The Cipher Brief spoke with Dr. James Henderson of the Oxford Institute to get his thoughts on the energy potential of the Arctic.
The Cipher Brief: What are your thoughts on the energy potential of the Arctic?
James Henderson: The potential resource base of hydrocarbons in the Arctic is very large, with the United States Geological Survey having estimated that the region could contain around 130 billion barrels of liquids and 1670 Tcf of gas, equivalent to around 15% of the world total for the former and 30% for the latter. The majority of this is likely to lie off the coast of Russia, which has the longest Arctic frontier, but Norway, the US, Canada and Greenland also have hopes for significant discoveries. An important distinction has to be made between oil and gas, though, in terms of the incentive for companies to explore in Arctic waters. Companies would much prefer to discover oil rather than gas due to the relative ease of transport (via tanker rather than via extensive pipeline systems or expensive LNG plants), and this is particularly true in Russia and the US where significant gas reserves already exist onshore. Any offshore Arctic discovery will take many years to develop, but gas discoveries are likely to be put aside for decades, and may indeed never be developed if renewable energy continues to take a much greater share of the global energy balance. Oil discoveries would potentially be brought onstream more rapidly, although at current low prices the incentive to spend the billions of dollars that will be needed in capital expenditure is likely to deter investment in the short-term. As any new fields will not come onstream until the end of the next decade at the earliest, though, the Arctic remains of interest because most companies would expect the oil price to have recovered by then.
TCB: What are the challenges of Arctic oil exploration? To what extent will the melting of the Arctic make it easier to access resources in this region?
JH: The key challenge is the remoteness of the region and the harshness of the environment. This makes it difficult to move equipment in and to potentially move hydrocarbons out, once they have been discovered and produced. Costs are much higher because of these issues, which means that relatively high oil prices are needed to generate sufficient revenues to allow companies to make a profit on their investment. Given the current state of the oil market, the Arctic is clearly not high on most companies’ priority, although some such as Shell are pushing ahead with exploration plans. Other companies, though, have taken the view that the other major risk of Arctic exploration, an oil spill or other environmental disaster, is too much of a threat and are foregoing investment altogether. An oil spill under ice could possibly be uncontrollable, and the financial and reputational risks for any company, no matter how large, could potentially see it bankrupted by a major incident.
The melting of the Arctic ice can ease some of the operational and cost issues, as it would obviously be easier to move equipment around and to export hydrocarbons. Operational bases would be easier to build and man, journey times to and from rigs would be shortened and the risks of ice damage would be reduced. Ships are already travelling via the Northern Passage from Russia to Asia for five months per year, and it is anticipated that this will increase over the next decade, allowing both oil and LNG to move east as well as west from projects currently under development.
TCB: What security challenges are most likely to impact energy sector operations within the region? For example, do you see Russian militarization in the region as a potential threat?
JH: As the Arctic ice melts and the transport routes open up the Arctic will inevitably become of more geo-strategic interest, particularly because of the countries which bound the region. Already Russia has planted its flag under the ice at the North Pole, all the litoral states have made claims on territory outside their 200km boundaries, and even China has expressed an interest in being involved in the region and has invested in some Russian ventures. Russia has conducted military manoeuvres and President Putin has stated that he intends to establish an Arctic force, underlining his position that Russia must establish a key presence in this vital region. The impact on the energy sector is that oil and gas operations can be used as a stepping stone to develop infrastructure in the region which can ultimately also be used for military purposes. Airports, roads, railways and ports can all have dual purposes, and Russian government support for hydrocarbon projects in the Russian Far North shows that it clearly understands this. Ultimately exploration and production of oil in the Arctic can provide significant revenues and taxes, but it can also help to build a foundation for future geo-political action if required. As a result, the race to establish a Russian energy business in the Arctic can also been seen as part of the drive to assert Russia’s broader claims to significant influence in the region.
