transport has emerged wells came up dry, investors remain eager to ac- as one of the best options. quire new exploration acreage in the island’s off- Shell’s exploratory drilling in the Alaskan shore. A pre-bid licensing round Beaufort and Chukchi Seas in 2012 was an was held in January 2013 for offshore eastern important step in weighing the viability of the Greenland that attracted 11 applications from year-round tanker option. But after serious three consortia for exploration acreage; license complications in the summer of 2012, Shell awards should be finalized by mid-2013. Further- was forced to delay drilling exploratory wells more, Cairn was granted a one-year extension until 2014 at the earliest; equipment prepared- until 31 December 2013 for its west Greenland ness and regulatory response will be mitigat- license. ing factors in how soon Shell can continue Cairn’s experience in the west of Greenland does its initial drilling efforts. Considerable delays not necessarily imply a lack of potential in other could jeopardize the availability of future crude parts of the huge island. The Greenland govern- supply to TAPS; shutting down the pipeline ment remains anxious to develop these resources could have particularly negative consequenc- so it can begin replacing the billions of dollars in es for crude supply to the U.S. West Coast transfer payments it receives annually from Den- and for the refining margins of PADD V refiner- mark and gain economic self-sufficiency. To this ies that run Alaskan barrels. end, Greenland’s national oil company is As TAPS continues to run at a very low rate, hoping to attract $20 billion in investments in the the transportation of oil by tanker is likely to Baffin Bay and West Disko fields over the next become an increasingly attractive alternative 20 to 30 years, which may help to realize Green- to piping, especially for more remote offshore land’s goal of achieving independence. fields. Transport along the 800 mile-long TAPS pipeline has an average tariff of $4.50 per barrel, whereas a barrel tankered from Valdez

9 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT to the U.S. West Coast would incur tariffs of Arctic, tankering in Canada would be a practi- only about half this rate, despite the shipping cal solution for transporting resources to and distance being more than double the length from offshore production sites. However, the of the TAPS pipeline. The Jones Act10 has limited global supply of Arctic class drilling reduced U.S. competitiveness in the develop- vessels, ice breakers, and support and oil ment and deployment of , as well spill response vessels restricts the speed and as in Arctic grade support vessels and tank- extent of hydrocarbon development activity ers, since compliant vessels and their crews currently possible in the Canada. Furthermore, are more costly. the lack of deepwater ports around the Cana- dian Beaufort and Arctic islands increases the Reduced ice in the Arctic and the lower costs logistics costs of Canada’s Arctic exploration of transport by tanker may make ice-resistant and production program. tankers the preferred means for transporting Arctic oil instead of constructing new pipe- Of the North American Arctic littoral states, lines. Tankers are already used frequently in Greenland is the most deficient in terms of oil the in Norway and Russia, and and gas export infrastructure. The lack of any Russia has begun testing shipment options significant offshore oil or gas finds means the along the to Southeast country has yet to attract requisite investment Asia using tankers assisted by icebreakers. In to build a more robust oil and gas infrastruc- North America, this option is also employed to ture network. This will be one of Greenland’s ship oil from fields in offshore Newfoundland. biggest challenges, made more difficult because of the severe ice conditions and the With the exception of the TAPS pipeline and presence of icebergs. the few existing shipping routes, energy infrastructure in the Alaskan Arctic remains Development and production infrastructure— largely underdeveloped. Natural gas on the including pipelines—will be critical to Arctic North Slope is currently not being produced resource development. Additionally, the ability because the region lacks pipeline and tanker to get these reserves to market, especially capabilities to ship the gas to market. Cono- in a timely and economical manner, will rest coPhillips, ExxonMobil, BP, and TransCanada heavily on the implementation of regulatory are considering a $65 billion project to send policies and incentives to encourage heavy Alaska’s North Slope gas to the south coast investments from oil companies. The develop- of Alaska, where it can then be shipped to ment of lease terms, approval processes, and Asian markets, notably to Japan. In addition environmental standards in particular are all to an 800-mile pipeline from the North Slope variables that rest heavily on individual govern- to Alaska’s southern coast, the project would ments. Greenland has set an industry bar by include a liquefaction plant as well as storage offering 16-year lease terms, which may be a tanks. The entire project will be very costly model that other governments will be inclined and is unlikely to be completed before 2020, to adopt in order to make Arctic development at which point Alaskan gas can expect to face economically viable. However, given the geo- very stiff competition in Asia. logical challenges to develop these resources, it is unlikely North American Arctic supplies Canada’s most significant infrastructure and will become readily and abundantly available hydrocarbon development limitations are with in the 2025-2050 timeframe. the offshore. As is the case across the entire

10 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT III NORTH AMERICAN ARCTIC: HURDLES TO EXPLORATION AND PRODUCT EXPANSION

REGULATORY CLIMATE petitioning a dedicated UN commission. The United States is the only Arctic littoral state not to have become party to this agreement, Boundary agreements and which has been supported by Democratic UNCLOS and Republican administrations and the Joint Chiefs of Staff; it is also supported broadly Eighty-five percent of the vast untapped in the business community, including by oil, resource potential in the Arctic is contained gas, and fishing interests. Apprehension in the offshore. Before permission to explore and de- United States to becoming a signatory to the velop Arctic waters can be granted, the Arctic convention stems largely from the reluctance littoral states have had to (or must still) resolve of several U.S. politicians to cede too much questions of rights to a number of disputed power to the United Nations. Moreover, most territories. Until recently, there was no press- of the sizeable oil and gas resources in the ing need to resolve boundary disputes and U.S. Arctic reside within the 200-mile nauti- establish sovereignty over these waters and cal boundary, so the United States does not their subsea reserves, or even to codify mari- stand to lose significant resource potential by time laws and customs. This changed in 1994 remaining outside UNCLOS. U.S. regulators when the United Nations Convention on the also feel that conventional means of border Law of the Sea (UNCLOS) entered into force, dispute settlement, in particular arbitration establishing a framework to govern offshore and bilateral negotiation, are more favorable activity. to U.S. interests. UNCLOS signatories Rus- A section of the UNCLOS is dedicated to the sia and Norway took this alternative route to Continental Shelf and grants states sovereign settle their disputed Barents Sea boundary in jurisdiction over the resources on the con- 2010 and opened up 68,000 square miles to tinental shelf to a limit of 200 miles. Signa- oil and gas exploration. The United States and tories to the treaty have the right to obtain Canada have also opted for bilateral negotia- an extension beyond this 200-mile limit by tions to resolve an ongoing dispute over the

