Battle for the Arctic

The link opens up to a colorful webpage and an animated image of the Arctic night sky. On top of the page, in large bold letters in both Chinese and English, is the message: “SAVE THE ARCTIC.” The accompanying video, shown on numerous Greenpeace websites globally as well as the Greenpeace International home page, is short, a mere 1:36, but hard-hitting. The name of the video is “Save the Arctic from Shell and its Russian friends.” 

It begins with a cartoon polar bear adrift on a sheet of ice as a British female narrator intones. This is an improved image over a Photoshop fake that has made the rounds of the blogosphere when global warming rhetoric was warmer. “The Arctic is melting,” the narrator says, “and as the ice melts the oil companies are moving north. They are determined to drill for the same fuels that caused the melting in the first place.” 

That’s when Greenpeace loses us. As the well-scripted but obvious spin unfolds, our misgivings have all faded away. The video then lists a brief history of accidents and the dangers of Arctic drilling, mentioning Shell’s recent unsuccessful offshore drilling attempts in Alaska, a 2011 Gazprom accident, and what the narrator calls the dangers of Gazprom’s outdated equipment. 

The video nears its end with these poignant words: “If we don’t stop them, an Arctic oil spill is inevitable.” The narrator concludes by asking the world to stand up to Shell to stop Arctic drilling.

Deal With a Russian Devil 

Meanwhile, the Greenpeace International website says, “Shell is getting increasingly desperate to plunder the Arctic in any way possible. It has recently made a deal with the devil: partnering with Russian oil and gas giant Gazprom to access the Arctic through Russia.” We’d like to hear what Vladimir Putin thinks about that statement.

While not disputing the fact that Shell did try to drill in Alaska but was unsuccessful, nor the fact that Gazprom did have a major accident in 2011, nor even examining the credibility of the bold sweeping statement that fuels caused the Arctic ice to melt in the first place, we will address who is interested in drilling for Arctic hydrocarbons and also the challenges, safety issues, and possible environmental impact that drilling in the Arctic brings.

To do this we have to head east (depending on your current location) to China, the newest shaker and mover on the global oil stage, north to the Arctic itself, and back around again.

The Middle Kingdom Goes North

It should be no surprise that China would be interested in exploring for and securing hydrocarbons in the Arctic. Its insatiable oil and gas appetite leaves the world’s largest consumer of energy with little choice, while a slice of vast Arctic reserves would continue to diversify the country’s oil and gas supplies. The Arctic holds an estimated 13 percent (90 billion barrels) of the world’s undiscovered conventional oil resources and 30 percent of its undiscovered conventional natural gas resources, according to an assessment by the U.S. Geological Survey. 

Yet tapping these resources won’t come easy, or cheap. The U.S. Energy Information Agency (EIA) said last year that “Studies on the economics of onshore oil and natural gas projects in Arctic Alaska estimate costs to develop reserves in the region can be 50-100 percent more than similar projects undertaken in Texas.” In other words, Arctic drilling is expensive, so profit margins will be lower.

In spite of these challenges, China stills wants in. On June 13, an insider with Sinopec, one of three Chinese state-owned national oil companies, told media that it started initial talks with the Icelandic government over oil exploration in the northeastern coastal waters of the country. Prior to this, CNOOC, China’s largest offshore oil producer, said publicly that it had been invited by the Icelandic government as well as Iceland-based EykonEnergy to take part in offshore oil and gas exploration and development in Iceland’s Arctic waters. Both sides are currently busy in negotiations, according to China’s nbd.com.cn. China’s third oil major, CNPC, has already gained access to Russia’s Arctic gas fields by concluding a framework agreement with Novatek, Russia’s largest independent natural gas producer.

Other companies that have either begun exploratory work in the Arctic Circle or plan to do so include Anglo-Dutch major Royal Dutch Shell, the U.S.’s Exxon Mobil and ConocoPhillips, France’s Total, Norway’s Statoil and Italy’s Eni, making the Arctic a truly international play.  

The EIA cites several Arctic-drilling challenges, including long supply lines and limited transportation access from the world’s manufacturing centers. It said that overlapping and disputed claims are also a problem, while the area north of the Arctic Circle is apportioned among the eight countries of the Arctic Council: Canada, Denmark (Greenland), Finland, Iceland, Norway, Russia, Sweden, and the U.S. 

