Polar pioneers: Is arctic oil the final frontier?
BP's bet on Russia is a technical, environmental and political risk
Tuesday 18 January 2011
BP's new chief executive has nailed his colours firmly to the mast. In the aftermath of the Gulf of Mexico rig explosion last summer, which unleashed the worst oil spill in US history, Bob Dudley has refused to be cowed. Instead, he is offsetting BP's $30bn (£18.9bn) of divestments – needed to pay for the tragedy – with an audacious move into "one of the world's last remaining unexplored basins".
"We are very pleased to be joining Russia's leading oil company to jointly explore some of the most promising parts of the Russian Arctic," Mr Dudley said yesterday of the ground-breaking equity-swap with the Russian energy firm Rosneft, which will see the two companies develop licence blocks in the South Kara Sea and pursue technical studies of other Arctic regions.
The Rosneft deal not only marks a new direction for a beleaguered oil major looking for ways to boost shares that lost half their value in the fallout from the Gulf of Mexico disaster. It is also emblematic of accelerating interest in the energy resources locked up by some of the harshest conditions on the planet.
The vast frozen wastes of the Arctic are one of the few areas not yet fully probed for oil and gas. But not because they lack potential. The US Geological Survey estimates that there are at least 90 billion barrels of oil waiting to be discovered there, and 1,670 trillion cubic feet of natural gas – some 22 per cent of the world's estimated undiscovered resources, equivalent to the entire hydrocarbon reserves of Kuwait.
That said, the region is not entirely new to prospectors. More than 400 oil and gas fields have already been discovered north of the Arctic Circle, between them accounting for some 40 billion barrels of oil and more than 1,100 trillion cubic feet of gas. By far the biggest is the North Slope, in Alaska, which includes the vast Prudhoe Bay field, which has disgorged some 11 billion barrels worth of its estimated 25 billion barrel of oil equivalent (BOE) since it was discovered in the late 1960s. There is also a string of producing fields at Snohvit, in the Norwegian side of the Barents Sea. But the discoveries are clustered together, and numberless tracts of ice and sea remain unexplored.
Much depends on economics. With an unimaginably harsh climate and a bare three-month drilling season, it can be several times as expensive to explore in Arctic regions as elsewhere. As a result, many companies hold licences in areas such as Greenland, but have not pursued them. The recent glut of gas, particularly from US shale, has also slowed developments, putting Russia's plan for a liquefied natural gas (LNG) plant at Shtokman in the east Barents Sea on hold, for example.
But over the longer term the global demand for energy is inexorably rising – as is the price. And as so-called "supermajor" oil companies, such as BP and Shell, struggle to add new reserves to their portfolios in "easier" locations held tighter by national oil companies (NOCs) than they were in the past, the combined effect is to push trickier regions up the agenda.
Put simply, international oil companies looking for "elephant" fields of 500 million-plus barrels, have fewer and fewer places to go as NOCs lock them out of anything but the most technically challenging projects.
BP's Rosneft deal is not the only example. Shell has been active in US and Canadian Arctic regions for decades, and is also pursuing new opportunities in Norway and Russia. And Cairn Energy hit the headlines last year, with a string of exploration wells in Baffin Bay, off the Greenland coast, of sufficient interest to see majors from Statoil to ConocoPhillips bidding for exploration licences in the region in November's auction.
"The reason these basins have not been fully explored already is because of both the cost, and the easy availability of oil," Manouchehr Takin, a senior analyst at the Centre for Global Energy Studies, said. "But resource nationalism has started again in the last 10 years, which is forcing supermajors like BP to look elsewhere."
Explorers face significant political and technical risks in the Arctic. Territorial claims in the region are theoretically governed by a UN Convention specifying that a country's "exclusive economic zone" extends to 200 nautical miles off its coastlines and sets rules for open sea beyond (although the US has not yet ratified the convention). But there are already rumbling disputes, such as that between the US and Canada over the border running through the Beaufort Sea. And a major diplomatic incident threatened to explode in 2007 when Russia planted a flag under the North Pole, despite claims that the move was "a major scientific achievement" only.
Unresolved questions with major sovereignty implications also remain unanswered – such as whether the Arctic is a sea or a lake, and whether the Russian continental shelf extends much further than its visible coastline (as does that of Britain in the North Sea, for example). With global warming increasing the likelihood of navigable passage through the ice, the potential for dispute is already rising. Major hydrocarbon finds will only add to the mix. "Even before oil has been discovered the Arctic is hugely strategically significant," Mr Takin said. "If, or when, oil is found in large quantities, then it will become even more so."
Meanwhile, all Arctic oil developments take place against a backdrop of sharp concern over the destruction of fragile Arctic ecosystems. The Prudhoe Bay field has been the subject of ongoing controversy, not least since the 2006 pipeline spill for which BP was fined $20m. In a sign of political sensitivity on the issue, the US Interior Secretary, Ken Salazer, last summer slapped a moratorium on Arctic drilling in the aftermath of the Gulf of Mexico spill – although it was relatively swiftly rescinded. And Shell was forced to postpone its Arctic drilling programme for a year following a court challenge over the threat to wildlife.
Greenpeace is campaigning for an end to all drilling in the polar region, warning that the difficult conditions not only make a spill more likely, but also incredibly hard to clean up.
"You only have to look at the Gulf of Mexico disaster to see that drilling in difficult conditions can have serious negative outcomes," Charlie Kronick, the senior climate adviser at Greenpeace, said. "That was 50 miles from the US coastline, in temperate waters, whereas in the Arctic you are thousands of kilometres from the necessary infrastructure and locked up by the ice for nine months of the year."
Whatever happens, developments will not be quick. Part of the reason Arctic exploration is so expensive is simply that it takes so long. Where the entire cycle from exploration to production in a relatively benign region such as the North Sea might take four years, in the Arctic the lead times stretch to more than a decade. BP and Rosneft are hoping to start drilling their first exploration well at South Kara in 2015, but the move is part of a much longer game.
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