11 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT international maritime boundary between the in the offshore and 150 days onshore; thus, and Alaska. depending on well depth and complexity, it is challenging to drill a single-season well on the Lease Terms continental shelf, and even more difficult to drill a well in less than two to three seasons on the The length of lease terms in the Arctic has had shelf edge. Furthermore, the United States re- the greatest influence on North American Arctic quires a development plan and timeline as part resource development. Given the extremely high of the approval process for granting a license; costs of drilling in remote, icy Arctic conditions, adherence to the schedule can force an opera- and the severe limitations of the Arctic drilling tor to abandon a lease for any reason if com- season (drilling on average can be conducted mercial production is not achieved within the only during a three- to four-month window in the designated timeframe. summer), longer-term leases are one of the few incentives governments can offer to companies By contrast, Canada offers more favorable lease to justify the immense up-front exploration and terms that encourage greater risk-taking by drilling capital expenditure commitments. energy companies willing to commit capital and resources to the Arctic. The Significant Discov- The 10-year lease term in effect in the Alaskan ery License (SDL) offered in Canada differs from Arctic is inadequate to support ongoing ex- the U.S. system of leasing based on production ploration and evaluation of oil and gas poten- unit determination; upon discovery, operators tial. Given the infrequency of lease sales and retain control over their field until it becomes the lengthy permitting processes that involve economical to develop and produce the re- multiple federal- and state-level government source. Operators can acquire large tracts with agencies, the 10-year timeline is hardly long work commitment bids covering nine years. If enough to accommodate a preliminary drilling an exploration well hits trapped oil or gas during program; it also poses serious risks to cost- the nine-year term, the operator is granted an recovery prospects. The typical drilling period SDL and can keep the lease in perpetuity until it in the region is a maximum of 105 days a year finds time to develop the resources.

The Yukon Territory, and British Columbia’s energy infrastructure. The 10-year lease term for the Alaskan Arctic is inadequate to encourage responsible development of the region’s infrastructure.

12 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT Greenland’s terms are also more accommo- Despite these objections to further develop- dating than those in the United States. Green- ment, the Obama administration has commit- land permits operators to acquire much larger ted to moving forward with offshore leasing tracts of offshore blocks than the three square in Alaska. However, if the United States were mile blocks offered by the United States. to implement a leasing system similar to what Furthermore, in the Northeast Greenland off- is offered by Canada or Greenland, operators shore, operators can extend the initial license would have a more solid guarantee that even term to 16 years. This area holds extremely small discoveries could be held until they can promising resource development potential, be economically developed in the future. Such but it also poses some of the most—if not the a leasing regime would boost investor confi- most—challenging ice conditions across the dence and draw more interest to the Alaskan entire Arctic. The climate and challenging ice offshore. conditions in both Northeast and Northwest Greenland require advanced technologies and Technological/infrastructure ice-strengthened equipment for seismic and requirements and associated costs drilling activities. A preferable leasing regime It should be noted that safe and success- would extend the same 16-year lease period ful drilling campaigns were conducted in the enjoyed by Northeast Greenland to Northwest 1970s and 1980s in the U.S. and Canadian Greenland. Arctic. As discussed above, these successes Lease term agreements aside, it is also impor- should provide confidence that drilling in the tant to note that approximately 28 billion bbls world’s Arctic basins, particularly given their of oil equivalent lie in areas of the North Amer- relatively shallow depth, is technically achiev- ican Arctic that are either currently unavailable able and operationally feasible. However, the for leasing and licensing or are under develop- intrinsically high costs associated with the ment moratoria. The Alaskan Arctic contains remoteness of the region, the short drilling the largest portion at around 14 billion bbls. window, extreme conditions, and the more In September 2012, a group of Democratic stringent well containment and emergency re- senators11 called for the U.S. Department sponse requirements that followed the Deep- of the Interior to halt future Alaska offshore water Horizon incident will all continue to limit drilling leases until the president is able to access to those few IOCs or NOCs with deep make a case that drilling is safe in the region, pockets. As exploration activity in the North that the U.S. government can implement a American Arctic progresses, such measures better monitoring plan, and that companies will help to safeguard the Arctic ecosystem, can provide adequate oil spill response. Until but will also force operators to find creative those conditions are achieved, they argued, investment solutions, most likely in the form of even more areas should be off limits for bid public-private partnerships. rounds and leasing. The group also requested There are an estimated 412 billion barrels of that offshore Arctic drilling be removed alto- oil equivalent (boe) in undiscovered resources gether in the U.S. 2012-2017 offshore leasing in the Arctic; 75 percent of the estimated 40 program; this would include a potential 2016 billion boes in the Arctic deepwater is believed sale in the Chukchi Sea and a 2017 sale in the to be found in four areas: Beaufort Sea- Beaufort Sea.

