The Arctic has been described as the last major unexplored oil frontier. Melting sea ice has opened up vast areas of the Far North over the past decade, sparking a wave of interest from the oil industry. A 2008 appraisal from the U.S. Geological Survey estimates that there could be around 90 billion barrels of oil and 1,669 trillion cubic feet of natural gas located north of the Arctic Circle.
Despite its potential, the Arctic will not likely see large-scale development in the near-to-medium term, if ever. The region’s remote location, lack of infrastructure, harsh conditions, and most importantly, the high-cost of drilling will continue to undermine Arctic oil drilling.
Companies drop interest in U.S. Arctic
The U.S. Arctic is emblematic of the unrealized potential of oil and gas development in the Far North. In 2008, with much fanfare, the U.S. government sold off exploration leases in the Chukchi and Beaufort Seas north of Alaska for the first time in nearly two decades. As a whole, the oil industry paid $2.6 billion for leases, after submitting a record 667 bids on 488 blocks. The federal government, the state of Alaska, and the industry all hailed the historic result as a sign of new era for oil and gas drilling in the Arctic.
Nearly eight years later, after billions of dollars spent, a variety of mistakes, strong environmental opposition, and one disappointing well drilled, the last glimmers of hope for oil development have been snuffed out.
After billions of dollars spent, a variety of mistakes, strong environmental opposition, and one disappointing well drilled, the last glimmers of hope for oil development in the U.S. Arctic have been snuffed out.
Norwegian oil company Statoil announced on November 17 that it was pulling out of Arctic Alaska. In a press release, the company said that its leases in the Chukchi Sea “are no longer considered competitive within Statoil’s global portfolio.” Statoil will relinquish 16 leases in the Alaskan Arctic in which it was the lead operator, and it will exit a further 50 leases in which it partnered with ConocoPhillips. The company also plans to close its office in Anchorage, ending a seven-plus-year saga in Alaska with little to show for it.
Alaskan Senator Lisa Murkowski hurled criticism at the Obama administration, blaming regulatory confusion for Statoil’s decision to pull the plug on Arctic drilling. “Low oil prices may have contributed to Statoil’s decision, but the real project killer was this administration’s refusal to grant lease extensions; its imposition of a complicated, drawn-out, and ever-changing regulatory process; and its cancellation of future lease sales that have stifled energy production in Alaska,” Sen. Murkowski said in a statement.
However, it is far from clear whether greater accommodation from the Obama administration would have rescued Statoil, or Arctic drilling in general. Drilling in the Arctic is extraordinarily expensive, and the frontier region suffers from a lack of infrastructure, along with harsh drilling conditions such as severe storms and sea ice.
In Senator Murkowski’s statement, she understates the role that low oil prices played in Statoil’s decision. The spectacular bust in oil prices is overwhelmingly behind the death of oil exploration in the Chukchi Sea. Oil companies eyeing the Arctic are scrambling to fix massive holes in their balance sheets. Statoil has been in the midst of a cost-cutting campaign as revenues have dropped significantly over the past year. In the third quarter, for instance, Statoil’s profits fell by 60 percent, and including impairment charges, the company swung to a quarterly loss. Statoil expects to cut spending by $3.5 billion in 2015, a 17.5 percent decline compared to the previous year. Exploratory drilling in a risky region such as the Arctic is a luxury that a beleaguered company cannot afford.
Statoil’s decision to scrap its Arctic drilling comes after several years of hesitation in the Chukchi Sea. The Norwegian firm purchased leases back in 2008, but never followed through on drilling in a substantial way. It instead opted to let Royal Dutch Shell blaze the trail before making any major investment decisions. In 2013, Statoil said that it would put its drilling plans on ice until the lessons from Shell’s campaign emerged. “One of the reasons—if not the only reason—for us to push back is that ideally we’d like to see Shell carry through . . . and basically learn from that before we embark on something similar,” Statoil’s executive vice president of global exploration Tim Dodson said at the time.
Shell’s campaign did not turn out well. On September 28, 2015, after a summer of drilling in its Burger prospect in the Chukchi Sea, Shell called it quits. The Dutch company said in a statement that it found oil and gas, but the volumes “are not sufficient to warrant further exploration.” Due to its poor results and the high costs of drilling, Shell would “cease further exploration activity in offshore Alaska for the foreseeable future.”
Senator Murkowski is right that the Obama administration put the nail in the coffin for Arctic drilling when it canceled future lease sales in October 2015. But it did so only because, unlike 2008, there was almost no interest from the industry.
Arctic Russia moves forward, slowly
Russia, meanwhile, is taking action on its side of the Arctic where state-owned firms can pursue strategic interests with less regulation and environmental concerns are less of a concern.
Russia is taking action on its side of the Arctic where state-owned firms can pursue strategic interests with less regulation and environmental concerns are less of a concern.
