ARCTIC SEA ENERGY: a Dream or a Nightmare?

ARCTIC SEA ENERGY: a Dream or a Nightmare?

By Amanda Figueras

Laying beneath the approximately 15,558,000 square kilometers of frozen Arctic Sea is 30% of the planet’s undiscovered natural gas reserves and 13% of its undiscovered oil, according to US Geological Survey.

For some, developing Arctic resources is essential to securing energy supplies for the future, especially in a world where demand is growing without an end in sight—due to increased pressure from emerging markets in China and India. But others consider the potential risks abhorrent; enough reason to abandon the idea of drilling in the wild north altogether.

For oil companies, this hesitance is not due to worries over the global environment, but rather because of the high costs necessary for such activities, especially when oil prices are so low. This makes the Arctic a less than thrilling prospect for most major oil and gas companies. Despite this, a relatively concentrated group of businesses have begun to look to a future under the ice.

The Arctic is one of the world’s largest remaining areas of untapped, accessible oil and gas reserves. This makes for a very interesting business prospect for countries that border the area: Canada, Denmark, Norway, Russia, and the United States of America have all staked claims on Arctic land.

Do we need to drill in the Arctic to satisfy energy demands and consumption? Is this too big a risk in both expense and logistics? Can we afford another major oil catastrophe? What does the future hold for this key region?

Shell Abandons Expensive Arctic Adventure

After seven years of preparation and $7b spent, Shell recently decided to abandon its exploration program in the Arctic “for the foreseeable future.” This announcement once again placed the Arctic debate on the front pages of the world’s newspapers.

Initially, the company drilled for two months at the Burger J Well, located 150 miles northwest of Barrow, Alaska, in the Chukchi Sea. After this period, however, Shell indicated that while the evaluation of all data revealed “indications” of oil and gas, there was not enough present to justify further activity in today’s low price environment. “This is a clearly disappointing exploration outcome for this part of the basin,” said Marvin Odum, director of Shell Upstream America in a press release.

“The current, federal permitting system brings high levels of operational uncertainty to offshore Alaska planning. In a normal course, this exploration program would have taken significantly less time,” a source from Shell explained to Egypt Oil & Gas, indicating another factor in their disappointment.

Indeed, the regulatory rules keep changing. The BP Gulf of Mexico oil spill, as well as the grounding of Shell’s Kullak drilling rig off the Alaskan coast in 2013 both greatly affected offshore drilling legislation in the United States.

“There was no spill and no environmental damage, but regulation tightened after this [Kullak] incident. Environmental groups did play a role here, in arguing for such tightening, and against any Arctic drilling of course. Their voices were not the only ones, but they were among the loudest and most articulate,” said Scott L. Montgomery, an affiliate faculty member at the Jackson School of International Studies, University of Washington.

To him, Shell’s decision to leave the Arctic is hardly surprising and has ramifications well beyond the Chukchi Sea: “It helps show that the widely proclaimed “land rush” to the Arctic, aimed at oil and gas most of all, is a myth.”

Prices, the Real Key

In an article published in The Conversation, an Australian-based website featuring news, analysis and comment, Montgomery explained that economics and geopolitics have made clear that the greater part of the Arctic would remain closed to hydrocarbon drilling—at least in the near term. “No company, American or foreign, will rush to replace Shell in the Chukchi Sea.”

Similar moves have happened before. Oil companies drilled in America’s corner of the Arctic Ocean in the 1980s and 90’s, Shell amongst them. Around 30 offshore wells were drilled in the US portion of the Beaufort Sea and five in the Chukchi, according to Popular Mechanics. Some oil production already takes place on artificial islands in the Beaufort Sea. For instance, BP operated the Endicott site in 14 feet of water, and the Northstar operation took place in just 39 feet of water over the course of decades. But none of the wells drilled farther away from the coast resulted in oil or gas production, mainly because the price of oil dropped roughly in half from the early 1980s to the early 1990s. Drilling in the Arctic is economically sound only when the price of oil is high, because operations in the frigid water are very expensive.