13 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT Canada Basin; West Greenland-East Canada; is much greater, and access to rigs for Arctic East Greenland; and East Barents Basin. The operators is often a challenging prospect. economics of developing these fields is chal- There is limited justification for shipping this lenging, and producers are targeting pros- equipment to the Arctic given the extremely pects with at least 500 million to 1 billion bbls limited operating window and the need to of potentially recoverable oil. outfit the equipment with additional Arctic- proof features. Additionally, drilling contractors The strong currents, severe storms, multi-year are reluctant to send rigs to the Alaskan Arctic ice, and floating ice found in the Arctic require when they could be bidding on multiple well specially tailored seismic and drilling technolo- opportunities in the Gulf of . gies. Seismic exploration using 2D technology is difficult and expensive even in moderate Most equipment and rigs are typically leased pack ice; 3D seismic exploration is virtually for five years; an additional five-year option is impossible once pack ice gets too thick. Cur- often available. The very limited drilling season rent gravity-based offshore drilling structures in the Arctic complicates the economics of are limited to a maximum depth of 100 me- leasing such equipment; there are only a few ters. The industry has not yet demonstrated months of feasible drilling time, compared to an ability to employ deep pipeline trench- non-Arctic resource-rich areas where drilling ing (necessary to avoid ice scour) in depths activity can be conducted year-round. The di- beyond 100 meters.12 Such technology will lemma of equipment leases in the Arctic could be critically important in the Continental Slope be remedied at least in part by extending regions of the Canadian Beaufort and Green- longer-term (15-20 year) leases, similar to the land. Iceberg management strategies will also Canada and Greenland models. Public-private be important for Greenland and for parts of partnerships could also be used to establish the Canadian Atlantic offshore. equipment-sharing agreements.

More investment in research and develop- There is a strong case to be made in support ment will be necessary before drilling can of public-private partnerships as an effec- be considered beyond the shelf edge into tive and smart approach to Arctic oil and gas deeper waters. Regulatory requirements for development. Sweden and Finland have long relief wells, oil spill containment systems, and pursued public-private partnerships with ice increased environmental protection measures management vessels. The Swedish and Finn- will all require significant capital expenditures. ish governments employ the vessels in the Arctic resource development is reaching a winter; in the summer, the vessels head else- critical juncture and it is imperative that opera- where in the Arctic to be used in hydrocarbon tors not cut corners on technology and safety development projects. If the United States requirements. Just one accident would have and Canada are serious about stepping up serious implications not only for the culpable their game in Arctic resource development, operator, but could jeopardize future pros- public-private partnerships could help manage pects in the Arctic for the entire industry. some of the high capital costs associated with equipment acquisition. Public-private partner- There is a variety of rigs available globally for ships could accordingly promote and incentiv- offshore drilling. However, the demand for rigs ize additional investment in Arctic reserves. in conditions far less severe than the Arctic

14 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT The high cost associated with drilling devel- It should be noted that advances in drilling opment wells has been described as one of technology are beginning to reduce develop- the greatest hurdles limiting more extensive ment costs, and partnership agreements have technology development in Arctic oil and permitted some operators to mitigate addi- gas production. Beyond simple drilling and tional Arctic-specific cost burdens. shipping costs, additional financial outlays are required for safety and environmental protection, such as containment wells and SOCIAL AND ENVIRONMENTAL emergency response equipment. Following OPPOSITION IN NORTH AMERICA the Deepwater Horizon incident, 10 major oil companies committed more than $1 billion to Local and indigenous communities and en- fund the initial costs of developing a marine vironmental NGOs (ENGOs) have expressed well containment system to prevent future concerns with and even actively opposed the underwater well blowouts. Additional operat- expansion of Arctic hydrocarbon develop- ing and maintenance costs as well as con- ment. They have been particularly concerned tracts with operating vessels will significantly about the effectiveness of clean-up technolo- increase overall expenses associated with gies in the event of a spill, especially one that drilling in the Arctic. occurred at the tail end of drilling season where The Canadian government first enacted a ice re-formed before a spill could be contained. same-season relief well (SSRW) policy in A leaking well could cause immense damages 1976 that required operators to demonstrate if it were left leaking until the drilling season the ability to drill and complete a relief well recommenced the following year. within the same operating season. Technology The level of opposition from ENGOs and developments over the last several decades indigenous communities continues to mount have put the industry into a position to ques- as new leases are offered for previously tion whether relief wells are the most appropri- unexplored Arctic territory. Not only are these ate solution for safety, environmental protec- groups concerned about protecting the fragile tion, and resource conservation. Well capping Arctic ecosystem, but also about protecting (instead of drilling relief wells) is now being wildlife and the livelihoods of local communi- explored as a primary response tool because ties. They want to ensure that local popula- it is a faster solution for spill cleanup; it also tions are sufficiently compensated for the relies less on dispersants and other chemical exploitation of their resources. spill cleanup solutions. According to ENGOs, new government re- The well-relief costs outlined above come on quirements, and regulatory oversight and ad- top of an average well cost of about $600-900 ditional safety measures employed by energy million; leasing and permitting expenses add companies, are insufficient to protect Arctic even more to the total. Capital expenditure wildlife and marine ecosystems. requirements remain too great even for some has been the most vocal ENGO with very of the large oil majors to engage in Arctic proj- public campaigns against pan-Arctic explora- ects13; only a very few of the largest IOCs and tion and production for oil and gas. Among some NOCs are pursuing Arctic exploration. those protest efforts, which include scaling

