Major oil and gas investment to the tune of $100million in the Arctic is predicted over the next 10 years, according to new research.
However, the Chatham House study warns that, given the “high risk/potentially high reward” nature of Arctic investment, this figure could be a lot higher . . . or lower.
Evidence of how difficult forecasting activity in this challenging though politically relatively stable region is the cancellation of a major $30-40billion Alaskan natural gas export pipeline due to the impact of cheap shale gas development and production many hundreds of miles to the south.
By a similar token, the estimated cost of producing a barrel of Arctic oil ranges from $35 to $100 whereas production costs in the Middle East are sometimes as little as $5 per barrel.
However, it would appear that the hunt for and exploitation of oil resources in northern latitudes will remain attractive, buoyed up by an apparently fairly robust market, despite global economic tensions and weakness of key regions such as Europe.
The report states:
o The Arctic will remain a complex risk environment. Many of the operational risks to Arctic economic development – particularly oil and gas developments, and shipping – amplify one another.
o The resilience of the Arctic’s ecosystems to withstand risk events is weak, and political and corporate sensitivity to a disaster is high.
o The environmental consequences of disasters in the Arctic are likely to be worse than in other regions
o While particular risk events, such as an oil-spill, are not necessarily more likely in the Arctic than in other extreme environments, the potential environmental consequences, difficulty and cost of clean-up may be significantly greater, with implications for governments, businesses and the insurance industry. Trans-border risks, covering several jurisdictions, add further complications.
o The politics of Arctic economic development are controversial and fluid.
“Arctic development is often politically contentious, with sometimes opposing interests and perspectives between local, national and international levels. Political support for development will continue to represent an uncertainty for businesses seeking to invest in Arctic projects,” says the report.
“The challenges of Arctic development demand coordinated responses where viable, common standards where possible, transparency and best practice across the north. These frameworks need to be in place to enable sustainable development and uphold the public interest.”
It points out that robust risk management is fundamental for companies wishing to work safely, sustainably and successfully in the Arctic
“There are many practical steps businesses can take to manage risks effectively, including investing in Arctic-specifc technologies and implementing best-in-class operational and safety standards, as well as transferring some of the risks to specialist insurers.”
Chatham House warns that investment in science and research – both by government agencies and by private companies – is essential to close knowledge gaps, reduce uncertainties and manage risks.
Moreover, Arctic economic development can only proceed at a rate that takes into account these factors, that can be measured against environmental baselines and that recognises the primary role of governments in setting frameworks and establishing public policy
“Further research is required to ensure future development takes place sustainably and does not cause irreparable damage to the environment,” says the organisation.
It calls for major investment in infrastructure and surveillance to enable safe economic activity and argues that, across many aspects such as shipping, search and rescue, infrastructure is currently insufficient to meet the expected demands of economic development.
Public/private co-operation is needed to provide this infrastructure.
Chatham House concludes that:
o Full-scale exercises based on worst-case scenarios of environmental disaster should be run by companies with government involvement and oversight to provide a transparent account of the state of knowledge and capabilities, to foster expertise and to assuage legitimate public concerns.
o Companies have a responsibility and interest in establishing industry-wide standards and expectations for safety and stewardship, through the Arctic Council, through the International Maritime Organisation or through industry associations. Failure by one company will have impacts for others.
o Integrated ecosystem-based management, incorporating the full range of economic factors, is needed in order to avoid one activity harming and displacing others and to take full account of the cumulative impacts of development. Long-term viability should be a key policy consideration for governments, business and other stakeholders.
o The mosaic of regulations and governments in the Arctic creates a multi-jurisdictional challenge for investment and operations in the Arctic. Working through the Arctic Council to promote high and common regulations for Arctic economic activity is key.
o Governments should be clear about the purpose and scope of military activities in the Arctic, so as to prevent misunderstanding or miscalculations from developing. At the same time, additional state policing capacity in the Arctic – to police and protect – should be broadly welcomed.
And the size of the prize?
In 2008, the United States Geological Survey estimated that the Arctic contained some 412.2billion barrels equivalent of oil and gas.
Over two-thirds of this was estimated to be natural gas – about 46trillion cu.m, representing 30% of global undiscovered natural gas.
Some 90billion barrels were estimated to be oil – roughly 13% of the gross global estimate based on current knowledge.
In general, the Russian Arctic is considered to be more gas-prone and the offshore Norwegian and American Arctics (including Greenland) more oil-prone.
The mean estimate for the Barents Sea in 2011 was 6billion barrels of oil equivalent. Over the course of just a single year . . . from the Skrugard oil find in January 2011 to the Havis find in January this year, Statoil alone reported Barents oil finds of some 400-600million barrels of recoverable hydrocarbons.