However, Dr. Lassi Heininen, Professor at the University of Lapland in Finland, whose studies include geopolitics, environmental politics, Russian studies and Arctic studies, has a different take. While juxtaposing the current geopolitical situation there with the second half of the 1980s when companies could not operate in the Arctic due to the Cold War, Heininen told Energy Tribune that globalization makes Arctic drilling attractive now: “The Arctic Council’s eight countries and observer states like China and Japan make it stable to drill now. This could not have happened previously.” He added that China’s interest in the Arctic was a new development and the area’s wild card. 

Arctic Wild Card

China is definitely a wild card in the Arctic but one with deep pockets. The country’s three state-owned oil majors are all listed in the top 100 of the Fortune Global 500 with Sinopec and CNPC numbers four and five, respectively. China’s three oil majors have combined revenues of nearly $1 trillion and the backing of Beijing, which has the largest cash reserves in the world at more than $3.5 trillion. Consequently, look for China’s Arctic interests to intensify in the future.

Perhaps the greatest challenge for oil companies in the Arctic will be a PR war of attrition since public opinion is already mounting against Arctic drilling. Environmental challenges do indeed pose real ecological dangers, including preservation of animal and plant species unique to the Arctic, particularly tundra vegetation, caribou, polar bears, seals, whales, and other sea life. 

On the PR front, Greenpeace knows how to hit the bull’s-eye. When discussing  attempts to drill for Arctic oil, it says: “These companies are risking oil spills in fragile northern waters. Think of Deepwater Horizon, but add remote, dangerous, stormy seas to the mix – the consequences are too horrible to imagine.” Without question, that’s an image hard to get out of one’s mind.

An Oil Major’s Take

After a border agreement was reached two years ago between Russia and Norway in the Barents Sea, part of the Arctic Ocean, Hege Marie Norheim, Senior Vice President, Corporate Climate, of Norway’s Statoil, acknowledged that environmental concerns are real. She said that Statoil is already operating in the area (more than 80 Statoil exploration wells have been drilled in the Barents Sea) and complies with “the strictest environmental standards in the world.” 

Statoil’s corporate website states the company is addressing environmental concerns through new technologies for “the safe and sustainable exploration and production of oil and gas in the Far North.” Statoil said it helped establish an ecosystem-based model (symbiosis) that calculates potential impacts of oil spills on zooplankton and fish populations in northern Norway and that results from the program are being synthesized and used to create a symbiosis project model.

Addressing the possibility of an oil spill in the Arctic, the company touts its oil response recovery plans, which it claims are “robust, efficient and well-adapted to local conditions.” The company said it participated in managing a substantial research program, together with eight other oil companies, that remains “the world’s largest endeavor ever dedicated to strengthening oil spill response in ice.” Statoil said it is now embarking on a follow-up project for the next five years with industry partners.

However, the company does admit the unique challenges that an Arctic oil spill would bring, which it says are “related to extreme cold, ice-covered waters, the darkness of winter, and limited access to clean-up resources.” It adds that prevention is their “ultimate goal.”

Statoil’s comments are characteristic of many oil companies’ views. They address environmental concerns in terms of their successful drilling history and technological breakthroughs. Most claim that offshore drilling technology has improved substantially due to lessons learned from the 2010 Deepwater Horizon disaster and that risks are therefore reduced.

The EIA agrees but states that the adequacy of existing technology to manage offshore oil spills in an Arctic environment is a unique challenge. “Spills among ice floes can be much more difficult to contain and clean up than spills in open waters,” the agency said.

Premature?

Yet, according to the University of Lapland’s Heininen, all of this may be a little premature. He said that oil companies going to the Arctic is an illusion and not happening yet. He makes a point since Shell, Statoil and ConocoPhillips recently suspended Arctic exploration amid technical challenges and regulatory uncertainty, at least until 2014 for Shell and 2015 for the others. 

But 2014 is just a few months away, and 2015 is following close behind. Look for this story to gain momentum and unfold as the New Year approaches and for both sides to wage a PR war of attrition.