15 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT rigs in the Arctic, Greenpeace has launched Alaska residents pay no state income tax; in an online petition and collected 1.6 million fact, they receive checks from the Alaska Per- signatures urging world leaders to declare the manent Fund, a corporation financed largely Arctic a global sanctuary and place it off limits by oil revenues. The oil and gas industry pro- to any oil and gas exploration. vides about 100,000 jobs or a third of Alaska’s employment. The extensive presence of indigenous groups, particularly those living close to areas where Currently the tax revenue advantages for local key Arctic oil and gas exploration and produc- communities apply only to state lands; they tion projects are underway, suggests that Arc- do not apply to the federally controlled off- tic states will have to make an ongoing and shore territory that is likely to see significant concerted effort to acknowledge the interests new production. Federal government revenue- and respect the concerns of these peoples. sharing with the State of Alaska could provide Many coastal indigenous groups in the North incentives to the local coastal communities American Arctic are concerned about how an that must assume much of the perceived risks oil spill might compromise fishing and whal- associated with offshore resource develop- ing, which are mainstays of their subsistence ment. economies. In order to alleviate some of these fears, Shell, for example, has agreed to sus- Finally, increased hydrocarbon exploration in pend drilling activity in the Beaufort Sea until the North American Arctic has forged closer the local indigenous Inupiat have concluded bonds among indigenous communities them- their traditional fall season. selves, which have begun to advocate for their common interests before national gov- Industry and indigenous communities have ernments. Indigenous communities have also worked together to build mutually beneficial started to participate in international fora re- arrangements in spite of concerns raised by garding Arctic energy and commercial devel- ENGOs. In Alaska, the $350 million annual opment. Six indigenous organizations are now budget of the North Slope Borough govern- permanent participants on the ; ment is funded with tax revenues paid by oil they have full consultation rights in connection companies operating in the state waters of the with the Council’s negotiations and decisions North Slope onshore and offshore. In addition, (see Section VI for more detail on the Council).

Greenpeace ship “Arctic Sunrise” is seen anchored outside the Arctic port city of Murmansk September 24, 2013.(Reuters / Stringer)

16 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT IV : HOW DOES IT COMPARE?

Russia’s and Norway’s experience with far Russia has continued to pursue exploration north and Arctic resource development activities in its western Arctic waters in the provides useful context and a basis of com- Kara, Barents, and Pechora Seas. The 2010 parison to better understand North American agreement between Norway and Russia on an scenarios. However, it is important to note Arctic border in the Barents Sea has unlocked that overall climatic and ice conditions vary significant opportunities for resource develop- significantly between the Western and Eastern ment by both countries. Hemispheres.

As in North America, exploration activity RESOURCE POTENTIAL AND LEASE began in the 1970s in Norway and the 1980s TERMS in Russia; neither country is a stranger to offshore development in extreme northern Russia climates. Seismic surveying of the Norwegian Barents Sea began in the 1970s, and explor- Russia is experiencing production decline at atory drilling in the 1980s. In 1984, Statoil its currently producing—but ageing—oil fields. discovered the Snøhvit development, the It is depending on tight oil production, as well world’s northernmost offshore gas field. Nor- as production in more remote East Siberian way has since drilled 94 exploration wells in and Arctic offshore fields, to meet its fiscal tar- its section of the Barents Sea and constructed gets and balance its budget. Furthermore, the the world’s northernmost liquefied natural gas government has been experimenting with vari- (LNG) facility near Hammerfest; it has a good ous adjustments to the tax regime to encour- reputation for compliance with strict environ- age production at fields that are remote or mental standards. more difficult to access. Russia needs these new fields to offset declines in production at In Russia, the first offshore Arctic gas field was its conventional, legacy fields and to maintain discovered in the Barents Sea in 1983, and production at a level of at least 10 million bpd in 1986 the first offshore oil was discovered beyond 2020.14 at the Severo-Gulyaevskoe field. Since then,

17 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT For Russia, and particularly the state-run oil nies for shelf access, private foreign compa- giant Rosneft, Arctic shelf development is a nies will inevitably benefit from the tax breaks longer-term strategic priority that could be extended to Rosneft. a significant source of production growth beyond 2020. The government is looking to Norway introduce tax incentives to make shelf ex- Norway is faced with a similar predicament ploration and production more economically as Russia in terms of production decline at its viable. The finance ministry announced plans ageing fields in the and Norwegian to finalize a tax package for the Arctic offshore Sea. Over the past few years, Norway has by 1 January 2014 that will apply to new shelf attracted more than $9 billion in investments projects that begin production from 1 January in far northern fields, largely due to the more 2016. Rosneft and the state-run gas company predictable and stable regulatory environment Gazprom enjoy exclusive rights to the Arctic for its offshore hydrocarbon developments. It shelf and already hold a combined 80 percent is important to note that although a good deal of the shelf currently open to exploration and of Norway’s future hydrocarbon potential lies production. Proponents of shelf liberalization in areas north of the Arctic Circle, the condi- argue that the two companies are unable to tions do not meet true Arctic criteria, particu- conduct timely exploration and production larly in terms of the ice regime. activities on their own in such challenging waters and that their monopoly will further There is potential for far greater activity in the delay progress in the Arctic. The tax package region if additional portions of offshore areas currently under consideration would include are opened up to the oil and gas industry. a number of incentives to make shelf proj- Currently 40 percent of Norway’s continental ects more economically appealing, including shelf remains off limits to exploration. One cancelled export duties and a reduced mineral such restricted area includes the waters off extraction tax. The energy and finance minis- the Lofoten, Vesteralen, and Senja islands, tries have been engaged in ongoing debates which Norwegian authorities estimate could over a range of topics including property tax, hold 1.3 billion boe; this region is situated royalty, VAT, and import duty calculations; closer to existing infrastructure than other customs procedures; and additional royalty acreage in the Barents Sea. Due to ecologi- discounts should oil prices fall below $60 per cal sensitivities associated with this area, the barrel. With ExxonMobil’s plans to begin Arctic government has postponed a decision on drilling in 2014, Russian tax reform legislation exploration until after Norway’s September should be passed by the 2014 deadline to 2013 parliamentary elections. Some members avoid further delays. of parliament want to introduce a ban on de- velopment until at least 2017. A parliamentary Meanwhile, Rosneft has announced plans to vote on opening up new areas for exploration spend nearly $40 billion in shelf exploration in the Barents could happen before the 2013 over the next 10 years and has established elections. joint ventures with IOCs such as ExxonMo- bil, Statoil, and Italy’s in order to tap their Interest in the Barents has picked up signifi- offshore technological expertise. Despite the cantly in recent years, due in part to the 2010 current restrictions on private Russian compa- Russia-Norway border agreement, which has

