Despite the dangers and soaring costs of arctic oil drilling, companies such as Shell continue to persevere. Should the gamble pay off, the monetary reward will be high - but will it be worth the cost to the environment?  

Tucked away among the Arctic’s ever-shifting jags of ice, hidden from the naked eye, are billions upon billions of dollars in black gold. The Arctic landscape, spanning the Barents to the Beaufort Sea and beyond, is home to a reported 30 percent of the world’s undiscovered natural gas reserves and 13 percent of its oil. Whoever conquers it will lay claim to 1,669 trillion cubic feet of natural gas and 90 billion barrels of oil – almost three times the annual global consumption.

Much of the prospective total, according to the US Geological Survey, sits offshore and is up for the taking, provided that those with suitably high ambitions come equipped with the necessary tools, know-how and – most importantly – resources to do so. Although the region accounts for as little as six percent of the Earth’s surface, it accounts for a disproportionately large amount of its resources, and it is this supposed abundance of hydrocarbons that has seen energy companies clamour for the rights to the region’s many opportunities.

“It is only in the last five years that hydrocarbon development has actually been contemplated as a possibility, principally due to technological and navigational advances,” says Trevor Slack, Senior Analyst at risk analysis company Maplecroft. “To varying degrees, Russia, Canada, the US, Norway and Greenland have all increased exploration and development activity on their relevant portions of the Arctic continental shelf.”

The majority of the Arctic countries have granted energy companies licenses to explore offshore reserves, however, the exploration phase is only a fraction of the overall effort required to reap the region’s riches. The difficulties companies face while working in the region can perhaps best be seen in the case of Royal Dutch Shell and the crisis that befell the Kulluk drilling rig late last year.

“What is failure but a bump on the road to triumph?” asked the company on its website soon after the 266ft barge ran aground off the Alaskan coast: circumstances that later incurred an impairment charge of $200m.

The failed expedition constitutes only a slither of the oil giant’s overall Arctic spending, which has so far amassed upwards of $5bn and yielded very little in the way of returns. Despite having introduced an armada of 20 support vessels, chartered well over a thousand dedicated flights, and exhausted $1bn on the project through the last year alone, the Anglo-Dutch powerhouse is yet to complete a single well in the region.

While these circumstances could well be considered a failure of sorts, they could just as easily be seen as par for the course, as the extraction of Arctic oil and gas ranks among the most expensive business opportunities in the world.

“Oil spill risks, high extraction costs, doubts over the amount of commercially recoverable reserves, and a precedent of cost overruns and delays combine to raise questions about the commercial viability of some proposed Arctic projects,” reads a Greenpeace report into Arctic exploration risks. “The drilling conditions facing oil companies operating in the Arctic are some of the most challenging on Earth.”

Risk and reward
The challenges of tapping the Arctic’s resources are quite plain to see, these being a harsh climate, underdeveloped infrastructure, long project cycles, spill containment and recovery risks, and conflicting sovereignty claims, to name but a few. All things considered, the complications have caused some to question whether the investment is actually worth the costs, whether they be financial or environmental.

Total is the first major oil company to publicly denounce offshore exploration in the Arctic, with the company’s CEO Christophe de Margerie expressing fears about the potential damages of a spill: “Oil on Greenland would be a disaster,” he told the Financial Times. “A leak would do too much damage to the image of the company.”

Total’s stance on the matter is very much the exception, however, with various competitors such as ExxonMobil, Rosneft, Eni, Statoil and, of course, Shell, having committed a great deal of time and money to the Arctic endeavour.

Despite previous problems, Shell hopes to resume its work in the Arctic at some point this year, with CFO Simon Henry believing the region to be the “most attractive single opportunity for the future,” as stated in The Telegraph.

However, the company will be subject to far closer scrutiny than before in light of its previous failings. Shell’s return to the Arctic – however delayed – will be watched by environmentalists, whose concerns for the surrounding environment need not be explained, as well as industry rivals, who will be keen to know whether or not the
region’s treasures can be extracted.

Exploration obstacles
Although Shell appears quite intent on exploiting the Arctic’s natural resources, a US appeals court has recently ruled that the Alaskan government acted illegally in granting Shell exploration rights to Arctic waters controlled by the US, which has, in effect, curbed the company’s oil ambitions further still.

The extraction site was sold for $2.66bn in 2008, of which $2.1bn was paid for by Shell, and has since been hotly contested by local and environmental groups, who claim the consequences were ill conceived and its environmental impact sorely underplayed.

Another major player whose progress has been hindered by development costs and other such obstacles is Norway’s Statoil, which late last year expressed concerns about the challenges of exploring and extracting Arctic hydrocarbon reserves.

“Logistical difficulties, regulatory hurdles, jurisdictional tensions, environmental opposition and above all extremely inhospitable climatic conditions will ensure that oil and gas activity in the region remains problematic, complex and expensive,” says Slack.

Many believe the inadequate infrastructure and tumultuous weather conditions, combined with the falling price of oil and gas, to be the perfect storm when it comes to
Arctic exploration

“Cost is probably the most important factor, with Statoil estimating that the cost of drilling one oil well in the Arctic could be as much as $500m. This is likely to be prohibitive for most companies in the current climate, with some analysts predicting that the price of crude could drop in the medium term.”

Statoil’s Exploration Chief Tim Dodson spoke at a climate change conference last year about some of the issues facing oil companies in the Arctic. “We don’t envisage production from several of these areas before 2030 at the earliest; more likely 2040, probably not until 2050,” he said. “I think what we have to realise is that the challenges our industry faces in the Arctic are at least as significant as we thought they were just a couple of years back, but they’re not insurmountable.”

Edinburgh-based Cairn Energy, meanwhile, has announced that, regardless of having spent over $1bn in the region, it is deprioritising its Greenland operations after not having made a single commercial find as of yet.

Many believe the inadequate infrastructure and tumultuous weather conditions, combined with the falling price of oil and gas, to be the perfect storm when it comes to Arctic exploration. These circumstances mean that short-term financial benefits can only be marginal at best, until stratospheric sums of capital are poured into developing the region.

Charlie Kronick, Senior Climate Advisor at Greenpeace UK, is sceptical. “[It] is impossible to drill safely for oil in the ice covered waters of the Arctic – the potential impacts on local livelihoods and biodiversity are uncostable. It would be literally impossible – for both technical and environmental reasons – to clean up after the inevitable spill, while the level of climate change that would result from successful (in economic terms) drilling there would be catastrophic.”

A report conducted by Lloyd’s and Chatham House found that investment in the Arctic could reach $100bn by 2022, as companies scramble to gain a foothold. “Business activity in the Arctic region is undeniably increasing, and the impact of climate change means that this is likely to grow significantly in the future. But as new opportunities open up, decisions on exploiting them need to be made on the basis of as full an understanding of the risks as possible,” said Richard Ward, Chief Executive at Lloyd’s.

At present, any areas of the Arctic that are unrepresented are being hotly contested by the bordering countries. Regardless, it is crucial that businesses granted permission to work in the region align their goals with those of local governments, communities and the environment, as the territory proceeds to transform. In addition, those partaking in Arctic exploration should put in place strict measures to avoid any environmental disasters, and have procedures in place should the worst case scenario occur.

“The businesses which will succeed will be those which take their responsibilities to the region’s communities and environment seriously, working with other stakeholders to manage the wide range of Arctic risks and ensuring that future development is sustainable,” says Ward.