Opening Oil and Gas Development in the Arctic - A Conflict and Risk Assessment

This post is a short excerpt from an article, which was published in Tvergastein Interdisciplinary Journal of the Environment, 2nd issue, November 2012, pp. 36-43. To read the full article please click here.

By Kathrin Keil
The recent reopening of Alaskan Arctic waters to hydrocarbon development has sparked a remarkable interest in the increasing economic utilisation of Arctic resources. This has also led to predictions about possible conflict over Arctic resources because of rising stakes and insufficient institutional regulations. Analysts contemplate the possibility of violent conflict over natural resources in the Arctic, forecasting a “new scramble for territory and resources” and a race “to carve up the region.” [1] However, such statements use simplistic underlying assumptions, taking a one-size-fits-all approach to a very complex issue like the increasing economic development of the Arctic region. In fact, activities such as increasing oil and gas development, usage of new shipping lanes, and utilisation of new fishing grounds all have different underlying interest constellations about diverse goods or resources. They thus demand different institutional responses in order to guarantee sustainable development of the North.

Oil and gas have often been depicted as the Arctic commodities most likely to be the cause of eventual conflict, given the combination of rising demand for hydrocarbon resources worldwide and their increasing scarcity, as well as political tension in traditional extraction regions such as the Middle East and North Africa. To get a coherent picture of the likelihood of possible confrontation over Arctic oil and gas resources, the Arctic littoral states’ actual stakes and interests in Arctic energy resources [2] have to be closely analysed along with the commodity character of Arctic energy resources and the interdependence of the actors involved. A survey of the existing institutions providing rules for Arctic oil and gas development and their suitability to contain possible conflicting interests completes the picture.

Commodity Character and Interdependence

The commodity character [3] of Arctic oil and gas is an important indicator for its conflict potential. The kind of commodity that is typically assumed to be the most conflictive is the common pool resource type. Ownership of these resources is usually impossible to establish, it is difficult to exclude actors from utilising these resources, and the consumption of these goods by one actor precludes consumption by another. In contrast, the vast majority of discovered and expected Arctic oil and gas resources are private goods, i.e. their ownership is undisputed and the owners of the goods exhibit private property rights and thus control access to the goods. However, the natural environment as affected by oil and gas extraction can be considered a common pool resource because it is difficult to exclude actors from utilising the environment, and consumption, in the sense of potentially polluting a formerly clean environment, prevents other actors from utilising the environment, for example for fishing. Especially in the case of offshore activities, accidents such as oil spills could easily have transboundary impacts affecting other issue areas as well.

A second important indicator of conflict potential is the interdependence or the expectation of future interaction of the relevant actors during the process of oil and gas exploration and extraction. Indeed, oil and gas exploration and extraction in the Arctic is necessarily a highly iterative and interactive process. The technological and financial efforts are so enormous that future projects, which will move into ever more northern and challenging offshore areas, will not be manageable for one company alone. For example, it takes decades to get investment returns, and required infrastructure cannot be used for anything else but oil and gas transport. Also, considerable uncertainty as to the details of future discoveries and developments in the Arctic requires iterative cooperation over a longer period of time.

The Stakes

The US and Canada have for the foreseeable future only a weak economic interest in the large-scale development of their Arctic hydrocarbon base. This has largely to do with the low competiveness of US and Canadian Arctic oil and gas resources with resources further south that are already much better explored and connected to infrastructure systems. Additional hindering factors are the shale gas revolution in the lower 48 states, the predominant role of the Gulf of Mexico for US oil production, the vast Canadian hydrocarbon concentration especially in Alberta, and limited northern infrastructure.

courtesy of Nordregio, Johanna Roto & José Sterling
The picture looks very different for Russia, which has substantial gas and oil reserves, the majority of which are located in the Russian North, and which are of high importance to the overall Russian economy. The government is eager to foster exploration and production of offshore fields. However, many problems remain, such as the dilemma of having to involve foreign companies in continental shelf production because of the limited technology and capital capacities, while keeping a tight state grip on the strategically important resources. In addition, the unconventional gas revolution in the US creates an oversupplied global gas market. Similarly, the petroleum industry is of vital importance to the overall Norwegian economy. While the majority of Norwegian hydrocarbon development is still taking place outside the Arctic, the Barents Sea in particular will play a dominant role in Norway’s future hydrocarbon production. Recent field discoveries as well as the upcoming licensing round highlight the increasing importance of these waters.