18 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT allowed Norway to open up the southern part In May 2012, Rosneft and Statoil signed an of the formerly disputed area. Statoil’s Havis agreement to jointly develop the shelf of the and Skrugard discoveries (estimated to hold Barents and Okhotsk Seas. The agreement 400-600 million bbls of recoverable oil) are establishes a joint venture to develop the also responsible for the uptick in interest. By Perseyevsky license area in the Barents Sea summer 2013, Norway’s Ministry of Petroleum and three fields in the ; Statoil and Energy will award 72 new licenses in the will finance geological prospecting work. Barents Sea, including licenses to drill Nor- Rosneft will then have the opportunity to buy way’s northernmost wells.15 a stake in Statoil’s North Sea and Barents Sea projects. The agreement permits Russia to In terms of taxes, Norway applies a 28 per- leverage Statoil’s vast offshore experience and cent corporate tax and an additional 50 its good safety record. The agreement also percent tax on profits derived from oil and gas creates an opportunity to stimulate Russia’s production, for a total tax rate of 78 percent. industry since the two parties These taxes are assessed only on earnings in plan to order ice-class vessels and drilling Norway, rather than as a proportional share of platforms that will be constructed in Russian producers’ worldwide earnings as is the case shipyards. in Alaska. Also, there are no federal property taxes, which are left entirely to the municipal- Rosneft has pursued similar agreements with ity. Much like its Arctic counterparts, Norway other IOCs that have extensive offshore expe- has felt pressure to offer incentives for its rience and are willing and able to fund explo- more remote, far northern fields. For example, ration work in Russia in exchange for a 33.3 in an effort to encourage development of the percent stake in the joint venture. This prefer- Snohvit natural gas field, Norway decided not ential tax treatment would make production at to apply the combined 78 percent profits tax the offshore fields more profitable. In addition on LNG shipped overseas, but instead to tax to its joint venture with Statoil, Rosneft has profits at just the 28 percent rate. an agreement with ExxonMobil and the two companies will start a seismic program in the TECHNOLOGY, INFRASTRUCTURE, AND in 2013; they plan to drill their first exploration well in the Kara Sea in 2014-2015. TRANSPORTATION Rosneft and Eni also signed an agreement to develop blocks in the Barents Sea. The two As in the Western Hemisphere, little infrastruc- companies will drill an exploration and ap- ture is in place due to the extreme conditions praisal well by 2020 in the Fedynsky block, and the remoteness of the Russian Arctic and located in the ice-free southern portion of the Norway’s far north regions. Developing resourc- Barents, and will also drill an exploration well es in these regions will require both specialized in the Central Barents by 2021. The Rosneft- technologies and large capital commitments. Eni agreement includes technology and staff In addition to its joint development agreement exchanges that will enhance Rosneft’s com- for the Barents Sea signed with Norway, Russia petence on the shelf. has also pursued a joint venture model with IOCs to gain access to additional capital and As Arctic interest mounts, Russia is well po- technical expertise as it expands exploration sitioned to become a leader in cutting-edge activity on its continental shelf. icebreaker and ice class vessel construction.

19 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT Hydrocarbon development will likely create a side of Gazprom’s Prirazlomnaya oil platform surge in Arctic shipping over the next decade; in the , claiming that Gazprom access to the Northern Sea Route (NSR)—a had failed to produce a comprehensive spill stretch from , Russia, to the response plan for its Arctic operations. The —will be crucial to this effort. With Association of Indigenous Peoples of the the help of modern icebreakers, it is estimated North, Siberia, and the Far East (RAIPON) has that ice class superlarge vessels will be able expressed its grievances with energy exploita- to navigate the NSR three to four months out tion in Russia’s resource rich northern territo- of the year along a route that cuts the travel ries, particularly the , arguing distance from to the Asian Pacific by that such activities could have a negative 40 percent. impact on members’ semi-nomadic lifestyle and disrupt the sensitive ecosystem. Russia The potential commercial viability of the NSR ordered the association to suspend activity lends support to Russia’s Arctic LNG projects, in November 2012 and temporarily banned it including Shtokman and Yamal. Russian gas from participating in Arctic Council meetings. producer Novatek, which operates Yamal in a RAIPON was reinstated in March 2013. joint venture, has signed a 15-year icebreaker transport agreement with the Russian state Russia has attempted to alleviate environmen- nuclear company Rosatom. Russia’s Baltiysky tal concerns through a series of environmental Zavod shipyard recently won a tender to build protection agreements with its Arctic joint ven- for Rosatomflot the largest nuclear-powered ture partners. The agreements outline mea- icebreaker of its kind for delivery by the end of sures to protect the Arctic ecosystem during 2017. And in December 2012, the River oil and gas exploration, and to minimize the tanker, operated by Dynagas and Gazprom impact of oil and gas activities on indigenous Global, completed the first successful LNG communities. Furthermore, Rosneft is consid- shipment from Hammerfest, Norway, through ering opportunities to cooperate with Russia’s the NSR to Japan’s Tobata terminal; the LNG federal space agency, transport ministry, and tanker was accompanied by a nuclear-powered emergency situations ministry. The Rosneft- icebreaker from state-owned Rosatomflot. Statoil declaration could set a precedent for bilateral agreements on responsible Arctic resource development among North Ameri- ENVIRONMENTAL AND SOCIAL can Arctic countries, or between Russia and CONSIDERATIONS IN RUSSIA Canada. AND NORWAY Most of the debate in Norway on resource development in the Far North is centered on Russia has not been immune to social and environmental issues and ecological con- environmental opposition to its Arctic re- cerns. Although Statoil has a solid record of source development ambitions. As in the rig safety, the company lost control of a North North American Arctic, the most vocal groups Sea well just a month after the Deepwater have been local indigenous groups and global Horizon accident in 2010. Statoil managed to ENGOs such as Greenpeace. In August 2012, shut 50 wells and avert a serious disaster, but Greenpeace environmental activists scaled the the accident raised concerns about the risks

