27 November 2020, NIICE Commentary 6509
Rashmi BR
The Trump administration in August 2020, gave its green signal for drilling in the Arctic National Wildlife Refuge, Alaska. The controversial move, though not the brainchild of the current administration, overturns the existing provisions that protects the Alaskan wilderness. It represents the idea that visualizes the Arctic to be the next energy frontier.
What makes the Arctic attractive?
The Circum Arctic Resource Appraisal (CARA) of 2008, by the US Geological Survey, revealed that the Arctic holds approximately 20 per cent of the world’s undiscovered oil, gas and natural gas liquids. Though this can be considered as the breaking point from where interest in the Arctic resources saw a new high, the estimates have been made since the beginning of 20th century. Canada was the first country to begin exploration and extraction of resources in the region. This was primarily conducted in its Northwestern Territories.
CARA conducted studies in 33 specific areas (both offshore and onshore) of the Arctic, and reported that 25 of them have at least 10 percent probability of accumulation of either oil, natural gas or both. The total potential in the 25 provinces was estimated to be “90 billion barrels of oil, 1669 trillion cubic feet of natural gas, and 44 billion barrels of natural gas liquids”. In addition to the hydrocarbons, the Arctic holds reserves of rare earth minerals, copper, gold, uranium, nickel, coal, zinc, silver and tungsten; marine resources and fossils.
The idea of extracting resources in the region has become more attractive due to climate change. Having the ability to alter the economic profile of a country or a region, climate change has been the key element in inducing the interest in the so called ‘scramble for the North’. Melting sea ice is uncovering the resources, making the access relatively easy and also making shipping possible during summers.
Major Stakeholders
The five littoral states of the Arctic Ocean are involved in resource exploration and extraction. However, the intensity of their involvement in resource development varies. The following section looks at the major players in the Arctic energy domain.
In 1960s, 40 years after Canada began extraction, Russia discovered hydrocarbon fields in the Yamalo-Nenets region. Russia is the most important, prominent country involved in Arctic resource exploration. Resource distribution, particularly natural gas reserves in the region is skewed towards the Russian territory. It has the largest coastline with the Arctic Ocean and is naturally at an advantageous position in terms of resources distribution. It also has the advantage of seasonally accessible, relatively well-developed Northern Sea Route for shipping. Moscow aims to stand as an energy giant in the world, for which Arctic plays a crucial role. Russian Arctic hydrocarbons are supplied to European and Asian countries like India and China. However, extraction has not yet reached its full capacity, as only onshore resources are being tapped. Cost of production, technology and sanctions since 2014, have made the offshore exploration a difficult task.
The United States is involved in oil exploration in Alaska. Prudhoe Bay Field in Northern Alaska is one of the biggest fields in the continent, that produced large amounts of oil during oil shocks induced by political turmoil in West Asia. The Arctic National Wildlife Refuge has 10.4 billion barrels of oil that is recoverable. Offshore fields in the Beufort Sea and the Chukchi Sea are promising, with eight billion barrels of oil, 28 tcf of natural gas; and 15 billion barrels of oil, 77tcf of gas respectively.
Norway extracts oil and gas from the Northern Sea, Barents Sea and Norwegian Sea. Hydrocarbon exploration gained momentum in Norway after the delimitation agreement with Russia in 2011. A large section of Norwegian politicians and civil society organizations however, voice strong discontentment against Oslo’s move to explore offshore oil fields in the Barents Sea, and the country’s dependence on revenues earned by the sale of petroleum.
Though the first country to extract resources in the Arctic, Canada is not the most active currently. Environmental concerns take over the political landscape, and thus, push the government to discourage production especially in offshore fields. Mining of minerals, rather than hydrocarbon extraction, is one of the primary sources of revenue for the communities in the remote North Western Territory.
Greenland has swaths of rare earth minerals that are very attractive for countries like Australia, China and the US. As the possibility of presence of oil and gas is very less, the focus is now on the development of rare earths.
Is Arctic a Viable Option?
Resource market functions on pure economics – investment capability, production cost, transportation cost, access to markets, demand, pricing and profitability. Considering these economic parameters, there is a need to understand the viability of making Arctic, an energy frontier.
The discoveries of onshore and offshore resources, particularly the hydrocarbons, may be considered a promising development, but extracting them is much complex when compared to other resource-rich regions. Despite rapid climate change, penetrating the permafrost demands special equipment that will automatically push the cost of production upwards. Additionally, the requirement of ice class vessels, the distance to the markets and the possibility of producing seasonally, not only increases the cost, but also limits the number of players who could be involved in the Arctic energy picture.
CARA estimates that most of the undiscovered oil and gas reserves are located offshore. The difficulties in drilling the sea bed, is discouraging to the companies. The risks associated with offshore drilling cannot be ignored. The possibility of oil spills and its impact on the endangered species and pristine biodiversity is a major concern, particularly when there is no incentive for the producers to internalize its cost. This is the primary reason for the environmental groups to protest the recent decision to allow drilling in the Alaskan Arctic.
One of the major attractions for production, is the price at the market. The volatility in demand and price fluctuations is a discouraging factor for the producers to extract resources in a complicated region such as the Arctic. The recent oil price war between Saudi Arabia and Russia pushed the price dramatically downward. The pandemic also has resulted in less demand, due to the lack of basic economic activities. In the wake of similar events, producers will not come forward to explore the resources further, when there is no profitability.
Climate change is the most severe disaster that is unfolding. Debates revolving around it, talk about the ill effects of burning fossil fuels. Drilling in permafrost releases methane, a potentially harmful greenhouse gas. The international pressure on the countries to reduce carbon emissions have resulted in some stringent legislations that prevent exploration in ecologically sensitive regions. This was evident during the Obama administration, that made Royal Dutch Shell close its operations in the Alaskan continental shelf. On the other hand, Canada has also tweaked its legislations to keep the offshore hydrocarbon fields off limits.
The Arctic is a promising ground, but has its own limitations before it could become an energy frontier. In the interest of the region and the planet, subsiding the projects in the Arctic is necessary, until risk averting technologies and methods are completely developed and are nearly fool-proof.