In late July this year, Ann Pickard, Shell’s top executive for the Arctic, told Bloomberg Businessweek that if oil prices remained below $50 a barrel, the offshore adventure would have to end. At $70, Chukchi oil would be “competitive,” and at $110—a reasonable projection, according to the company’s economists—it would be a huge winner. But of course, with prices currently hovering around $45 a barrel, Pickard was talking about prospective prices up to 15 years from now.

Shell chose to leave much earlier, but it could go back; the company is still holding 275 Outer Continental lease blocks. Marvin Odum, director of Shell Upstream Americas, said in the written statement that the company “continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the US.”

The Chukchi Basin is largely unexplored, with an estimated mean of 29b barrels oil equivalent potentially recoverable. Shell spent $2.1b to lease 275 offshore blocks and another $1 billion in preparations and drilling, The Conversation noted.

The Burger J well was drilled in 150 feet of water to a depth of 6,800 feet. Though located substantially offshore, the area is shallow, a factor which makes it attractive due to the reduced drilling costs. Besides “indications” of hydrocarbons, the company undoubtedly recovered significant amount of valuable data, useful to grow its knowledge base for the future.

The main challenges for offshore drilling in the Arctic are well known; these include cold temperatures, sea ice, and, in some areas, permafrost on the seabed. Major international oil companies, like Shell, Exxon, and BP have developed advanced and specialized technologies to deal with these challenges, but in Montgomery’s opinion this investment is not cost effective at prices below $80—$90 per barrel.

Shell’s answer to Egypt Oil & Gas when asked if pressure from environmentalist groups affected their departure was clear: “No. Shell understands managing exploration risk. Dry holes as well as discoveries are part of exploration outcomes.”

Hundreds of protesters, lately including ‘kayaktivists’ paddling in front of an icebreaker to block its path, have rallied against Shell operations. Many groups have consistently and constantly run campaigns against drilling in the Arctic, mainly fearing oil spills and other risks to wildlife. These protests and boycotts show no signs of abating.

“There’s no doubt that the global protest movement that rose up against Shell’s Arctic plans had a role in its decision. The company said so itself, admitting it had been surprised by the reputational damage Arctic drilling was doing. Without the millions of people who helped make its plans so visibly toxic,” Dave Walsh, Greenpeace’s International Communications and Strategic Advisor said by email to Egypt Oil & Gas.

“Of course, other factors were involved,” Walsh admitted. “Shell didn’t find as much oil as it had hoped; working in the Arctic is very expensive and there are, quite rightly, very strict rules on what oil drillers can and can’t do there; the low oil price made people, especially major investors, question the logic of exploring in the Arctic; and there was growing political uncertainty around support for Shell as people like Hillary Clinton openly spoke against its plans. These issues, together with the wrecking ball that public protest put through Shell’s reputation, caused the company to cut its losses and walk away.”

Reasons Not to Drill

Whenever environmental disasters are discussed, one in particular stands out. In March 1989 the Exxon Valdez oil spill marked the birth of ecological awareness, as Spanish journalist Eduardo Suárez—who won the Gabriel García Márquez Journalism Award with his investigative article about the accident—said.

The oil tanker spilled between 260,000 and 900,000 barrels of crude oil inside of a few days. Even today, it is still considered to be one of the most devastating human-caused environmental disasters of all time.

The Valdez spill was the largest in US waters until the 2010 Deepwater Horizon oil spill—measured by volume released. However, the Exxon Valdez case caused more ecological damage as the remote location—accessible only by helicopter, plane, or boat—made government and industry response efforts extremely difficult and severely taxed existing plans for response.

Could something like this happen in the Arctic Sea? Could the drillings lead to spills whether from blowouts, pipeline leaks or shipping accidents? According to a report about the operations in the Chukchi Sea done by US Department of the Interior and published on February 2015: there is 75% chance of a major spill occurring over 77 years of the studied scenario—at least one spilling more than 1,000 barrels of oil. Despite this, last May the Obama administration gave Shell approval to restart drilling in the Arctic Sea.