20 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT of offshore drilling, particularly in more fragile, cies, seabirds, marine , and what is remote areas such as the Barents Sea. believed to be the world’s largest cold-water coral reef. In an effort to address concerns from en- vironmental groups, commercial interests, Norway’s indigenous Sami population has and opposition parties within the Norwegian spoken out against energy development in Parliament, the government of Prime Minister the past, expressing concern about adequate Jens Stoltenberg offered a compromise to protection of wild salmon runs and leave large areas in the northern Barents Sea feeding grounds. As the oil and gas industry and northeastern off limits to expands its footprint in Norway’s far northern exploration activities for the time being. The reaches, debate on environmental issues will fishing industry and environmental groups continue, particularly on the potential impact have expressed fears about the disastrous of pollution or spills on wildlife. impacts pollution or an oil spill would have on a region that is critical to commercial spe-

Unidentified people take part at the meeting in support of 30 Greenpeace activists charged with piracy at an oil platform in the Arctic, October 5, 2013 in , Russia. Photo by: vlad0209 / Shutterstock.com

21 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT V EAST-WEST: LESSONS AND COOPERATION

As resource exploration in the Arctic’s east- Alberta (tight oil and oil sands) are contained ern hemisphere catches up with the western in far more agreeable climates. The United hemisphere, technological progress continues States and Canada also have easier access to be made across the entire Arctic. Coopera- to existing infrastructure networks—or at least tion has helped identify best practices and op- easier access to locations where additional in- portunities for technology and policy transfer. frastructure can be built to link these fields to Russia and Norway continue to aggressively existing pipelines, railways, and ports. Howev- target new resources in their respective Arctic er, without longer and more accommodating and far north regions. Greenland is eager to lease terms and public-private partnerships to become the next big player. Canada and the facilitate equipment leases (a practice that is United States continue to direct greater at- already effective in Scandinavian countries), tention to developing unconventional plays. it will be difficult to incentivize large-scale Regional cooperation through organizations production in the North American Arctic in the such as the Arctic Council will result in greater near term. With respect to transportation and research and technology sharing, more co- shipping experience, tankering has become a operation on environmental preservation, and widespread practice in the Barents Sea, and better coordination on policy planning. the Russians have begun to experiment with limited tanker traffic to through Production of conventional energy resources the NSR. Russian companies are also us- faces sharp decline in the less remote, more ing icebreaking tankers to export oil to North temperate areas of Russia, and in Norway’s America and Europe from an ice-resistant North Sea and Norwegian Sea. At the same floating storage unit in the far north. The time, new energy projects in the far north United States and Canada continue to weigh and Arctic regions of Norway and Russia will the tradeoffs of pipeline versus tanker exports. become an important source of future sup- ply. This situation stands in sharp contrast As Arctic littoral states gain experience in to what is found in the United States and Arctic energy development, they have begun Canada, where significant tight oil reserves in to work through different treaties and interna- the Bakken and Eagle Ford formations, and in tional organizations to establish uniform safety

22 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT standards, search and rescue protocols, and on a range of issues relating to sustainable new environmental precautions. Having re- development and environmental protection. solved a long-standing border dispute, Russia In 2011, the Arctic Council member states and Norway have also worked to harmonize signed their first agreement on cooperation health, safety, and environmental standards in air and maritime search and rescue. Since for industrial activities in the Barents Sea then, an Arctic Council working group has through the Barents 2020 project. Norway completed the draft Arctic Marine Oil Pollu- also signed a historic energy agreement with tion Preparedness and Response Agreement, the United Kingdom in October 2011 commit- which will be signed in Kiruna, Sweden, at the ting to use the best available technologies to Arctic Council meeting in May 2013. The rapid manage energy sector-related emissions and expansion of oil and gas exploration activities to enhance environmental protection. Similar has exposed the need for pan-Arctic compli- cooperation agreements among littoral states ance with an established set of environmental in the North American Arctic could be an ef- regulations for hydrocarbon development. fective strategy for ensuring best practices in oil and gas exploration and production in Organizations such as the Arctic Council can those regions. help maintain open channels of communica- tion between key stakeholders and encourage Finally, the Arctic Council has been estab- best practices in Arctic resource exploration lished as the main, consensus-based, high- and development. Such cooperation and level intergovernmental forum through which discussion can ensure that the interests of the eight Arctic nations, six international social, environment, government, and in- indigenous peoples organizations, and non- dustry groups are adequately addressed as Arctic observer countries can coordinate the development of Arctic energy resources policies for the region. The council focuses continues.

Oil rig in Canadian Atlantic. As the current Chair of the Arctic Council, Canada will have a leadership role in determining how to responsibly develop the region’s energy resources while keeping geopolitical tensions manageable.

