Arctic oil and gas: fuelling the debate

written by Eleonora Milazzo – ACCEL European Fellow

In the last Arctic 101 post, we learned how natural and economic resources are distributed in the Arctic, all of which together constitute an important and largely untapped potential source of investment for the Arctic economy. In this context, oil is the resource the world is currently looking at with most interest in the Arctic. Our human population relies heavily on hydrocarbons and the demand for energy is constantly growing.

Exploration and extraction activities in the Arctic are expected to intensify. This trend has two main explanations: first of all, Arctic oil and gas activities will increase as a result of the effects of climate change-related factors, especially increased accessibility and sea-ice retreat. In addition, improvements in offshore technology are making it possible to drill for oil in increasingly harsh conditions.[1]

It is worth focusing on the issue of Arctic oil and trying to understand what are the prospects of its development. To do this, we will analyze three projects: Prirazlomnaya, Shtokman, and Apollo-Transocean Spitsbergen.

 

  1. The projects

    Prirazlomnoye oil field. Photo credit: Gazprom.com
    Prirazlomnoye oil field. Photo credit: Gazprom.com

The Prirazlomnoye oil field was discovered in 1989 60 km offshore on the Pechora Sea shelf, at the depth of 19-20 meters. This is the first Arctic offshore oil field ever. The project is at the core of the Gazprom group’s development strategy and, more generally, is central for the achievement of Russia’s ambitious goals of oil and gas production by 2030.[2] It is estimated that the field contains 72 million tons of oil reserves. According to Gazprom, these will enable to production of 6.6 million tons per year.[3] Gazprom Neft Shelf, Gazprom’s subsidiary in charge of developing the field, started production in December 2013. The Prirazlomnaya platform is a stationary, ice-resistant platform set for drilling, production, storage and offloading[4].

Among many other projects, Gazprom is also involved in another much debated project in partnership with Total and StatoilHydro. The development of the Shtokman field was considered pivotal for gas production in the Russian Arctic. The field is one of the biggest in the world. It was projected to serve as a base for the Russian gas and LNG supplies to the domestic and foreign markets.[5] The Shtokman gas field is located at a depth that may reach 340 meters in the Barents Sea Shelf, northeast of the Russian city of Murmansk. The field was expected to make up 3.9 trillion cubic meters of gas and 56 million tons of gas condensate (3.8 and 53.4, respectively, are located within Gazprom’s licensed area).[6] Gas processing was due to happen onboard a 320 m long Floating Production Unit (the same size as three football fields!).[7]

The ]Apollo well is operated by the Transocean Spitsbergen mobile drilling rig, serving as the northernmost current oil drilling operation in the Barents Sea, not far from Spitsbergen waters, in the so called Hoop Area. The oilrig is located close to the 74th latitude, about 175km southeast of Bear Island, where the water depth is around 430 m. Exploration started in May 2014.[8] The license holder Statoil started drilling using the Transocean Spitsbergen, a semi-submersible drilling facility. Expectations for the outcome of exploration drilling are set very high: other fields in the same area are rich in oil deposits and Apollo is expected to make great discoveries. This project confirmed the Norwegian engagement in the Barents Sea and fuels the debate regarding Arctic oil.

 

  1. Arctic oil: a good deal?

Undoubtedly, these projects look very attractive to the energy market. In a world where the demand for hydrocarbons does no seem to stop, development of new fields is necessary to feed steadily growing consumption levels. New oil and gas fields in the Arctic mean new opportunities to feed this demand. But what resources are required for these projects? And how are these projects going?

