Over ten years ago, the US Geological Survey estimated that over 22% of the world’s undiscovered oil and gas resources are located in the Arctic, most of it offshore. Since then, there has been a string of reports about the ensuing ‘race’, ‘fight’, and ‘scramble’ for these resources. Indeed, it remains undecided which States have sovereign rights over some parts of the Central Arctic Ocean, but most of the Arctic maritime boundaries have been established decades ago, and further delimitation process is going in accordance with the rule of law. To this day, the predicted rush for Arctic resources has not begun – only Russia, Norway, and the US have active petroleum production activities, albeit very limited. This article will provide an overview and outlook of the Arctic oil and gas development in light of the recent developments in maritime delimitation and environmental risks.
A brief history of petroleum development in the Arctic
The Arctic has been an extractive industries playground since the beginning of the 20th century. In 1906, coal mining started in Longyearbyen, Svalbard. For decades, large-scale mining operations have been developing gold, nickel, diamonds and other minerals in Russia, Canada, Alaska, Scandinavia, and Greenland. Russia, or rather the Soviet Union, was the pioneer in Arctic oil and gas exploration, with the first oil development dating back to the 1930s. In the US, after success in Prudhoe Bay, the first offshore exploratory well was drilled in 1976. Exploration drilling off Alaska peaked in 1984 -1985, but with the oil price crash and high operation costs, no substantial production followed.
The offshore petroleum exploration in the Canadian Arctic began in the early 1970s through a public-private partnership, Panarctic Oils. While a lot of discoveries were made in the ’80s, the costs of developing the oil and getting it to the market made the large-scale production unfeasible. Across the ocean, in Norway, offshore petroleum development was already established in the early 1970s and has since been gradually moving north to the Norwegian and Barents seas. The Parliament opened the Barents Sea for oil and gas activities in 1979.
Despite the rich history and the recent discoveries, the current production is not as large-scale as commentators predicted.
Where we stand now
Today, petroleum production in the Arctic waters occurs in Russia, Norway and in the US. Russia was the pioneer again with the Prirazlomnaya platform in the Pechora Sea, but not without controversy. Production has been delayed several times due and the platform was mounted by Greenpeace activists, who were later arrested and spent some weeks detained in Russia. Despite these setbacks, Prirazlomnaya serves as a proud example for the Russian State industry and could become a hub for further developments in the Pechora Sea.
In the Norwegian Arctic, oil is being produced in the Barents Sea, from the Gøliat platform, specifically designed for Barents conditions . There has also been natural gas development at the Statoil (now Equinor)-operated Snøhvit, since 2007. It is entirely sub-sea, with pipelines connecting subsea wells to the processing plant on the island of Melkøya off the coast of Hammerfest. Statoil reports that Snøhvit license contains ‘enough gas for maximum capacity utilisation of the processing and transportation facilities until 2042, and sustained production through 2050, and beyond’. Statoil is planning to produce from the Johan Castberg development 100km north of Snøhvit, projected to be one of the biggest oil-producing fields in Norway. However, other Barents Sea developments are not so successful, the drilling results in the Eastern Barents have been disappointing.
In the US Arctic, offshore production is currently occurring only on artificial islands. One is the Northstar in the Beaufort Sea (in production since 2001). The second field, Liberty, has recently received the final approval from the regulator. No further imminent developments offshore are planned. Shell’s infamous decision to pull out of their Chukchi Sea development in 2015, after having spent an estimated seven billion USD, must be serving as a warning for other oil majors.
Finally, in Greenland, there is currently no production. After a string of unsuccessful exploration wells, the industry seems to have lost interest, with no bids posted in the latest licensing round.
Most of the discussions over the ‘race’ or ‘scramble’ for Arctic resources refer to the fact that not all maritime borders have been finalised in the Arctic Ocean. However, the Arctic States are all following an orderly process of maritime delimitation in accordance with the United Nations Convention on the Law of the Sea (UNCLOS).
With regards to offshore petroleum development, the UNCLOS confirms sovereign rights of the coastal States to natural resources in the seabed of the Exclusive Economic Zone (EEZ), 200 nautical miles offshore and in the continental shelf which may stretch further. If States’ EEZ or continental shelf claims overlap, the UNCLOS prescribes a number of ways for them to peacefully resolve the potential dispute. This practice has been followed in the Arctic. For example, Russia and Norway signed the delimitation agreement for the Barents Sea in 2010. The EEZs in the Arctic have now been delimited with an exception of a disputed area in the Beaufort Sea between Canada and the US.