Greenland is a special case when it comes to Arctic oil and gas interests. While no proven oil or gas resources and no accompanying industry exist yet, the importance of these resources to Greenland lies in the potential of future development. Revenues from the hydrocarbon sector could provide the financial means needed to reduce the still substantial financial dependence on Denmark.

The Conflict Potential

Given that the US and Canada show little interest in Arctic hydrocarbons and Norway and Greenland focus on their own national hydrocarbon base, this leaves Russia as the most prevalent location of Arctic oil and gas development, which requires the involvement of foreign actors. In other words, if any conflict over Arctic hydrocarbon development were to arise, it would most likely concern business relationships between Russian (state) and foreign companies over access to Russia’s resources and the cost-and-benefit sharing of joint ventures. Importantly, the interests of all actors involved point in the same direction: Russia wants to develop its resource base and sell it to high-price-paying Europeans, while foreign energy companies want a share in this profitable endeavour. 

What remains is a coordination problem: cooperation increases the benefit for all parties involved, but the distribution of those benefits and the sharing of the investment costs necessary to reap them is problematic as the players’ preferences diverge on the distribution of costs and benefits. The crucial point is that foreign and Russian energy companies are able to agree on business cooperation (compare the recent deals between Rosneft and Exxon, Statoil and Eni), and Russian oil and gas development is thus unlikely to provide an incentive for conflict thanks to existing mutual interests. However, a number of hazard problems remain, mostly in form of Russia’s generally challenging and demanding legal and political environment for foreign investors.

The picture looks different for environmental consequences of Arctic oil and gas development. The institutions setting up rules for the development of oil and gas resources to minimise the risks of environmental degradation must be very robust, given that they are usually directed against the short-term interests of the affected actors. Relevant institutions for Arctic oil and gas development are often not entirely adequate for various reasons. While the United Nations Convention on the Law of The Sea (UNCLOS) provides binding rules for the protection and preservation of the marine environment (Part XII), it does not sufficiently provide for Arctic-specific rules and dispute-settlement competencies. The International Convention on Oil Pollution Preparedness, Response and Co-operation (OPRC), while providing binding provisions, only calls for minimum standards for national systems for preparedness and response. 

The Arctic Council Arctic Offshore Oil and Gas Guidelines provide highly precise but no binding rules for marine environmental protection. The Convention for the Protection of the Marine Environment of the North-East Atlantic (OSPAR) in contrast provides binding and highly precise rules together with strong monitoring and verification competencies. However, the regional scope of the Convention is limited to the Northeast Atlantic and of the A5 only Denmark and Norway are members. In sum, it is not the extraction of the resources themselves that contain a high conflict potential but rather their side effects, first and foremost the environmental dangers they entail.

In addition to the absence of adequate institutional arrangements for the development of Arctic oil and gas resources, an additional challenge is the linkage between various Arctic economic activities as well as the linkage with the broader social and ecological circumstances of the specific region in which they occur. In other words, institutions for the sustainable development of the Arctic have to take account of the complexity of the Arctic region as a system of various dynamic internal and external relationships that change over time. Importantly, such institutions would take account of the fact that many potential victims of extraction-induced pollution do not have their interests adequately represented in the existing institutions. These are especially residents with no, or only weak, representation options and especially the flora and fauna of Arctic lands and waters. The appropriate institutional device could be an ecosystem-based management (EBM) approach, which leaves out none of the links in the ecosystem and which is flexible enough to take into account new knowledge about affected actors and their concerns and interests. These are the actual challenges ahead and not the often-stated likelihood of possibly violent conflicts over Arctic resources.

[1] Scott G. Borgerson, “Arctic Meltdown,” Foreign Affairs 87, no. 2 (2008): 63 f..

[2] For a detailed analysis of the Arctic littoral states’ interests in Arctic oil and gas resources, cf. Kathrin Keil, “The Arctic: A new region of conflict? The case of oil and gas”, Cooperation and Conflict (forthcoming 2013).

[3] Elinor Ostrom, Roy Gardner, and James Walker, Rules, Games, & Common-Pool Resources (Ann Arbor: The University of Michigan Press, 1994), 6 f.; Elinor Ostrom, “The Challenge of Common-pool Resources,” Environment: Science and Policy for Sustainable Development 50, no. 4 (2008): 11.