Costs and state of the projects

The Prirazlomnaya costs approximately $800 million.[9] The total investment is expected to be about US$1.03 billion.[10] The first oil extracted north of the Arctic Circle was shipped in April 2014: the first 70 000 tons of what is now branded as ARCO (Arctic Oil) was saluted by President Vladimir Putin as an important achievement. The project will provide “an exceptionally positive boost to Russia’s continued expansion on global energy markets, as well as strengthening our economy in general and our energy sector.”[11]

According to Gazprom estimates, the Shtokman project would have required $30 billion for Phase One only (development costs were estimated between $12

Transocean Spitsbergen
Transocean Spitsbergen

and $25bn for the first phase, with $50bn of overall investment). These projections were overtaken by rising costs since 2007. In 2008, Gazprom, Total and StatoilHydro established a consortium to lead the project. Shortly after that, in 2010, the shareholders decided to postpone the project for 3 years, mainly because of the shale gas revolution in the US. The shareholders agreement expired in 2012 and, in the same year, Statoil wrote off its $336.2 million investment. This is just a brief history of a project and its joint venture that are currently considered dead. Officially, Gazprom has put on hold the project postponing production up to 2018. Significantly, the argument provided to justify the postponement is high costs and low gas prices.

Drilling at Apollo was postponed after a Greenpeace campaign against the project, bringing to the table the issue of environmental impact on the fragile ecosystem of Bear Island. Following Greenpeace’s claims, in May 2014 the Norwegian Environment Agency decide to reexamine drilling permission in the area.[12]

Arctic oil and gas: at what price?

The shipment of the first Arctic oil extracted at the Prirazlomnoye oil field has been presented as a great achievement in terms of energy development north of the Arctic Circle. Before getting to the more serious environmental concerns, we may take a look at the actual commercial viability of these ambitious projects.

In the case of Prirazlomnoye and Arctic oil in general, commercial rationality of this projected is seriously questioned – at least in the short term- by the price of Arctic oil on the market. Arctic oil will simply be too expensive compared to cheaper oil extracted at fields that require less investment.

In the Shtokman case, the main reason for the failure of the project reflects shifting market priorities. The gas produced at the plant was mainly destined for the US and West European markets. The project was tailored to a market where natural gas was a scarce resource and demand for LNG from North America was high. This factor together with projections of high demand for Russian gas was the main raisons d’être of drilling at the field. Around 50% of the LNG production was destined for the US market, and the remaining 50% for Germany and other EU countries through the Nord Stream pipeline. Considerable shifts in the LNG market make these calculations wrong. The US shale gas revolution and diversification of LNG suppliers (Middle East and North Africa) to the European market made Arctic LNG less attractive for the traditional buyers. Overpriced Arctic gas could not compete on a highly diversified market.[13] The International Energy Agency has, in fact, estimated that the cost of petroleum extraction in the Arctic is about three times higher than in other fields.[14]

 

  1. Looking to the future of oil production

    Photo credit: Gazprom.com
    Photo credit: Gazprom.com

These examples show why there are many doubts about the commercial viability of Arctic oil and gas. Yet, there are also concerns of another and more important nature. Arctic energy development is questionable not only from the strictly commercial point of view, but also from the environmental one.

The Prirazlomnoye field was the theatre of two Greenpeace campaigns against Arctic oil, the first one in 2012 when a group of activists put up a banner on the Arctic with the words “don’t kill the Arctic”, urging to stop extraction of Arctic oil. Later on, in 2013, a group of activists on the Arctic Sunrise climbed up the platform and were pushed back by the Russian coast guard. The Greenpeace demonstrations center around the risk of irreparable disaster that an oil spill at the platform would cause for the environment. The spill would be impossible to clean and would destroy the broader ecosystem.[15]

Extreme cold conditions and high risks of collisions with icebergs are – or were – just some of the risks connected to the extracting activity of the Shtokman field. The use of a safer floating platform was the solution provided for these concerns by Gazprom, though worries remain about the actual level of risks of extraction activities as they progress.[16]

In the case of Apollo, Greenpeace successfully drew attention to risks for the Bear Island ecosystem by occupying the drilling site with the ship “Esperanza”. Greenpeace’s complaint was based on the proximity of the site to Bear Island’s rich bird colonies and wildlife. To add to these complaints, recent research from the Norwegian Polar Institute concluded that the average extension of the polar ice edge over the last 30 years has been located close to the drilling site, with serious risks for the stability and safety of the structure.[17]

With the Shtokman projects considered dead and others seriously undermined by environmental concerns, it remains to be seen whether Arctic oil will prove revolutionary for energy markets or whether it will just impose too heavy of a burden on the environment to be economically viable.