Gazprom Neft started production in 2013 at the Prirazlomnoye field in the Pechora Sea, using the world’s first ice-resistant platform. Production started at 5,000 barrels per day, but Gazprom Neft expects to ratchet up output to .12 mbd by the end of the decade. The Novy Port field, which is onshore and north of the Arctic Circle, is expected to come online in 2016 and eventually reach peak production of .17 mbd by 2020. A handful of other onshore projects are in the development phase.
Although Russia has opened up Arctic offshore, it has run into several problems that could cap its potential. Western sanctions have inhibited Russia’s ability to access capital and technology to keep Arctic plans moving on schedule, and top Russian officials have admitted that delays in finding alternative suppliers have held back offshore development. For instance, ExxonMobil and Rosneft jointly discovered a 1 billion barrel oil field in the Kara Sea in September 2014, but Western sanctions forced the American multinational to withdraw shortly afterwards, taking its expertise and supplies with it.
Russia hopes to overcome this problem by developing its own technology and has drafted a plan that calls for cutting the share of imported equipment for oil projects by 60 to 70 percent by 2020. Gazprom is working on developing its own technology, but it is unclear how much progress is being made. A report from Oxford Energy earlier this year concluded that Russia will need significant investment in manufacturing capacity in order for Russia to replace foreign technology. Russia often sources as much as 80 percent of the required equipment from abroad. This includes advanced technology such as seismic software, offshore drilling equipment, and knowledge on hydraulic fracturing. While some of this could be manufactured domestically, it will likely take until 2020 before a substantial share of the needed equipment can be replaced with Russian-made sources. Even that timeline may be optimistic.
In the meantime, Russia may turn to Chinese suppliers to fill the gap. Rosneft is reportedly in talks with China which could lead to Chinese state-owned firms participating in Arctic development, according to Russian Deputy Energy Minister Anatoly Yanovsky. Rosneft signed a deal with China Oilfield Services Limited in September to drill two exploration wells in the Sea of Okhotsk, along with Statoil. As relations with the West have soured, Russian oil firms will need to increasingly rely on Asian partners.
Access to technology is not the only, or even the largest, problem standing in the way of Russia’s Arctic ambitions. The collapse of oil prices is arguably much more damaging.
However, access to technology is not the only, or even the largest, problem standing in the way of Russia’s Arctic ambitions. The collapse of oil prices is arguably much more damaging. With Brent crude trading at less than half of what it was in mid-2014, Arctic drilling is simply unprofitable. The main Russian oil firms—Rosneft, Gazprom Neft, and Novatek—will likely delay 29 oil projects because of low oil prices, several of which are located in the Arctic. Gazprom Neft’s Zapadno-Tambeyskoye, for example, is a field located on the Yamal Peninsula. The project may not come to fruition until at least 2023, more than six years behind schedule. Rosneft will defer drilling the Pobeda field, the 2014 discovery it made with ExxonMobil, by a few years as well.
Oil production from the Russian Arctic remains viable in the long-term, but if low oil prices persist through the rest of this decade, investment would be capped. Sanctions and the lack of access to modern technology and capital will also slow production increases. Oil will likely flow from the Russian Arctic, but it may only come in at a trickle rather than flood.
Arctic drilling in Canada or Norway?
Development in the Canadian Arctic is an even longer shot than the U.S.
Development in the Canadian Arctic is an even longer shot than the U.S. Few companies had serious plans to begin drilling in Canada’s Arctic area. Many waited to see what would happen with Shell’s Chukchi campaign before moving forward. Chevron said its plans to drill in the Beaufort Sea would be deferred indefinitely. Imperial Oil, along with partners BP and ExxonMobil, also suspended drilling plans in the Canadian Arctic, arguing there was not enough time to move forward before their leases expired in 2020. Shell’s failure in the Chukchi effectively killed plans in the Canadian Arctic.
Italian oil giant Eni may have the only other sizable oil production asset in the offshore Arctic. The Goliat field, located in Norwegian waters, has been beset by cost overruns and delays, but it is expected to come online by the end of 2015 or early 2016, several years behind schedule. The floating production facility came with a 5.6 billion euro price tag, but Goliat will be the first oil-producing field in the Barents Sea and the world’s northern-most producing offshore field. Peak production is expected to reach .1 mbd.
The dim future of Arctic production
Producing oil and gas from the Arctic has turned out to be a lot more difficult than many realized. Oil from the Chukchi and Beaufort Seas in American and Canadian waters can essentially be written off for the foreseeable future. Even if oil prices rebound, stiff environmental opposition could deter drillers from plunging back into icy waters. The FT reported in September that Shell privately admitted that environmental protest “had a bigger impact than expected, and damaged the company’s reputation.”
With the world awash in oil today, drilling in the Arctic does not make economic sense.
That leaves only a handful of oil projects in Russian and Norwegian waters likely to move forward. But those too are facing—and will continue to face—significant delays and cost overruns. Oil fields in production were planned years ago when oil prices were high. With the world awash in oil today, drilling in the Arctic does not make economic sense.