With regards to the outer limits of continental shelf, the States’ rights for resources there do not depend on any occupation or proclamation, according to the UNCLOS. However, they have to make submissions to the UN Commission on the Limits of the Continental Shelf. In the Arctic, most States have made their submissions, with the exception of the US, which is not a party to the Convention, but accepts most provisions on EEZ and continental shelf (Truman Proclamation, 1945; EEZ Proclamation, 1983). Just last month Canada has lodged its partial submission to the Commission, Russia has lodged its revised submission in 2015. Reading the Arctic States’ submissions together, there is an overlap in the North Pole and the Lomonosov ridge (see map here). The Commission is not an adjudicator and consists of scientists, who study the submissions and make a relevant recommendation. It is ultimately up to the States to peacefully resolve their overlapping claims, which the Arctic States committed to doing in the Ilulissat Declaration (2008). Indeed, they would have little economic interest to fight over those areas, as the assessment of the Arctic petroleum resources conducted by the US Geological Survey places the majority of the petroleum resources within the Arctic States’ EEZs.
Arguably, the more pressing risks of the large-scale petroleum development in the Arctic are the risks of environmental harm from such activities due to the limited resilience of the northern ecosystems to pollution and the difficulty of conducting clean up and rescue operations in the region. Arctic is home to over 4 million people, many of whom live in indigenous communities that remain linked to their lands and waters, and depend on them for subsistence.
Offshore oil and gas development is associated with routine emissions into air and water, but the biggest risk to the marine environment, is arguably posed by a possible large-scale oil spill in the Arctic Ocean. Previous disasters, Deepwater Horizon in the Gulf of Mexico or Montara in Australia, demonstrated the difficulty in dealing with consequences even in the warmer waters, milder climate, and with more infrastructure. The US Bureau of Ocean Energy Management estimated that in the course of the proposed production in the Chukchi Sea there is a 75% chance of one or more spills of more than 1,000 barrels of oil. In the Arctic conditions, the response operations would be challenging due to the short duration of the ice-free seasons, lack of infrastructure, and lack of proven methods of oil spill clean-up in the Arctic conditions. Generally, the effectiveness rates of spilled oil recovery are low: only about 25% of oil spilled during the Deepwater Horizon blowout was recovered, burned or skimmed during the response operations.
Environmental destruction caused by an oil spill would be more severe and last a longer period of time in the Arctic than the impact in more temperate climates due to the lower rate of oil biodegradation in cold temperatures. If spilled, oil would ‘persist in the Arctic environment for decades’.
Some characteristics of the Arctic environment and wildlife species ‘exacerbate the potentially negative consequence of an oil spill to Arctic waters’. During the 1989 Exxon-Valdez oil spill in Alaska, this was the main cause of the death of over 250,000 seabirds and thousands of marine mammals, subsequently leading to a nesting failure, which resulted in a loss of thousands of additional birds.
At the international level, there are agreements regulating cooperation in response operation post-oil spill, but there is a gap in regulation of prevention through standards for safety, equipment, and materials used in drilling. Arctic Ocean countries have very different approaches to regulating offshore oil and gas development, but the regional intergovernmental forum, the Arctic Council, has developed guidelines and collected best practices for petroleum activities in the Arctic waters.
The future of Arctic resources remains unclear even today. The Shtokman development, the ‘giant gas field’ the in the Barents Sea long hailed to boost LNG sales, has recently been reported to be abandoned. Coupled with the lack of industry interest in Greenland, Alaska, and Canada, and the lack of large-scale discoveries in Norway, it does not look like any sizeable and ubiquitous development will be taking place in the Arctic in the next 10-15 years.
In the long term, developing Arctic petroleum raises not just pollution, but climate concerns. Based on the latest assessments, developing and burning the Arctic resources, would inevitably bring global warming over 2°C, breaking the goal established in the Paris Agreement. Furthermore, the current oil and gas prices, still low as a consequence of the ‘shale boom’, do not make expensive Arctic developments very attractive without substantial subsidies.
At the same time, the Arctic States are historically large-scale petroleum producers and exporters. Some are heavily dependent on crude petroleum exports, which constitute a sizeable share in Russian and Norwegian GDP, 30% and 16% respectively. With demand for fossil fuels showing no signs of slowing down, and the lack of ambition in the Arctic States of economy diversification, it is fair to expect northern resources to be developed sooner or later.