23 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT VI CONCLUSIONS: BEST PRACTICES

Despite the large variation in climatic condi- for operators to conduct preliminary drilling tions and offshore ice regimes between the programs in anything less than two years; it western and eastern Arctic regions, hydro- is even longer before production can reach a carbon development across the Arctic and state where cost-recovery can be achieved. far north comes with inherent risks. It is in the best interest of all Arctic littoral states to Short lease terms are particularly problematic find forums to share experience and technol- in Alaska, where the 10-year terms render the ogy, as well as to cooperate on environmental U.S. Arctic relatively unappealing to potential protection. While there is no one-size-fits-all operators, because of concerns this is an approach, certain lessons can be derived from insufficient time to recover extremely large the experience of oil and gas companies cur- up-front capital expenditure costs. Green- rently operating in the Arctic and the far north land and Canada offer slightly more favorable that can help create more cost-effective, effi- terms. Greenland offers an extension of up to cient, and safe approaches to resource devel- 16 years in northeast Greenland. In Canada, opment in the region. Shared best practices although work commitment bids cover just can also help mitigate disasters and improve nine years, operators can keep fields in per- overall accountability in the Arctic. petuity with a Significant Discovery License (SDL) if resources are found during this initial stage. The lease regimes in Greenland and LONGER LEASE TERMS Canada come closer to offering more attrac- tive and favorable timelines, but the longest possible lease terms would offer the most Longer lease terms are particularly important favorable conditions for operators. A combi- in the North American Arctic, where severe ice nation of Greenland’s lengthier lease terms conditions limit the window for exploration and for northeast Greenland and Canada’s SDL production activity to just three to four months would create more favorable conditions for of the year. Short lease terms, combined with operators across the North American Arctic. the more stringent consultation processes and Longer lease terms would give operators time regulatory oversight, make it extremely difficult to implement more comprehensive safeguards

24 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT and better observe best industry practices is expected to become a critical gateway for and safety precautions. LNG exports. Government financing of the port’s construction will come to $1.6 billion, while shareholders of Yamal LNG will invest PUBLIC-PRIVATE PARTNERSHIPS $830 million into port infrastructure.

Cooperation between state and private com- panies can potentially incorporate a wider EXPANSION OF ARCTIC COUNCIL’S range of interests in Arctic resource develop- LEGAL RIGHTS ment. Public-private partnerships can lever- age the most cost-effective, efficient, and The Arctic Council’s first two legally binding advanced technologies and methods avail- agreements will help enforce a uniform set of able; this is particularly true for shipyards and environmental and operating standards across shipbuilding efforts. the Arctic. These agreements will eliminate sources of ambiguity or confusion by clearly Construction of ice class vessels is extremely delineating roles and responsibilities of each costly. Many oil and gas companies that re- Arctic littoral state in search and rescue and quire such vessels for drilling, exploration, and oil spill response efforts. Future agreements production support find it prohibitively expen- could expand the role and prominence of the sive to construct their own, particularly when Arctic Council in Arctic affairs by enforcing the use of the ships is limited to one-third of environmental stewardship, representing the the year.16 A financing model based on a 20- interests of indigenous peoples, and promot- to-30 year contract between the state and a ing social responsibility and economic devel- private entity creates an opportunity to spread opment in far northern and Arctic territories. the costs over a much longer time frame. Indigenous peoples will likely play a much In most cases, the construction of icebreak- larger role in the development of hydrocar- ers is financed by the state. Public-private bons and other resources as new Arctic partnerships that share construction financing territories are opened to exploration and new and establish annual vessel sharing agree- leases are offered. With the ability to estab- ments will improve vessel access for all parties lish legally mandated consultations among involved. Furthermore, as resource extraction producers and indigenous groups, the Arctic activity increases in the Arctic, so will ship- Council can ensure that the interests of indig- ping. Governments will need more substantial enous groups are respected, their livelihoods fleets of ice class vessels for security, re- protected, and that resource and economic search, and surveillance. Public-private part- development benefit the communities. nerships, particularly in ship construction, can also reduce the financial burden to taxpayers. The Arctic Council could also play a role in coordinating best practices in the use of The same strategy can be used to support equipment and technology. As a pan-Arctic infrastructure projects such as port construc- forum, it can look at Arctic resource develop- tion. For example, Russia’s Sabetta Port on ment more holistically. It could promote the the northeast coast of the Yamal Peninsula application of new technology to oil and gas

25 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT development by establishing equipment stan- Bilateral agreements can be more comprehen- dards, best drilling techniques, and well safety sive and quicker to achieve than multilateral measures that are legally binding across the efforts. Canada and Russia have had a long- whole Arctic. Adding safeguards to Arctic standing debate over rights to the Lomonosov hydrocarbon development is a positive step Ridge and Mendeleev Rise; Russia submitted that will ensure the best interests of industry, a claim to the UN Commission on the Limits indigenous groups, and environmental organi- of the Continental Shelf in 2001 providing its zations. recommendations on how the shared border should be delineated. However, with 51 sea claims currently before the UN Commission BILATERAL AGREEMENTS and only three examined each year, a timely resolution is unlikely. Bilateral agreements Cooperation among Arctic littoral states can can resolve border disputes more quickly and ensure greater responsibility and adherence avoid inefficiencies and delays. to best practices at the local level. Collabora- tion among Arctic countries on best practices, environmental standards, and technology transfer can introduce an additional layer of accountability to ensure safe and responsible Arctic development.

Norway and Russia have recently been very active, reflecting the benefits of formal coopera- tion. The July 2011 maritime border agreement in the Barents Sea has enabled Russia and Norway to explore the resource potential in the region. Statoil and Rosneft have agreed to jointly explore offshore deposits in the region. Norway and Russia are also exploring the possibility of joint naval exercises in the Barents and Norwegian Seas. As climate change makes larger portions of the Arctic accessible, cooperation on bilateral energy exploration and maritime capabilities could benefit other nations as well (for example, among Arctic neighbors Canada, Russia, and the United States in the Chukchi and Beaufort Seas). USCG and Canadian icebreakers working in When possible, bilateral dispute settlements tandem to support American and Canadian and cooperation between countries in contig- Extended Continental Shelf claims. Elsewhere, uous Arctic regions can ensure that best prac- Russia and Norway also concluded a maritime tices are employed as operators expand oil border agreement which will allow for greater and gas exploration and production activities. resource exploration.