In fact, US President Barack Obama has been accused of flip-flopping on this issue, as he favors aggressive actions on climate change—including a 26% to 28% reduction in carbon emissions by 2025 from 2005 levels—while simultaneously supporting measures to open oil drilling in the Arctic, a move condemned by environmentalists angered over the danger of a disastrous oil spill and the threat of more carbon emissions, Time reported.

According to the cited document, the 75% chance of a disaster that would threaten the very existence of multiple endangered Arctic species represents a “reasonable balance” between environmental and energy demands.

The Arctic is home to mammal and marine life found nowhere else in the world. All of them depend on sea ice to survive: polar bears, orcas, foxes, reindeer, and whales—many of which are endangered. Experts warn that polar bears alone could completely disappear from the Arctic in the next 100 years if action isn’t taken to resolve the issue.

Greenpeace summarizes the organization’s point: “We oppose drilling for oil in the icy waters of the Arctic for two simple reasons. Firstly, as scientists have said, we cannot burn the oil that might be found under the Arctic and expect to keep global warming under a 2°C limit. A safe climate is incompatible with Arctic oil.”

“Secondly, it is impossible to drill safely in the freezing waters of the far north. There is no proven way to clean up oil spilled in ice and even Shell has admitted that spills there would be likely in the future as a result of its operations.”

Ecological Disaster

The nature conservation group World Wildlife Fund (WWF), also pointed out that there is no proven method for containing and cleaning up an oil spill in icy water. Besides, the distance from where response capacity is stationed in the icy north Arctic would mean it could take days or weeks to respond to a spill, even during ice-free periods.

According to the group, many challenges would remain even if a spill was cleaned up and it would take many decades for Arctic regions to recover from habitat disruption, tundra disturbances, and oil spills.

“Offshore oil exploration, drilling, and production can disturb the fish and animals that are cornerstones of the subsistence and cultural livelihoods of Indigenous peoples in the Arctic. Arctic fisheries, providing both food and economic value far beyond the Arctic, are also at risk,” WWF added.

Other main concerns include the mammals unique to the area; whales and other marine mammals that use sound to navigate, find mates and food in the often-dark waters of the ocean. Much of this occurs by sonar and other sound sensing. Noises like the air guns currently used by oil and gas companies to explore for oil offshore can be deafening for these species. Excessive noise levels from oil and gas exploration and drilling could cause injury, confusion, and even death.

“There are always risks involved in drilling an environment as challenging as the Arctic. Oil companies certainly do not want an accident to happen, of any kind. Shell’s well in the U.S. Arctic had to obey many new demands for safety-related equipment and vessels on site, and they drilled the Burger J well without incident,” Montgomery said.

In his opinion, global oil companies do have the technology now to drill safely in Arctic conditions. “We should remember, too, that the spill that everyone brings up in discussions, the Exxon Valdez, was not a drilling accident but a tanker accident. The greater worry for the Arctic, therefore, may be the increased tanker traffic in the decades ahead as climate change increasingly opens the Northwest and Northeast commercial trade routes,” he added.

To Michael LeVine, Pacific Senior Counsel Oceana Staff, a Washington-based environmental group, we have just being so lucky so far. “Shell’s experiences highlight the significant risks of searching for oil in remote and dangerous places like the Arctic Ocean. As we unfortunately learned in 2010 when the Deepwater Horizon exploded and sank in the Gulf of Mexico, exploration drilling—exactly what Shell was doing in the Chukchi Sea—creates the very real risk of a catastrophic accident. We may have gotten lucky this year and avoided a spill, but there is no reason to continue taking that chance,” Levine noted in an email to Egypt Oil & Gas.

As Montgomery concluded, cheap oil seems a friend to the people who oppose Arctic drilling. The only problem is that it is also the comrade of higher consumption and demand. That means at some point, higher oil prices, driven by demand, may again make the Arctic more tempting in the future.


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