 

 

[1] Eskeland, G. S. and Flottorp, L. S., 2006. Climate change in the Arctic: A discussion of the impact on economic activity. In Glomsrød, S. and Aslaksen, I., eds., 2006. The Economy of the North. Oslo: Statistics Norway.

[2] Ministry of Energy of the Russian Federation, 2010. Energy Strategy of Russia for the Period Up to 2030. Moscow.

[3] Gazprom, 2014. Prirazlomnoye oil field. Retrieved July 10th, 2014 from

http://www.gazprom.com/about/production/projects/deposits/pnm/v

[4] Ibid.

[5] Gazprom, 2014. Shotkman. Retrieved July 10th, 2014 from

http://www.gazprom.com/about/production/projects/deposits/shp/

[6] Ibid.

[7] Shotkman AG, 2014. Offshore Facilities. Retrieved July 10th, 2014 from

http://shtokman.ru/en/project/about/offshore/

[8] Petroleum Safety Authority Norway, 2014. Consent for exploration drilling using Transocean Spitsbergen. Retrieved July 10th, 2014 from http://www.psa.no/consents/consent-for-exploration-drilling-using-transocean-spitsbergen-article10604-890.html

[9] Offshore technology.com, 2014. Prirazlomnoye Oilfield – Russia. Retrieved July 10th, 2014 from

http://www.offshore-technology.com/projects/prirazlomnoye/.

[10] Севмаш, 2011. «Приразломная» отправилась на работу в Печорское море. Retrieved July 10th, 2014 from http://www.sevmash.ru/rus/news/601-lr-.html.

[11] Nilsen, T., 2014. World’s northernmost offshore oil in transport. Barents Observer. Retrieved July 10th, 2014 from http://barentsobserver.com/en/energy/2014/04/worlds-northernmost-offshore-oil-transport-22-04.

[12] Staalesen, A., 2014. Drill stop at world’s northernmost oil field. Barents Observer. May 26, 2014. Retrieved July 10th, 2014 from http://barentsobserver.com/en/nature/2014/05/drill-stop-worlds-northernmost-oil-field-26-05

[13] Socor, V. 2012. Gazprom’s Shtokman Project: Relic of a Past Era. Eurasia Daily Monitor. Vol. 9 (153).

[14] Eskeland, G. S. and Flottorp, L. S., 2006. Climate change in the Arctic: A discussion of the impact on economic activity. In Glomsrød, S. and Aslaksen, I., eds., 2006. The Economy of the North. Oslo: Statistics Norway.

[15] Greenpeace, 2012. Prirazlomnaya oil spill would threaten Russian Arctic with irreparable disaster: study. Retrieved July 10th, 2014 from

http://www.greenpeace.org/russia/en/news/Prirazlomnaya-oil-spill-would-threaten-Russian-Arctic-with-irreparable-disaster-study-/

[16] Bellona, 2012. Russia’s giant Shtokman gas field project put on indefinite hold over cost overruns and failed agreements. Retrieved July 10th, 2014 from http://bellona.org/news/fossil-fuels/oil/2012-08-russias-giant-shtokman-gas-field-project-put-on-indefinite-hold-over-cost-overruns-and-failed-agreements

[17] Staalesen, A., 2014. Drill stop at world’s northernmost oil field. Barents Observer. May 26, 2014. Retrieved July 10th, 2014 from http://barentsobserver.com/en/nature/2014/05/drill-stop-worlds-northernmost-oil-field-26-05

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