26 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT ENDNOTES bbls NGLs, followed by the Baffin Bay offshore, and the Sverdrup Basin and Arctic Islands. Ad- 1 According to an April 2012 report from Lloyd’s ditionally, the Labrador-Newfoundland offshore, in conjunction with Chatham House, avail- while estimated to contain smaller volumes of able at http://www.lloyds.com/~/media/Files/ oil at only 2.7 billion bbls, has fairly significant News%20and%20Insight/360%20Risk%20 natural gas reserves with an estimated 57 tcf Insight/Arctic_Risk_Report_20120412.pdf; for of gas. the purposes of this paper all monetary values 9 Greenland contains an estimated total of 16.1 will be presented in U.S. dollars. billion bbls of oil, 137.6 tcf gas, and 9.93 billion 2 Sakhalin has approximately 1.5 trillion barrels bbls of NGLs. The East Greenland Rift Basin (bbls) in recoverable reserves; Hibernia has is believed to hold the largest share of such about 1.2 trillion bbls in recoverable reserves reserves with 8.9 billion bbls of oil, 86.2 tcf of gas, and 8.1 billion barrels of NGLs. The West 3 From 6,900 million tons of oil equivalent Greenland Basin offshore contains the next (mtoe) in 2010 to 9,400 mtoe by 2035 most significant reserve base followed by the North Greenland Sheared Margin. 4 All resource estimates based on U.S. Geologi- cal Survey methodology, which uses a calcula- 10 The U.S. Merchant Marine Act of 1920 (better tion based on the mean, risked, undiscovered, known as the Jones Act) requires that ves- technically recoverable oil, natural gas liquids, sels transporting goods between U.S. ports and gas volumes. For more information see: be U.S.-flagged; these vessels must further- http://pubs.usgs.gov/fs/2008/3049 more be constructed in the United States and owned and operated by U.S. companies. 5 6.4 billion bbl of oil, 0.9 billion bbl of natural gas liquids, 83 tcf of gas 11 These Democratic senators include: Richard Durbin, IL; Barbara Boxer, CA; Frank Lauten- 6 An estimated 80.1 billion bbl of oil, 11.1 billion berg, NJ; Patrick Leahy, VT; Jeff Merkley, OR; bbl of natural gas liquids, and 595 tcf of gas and Sheldon Whitehouse, RI. 7 Estimates for the Chukchi Sea are 14.5 billion 12 This does not apply to the U.S. Outer Conti- bbls oil and 76.8 tcf of gas, and 9.2 billion bbls nental Shelf. of oil and 33.5 trillion cubic feet of gas for the Beaufort. Additionally, state waters and the 13 In July 2012, BP announced it would abandon onshore North Slope are expected to contain its offshore Alaska Liberty field, originally an- an additional 15.2 billion bbls oil, 61.3 tcf of ticipated to cost $1.5 billion. It cited increased gas, and 0.1 billion bbls of natural gas liquids. safety standards and additional technical South and Central Alaska also contain smaller needs that would add additional costs and volumes of oil and gas, an estimated 3.8 billion render the project uneconomical. bbls of oil, 61.3 tcf of gas, and 0.1 billion bbls of natural gas liquids. 14 The United States Geological Survey (USGS) estimates that the Barents Sea could contain 8 Undiscovered recoverable volumes are esti- as much as 11 billion bbls of oil and 380 tcf mated to be 20.2 billion bbls of oil, 186.8 tcf of of natural gas, and the Kara Sea another 2.5 gas, and 0.9 billion bbls of natural gas liquids billion bbls of oil and 622 tcf of gas. Ninety- (NGL). The region around the Mackenzie Delta five percent of Russia’s gas reserves and 60 onshore and Canadian Beaufort offshore con- percent of its oil reserves are believed to lie in tains the largest portion of these reserves: 8.1 the Arctic. With just 252 wells drilled on the billion bbls of oil, 67.1 tcf gas, and 0.2 billion entire Russian continental shelf, and most

27 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT concentrated in the Barents and Kara Seas in the west, Russia’s shelf remains largely unexplored. Additionally, there has been practi- cally no surveying or drilling carried out in the Laptev, East Siberian, and Chukchi Seas. Several promising finds have encouraged the Russian government and investors alike to pursue opportunities on the shelf, including the supergiant Shtokman gas field and the Ledovoye and Ludlov fields in the Barents Sea, and the Rusanov and Leningrad gas fields in the Kara Sea.

15 The exploration lease period for shallow water blocks will be seven years (down from eight years previously) and eight years for deepwater blocks (down from nine years previously).

16 An average icebreaker can cost as much as $200 million. The price is even higher for Russia’s nuclear-powered vessels, which cost more than $1.5 billion each. High-tech vessels with military enhancements can cost more than $850 million each.

28 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT PHOTO CREDITS:

Page 5: https://commons.wikimedia.org/wiki/File:Arctic_circle.png Page 6: http://futurejacked.blogspot.com/2011/08/chill-wind-from-north.html Source: DOE Page 7: http://www.swri.edu/3pubs/ttoday/fall96/pipe.htm Page 12: http://fairbanks-alaska.com/images/lgalaskamap.jpg Page 16: Reuters/Stringer Page 21: Photo by: vlad0209 / Shutterstock.com Page 23: Image 46 http://www.flickr.com/photos/hfxshippingnews/8392243442/in/set- 72157632554418200 All Rights Reserved. Halifax Shipping News. [email protected] Page 26: Is from NOAA http://continentalshelf.gov/media/healy_louis_s_st-lau- rent_600.jpg.

29 OPPORTUNITIES AND CHALLENGES FOR ARCTIC OIL AND GAS DEVELOPMENT