Polar pioneers: Is arctic oil the final frontier?

BP's bet on Russia is a technical, environmental and political risk

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.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Sport
Adnan Januzaj and Gareth Bale
footballManchester United set to loan out Januzaj to make room for Bale - if a move for the Welshman firms up
Arts and Entertainment
Lena Headey as Cersei Lannister in Game of Thrones
film
News
i100
Sport
Yaya Sanogo, Mats Hummels, Troy Deeney and Adnan Januzaj
footballMost Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
News
Nigel Farage celebrates with a pint after early local election results in the Hoy and Helmet pub in South Benfleet in Essex
peopleHe has shaped British politics 'for good or ill'
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?
Finally, a diet that works: Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced

Finally, a diet that works

Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced
Say it with... lyrics: The power of song was never greater, according to our internet searches

Say it with... lyrics

The power of song was never greater, according to our internet searches
Professor Danielle George: On a mission to bring back the art of 'thinkering'

The joys of 'thinkering'

Professor Danielle George on why we have to nurture tomorrow's scientists today
Monique Roffey: The author on father figures, the nation's narcissism and New Year reflections

Monique Roffey interview

The author on father figures, the nation's narcissism and New Year reflections
Introducing my anti-heroes of 2014

Introducing my anti-heroes of 2014

Their outrageousness and originality makes the world a bit more interesting, says Ellen E Jones
DJ Taylor: Good taste? It's all a matter of timing...

Good taste? It's all a matter of timing...

It has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
Olivia Jacobs & Ben Caplan: 'Ben thought the play was called 'Christian Love'. It was 'Christie in Love' - about a necrophiliac serial killer'

How we met

Olivia Jacobs and Ben Caplan
Bill Granger recipes: Our chef's breakfasts will revitalise you in time for the New Year

Bill Granger's healthy breakfasts

Our chef's healthy recipes are perfect if you've overindulged during the festive season
Transfer guide: From Arsenal to West Ham - what does your club need in the January transfer window?

Who does your club need in the transfer window?

Most Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
The Last Word: From aliens at FA to yak’s milk in the Tour, here’s to 2015

Michael Calvin's Last Word

From aliens at FA to yak’s milk in the Tour, here’s to 2015