Canada in the Arctic - Arctic Oil and Gas: Reserves, Activities, and Disputes

This article is part 1 of a background piece about "Canada in the Arctic."

By Kathrin Keil Canada has recorded 90 major offshore oil and natural gas discoveries since 1964. Most Canadian petroleum companies are active in both crude oil and natural gas development and the level of capital investment in exploration and development has increased significantly in recent years. Capital investment in the conventional oil and gas industry has grown steadily from an average of CAN$ 5 billion in the early 1990s to CAN$ 10 billion per year in 2006. Map 1 gives an overview of Canada’s seven major sedimentary basins with the major petroleum-producing fields of conventional natural gas, crude oil and oil sands. The red and blue lines illustrate the existing oil and gas pipelines. 

According to the 2007 Arctic Monitoring and Assessment Programme Assessment Report “Oil and Gas in the Arctic: Effects and Potential Effects”, Canada issued most licences for Arctic land in the late 1960s and early 1970s, late 1980s and again in the early 2000s. Seismic data acquisition in Canada peaked in the early 1980s and then fell to very low levels in the 1990s. More recently small amounts of seismic activity have taken place. Exploration and discovery wells drilling peaked in Canada in the mid-1970s and then dropped to low levels in the early 1990s followed by a slight increase.

Estimated Canadian Arctic Oil and Gas Reserves

The USGS estimates that the Amerasia Basin, which is shared by Canada and the US, holds the second biggest undiscovered oil share in the Arctic, which amounts to ca. 10 billion barrels of oil equivalent (BBOE) and is only topped by Arctic Alaska with approximately three times as much. Counting all the estimated oil reserves together that belong to Canadian provinces or shared provinces with Canada involved, the total oil share is 18.52 BBOE, which is approximately 20.6% of the total undiscovered Arctic oil estimate.

In terms of natural gas, Canadian provinces and provinces shared with the U.S. contain an estimated 124.78 BBOE, which amounts to approximately 7.5% of the total undiscovered gas estimate. The share of undiscovered natural gas liquids is 2.09 BBOE, which corresponds to approx. 4.7% of the total estimate. While the natural gas and natural gas liquids (NGL) estimates are not overwhelming for Canada, the oil estimate – after all one fifth of the total – is large enough to justify at least an exploration interest.

Securing access to these oil resources also explains why Canada has listed securing international recognition of the Canadian continental shelf as one the priorities in its 2010 Arctic Foreign Policy statement. As map 2 and 3 indicate, the extended continental shelf would include parts of Amerasia Basin, which is expected to hold the second biggest undiscovered oil share in the Arctic after the Alaskan Arctic.

Canada is conducting scientific studies in order to determine the full extent of the Canadian continental shelf as defined under UNCLOS, which is also important against the background of some of the territorial disputes the country is involved in. According to the Northern Strategy from 2009  and the Foreign Policy Strategy from 2010, Canada is planning to submit its claim to the Convention on the Limits of the Continental Shelf (CLCS) by the end of 2013.In 2004, CAN$ 69 million (approx. € 51 million) have been allocated in the federal budget to carry out the mapping in order to determine the outer limits of Canada’s continental shelf. This amount was further increased by the Canadian Government  in 2008 by an additional CAN$ 40 million (ca. € 30 million) for data collection and legal work to enable Canada to present an effective submission to the CLCS.

The 2009 Strategy emphasises that this process “is not adversarial and is not a race. Rather it is a collaborative process based on a shared commitment to international law. Canada is working with Denmark, Russia and the United States to undertake this scientific work” and “[a]ny overlaps with the submissions of neighbouring states will be resolved through peaceful means in accordance with international law”.

Importance of Disputed Areas for Canadian Arctic Oil and Gas Interests

The dispute between Russia, Denmark, and Canada about the Lomonosov and the Mendeleev Ridges, between Canada and the US about the exact boundary in the Beaufort Sea, and between Canada and Denmark about the possession of Hans Island are struggles about land and marine territory and are thus potentially important for Canadian Arctic oil and gas development. 

According to the USGS, not many oil and gas resources are expected in the area of the Lomonosov and the Mendeleev Ridges that Russia, Denmark and Canada quarrel about: only 1.11 BBOE of oil are expected in the Lomonosov-Makarov area, 7.16 BBOE of natural gas and just 0.19 BBOE of NGL.The struggle with the US about the exact boundary in the Beaufort Sea is located in an area that is forecasted to be relatively resource-rich, namely the Amerasia Basin. However, the area under dispute is only medium-sized – 6250 nm² as shown in map 4 – and thus not outstandingly important in terms of Canadian Arctic oil and gas exploitation. Further, there have been indications that the dispute could be settled in the not too distant future in the same fashion as Norway and Russia solved their boundary struggle in the Barents Sea.

Lastly, while Hans Island is located in possibly resource-rich waters in the West Greenland-East Canada area, the dispute between Canada and Denmark is only about the island itself and not about the surrounding waters or the seabed. Thus, this dispute will not be of major relevance to Canada’s oil and gas interests. In conclusion, none of the three disputes is relevant for Canada’s oil and gas development prospects.

References:

[1] Natural Resources Canada, http://atlas.nrcan.gc.ca/site/english/maps/economic/energy/oilgas

[2] Foreign Affairs and International Trade Canada (2011), http://www.international.gc.ca/continental/limits-continental-limites.aspx?lang=eng

[3] Van Pay (2009)

[4] Fuchs et al (2011, 21)

No Race for Arctic Hydrocarbon Resources? A Possible Scenario for an Unclear Development

by Andreas Raspotnik Polar Might – Energies of the High North: this year’s Arctic Frontiers Conference prominently addressed the issue of hydrocarbon energy resources in the Arctic region. Statoil’s representative, executive vice-president Tim Dodson explicitly stressed that recent developments indicate that an often-understated race for Arctic oil and gas resources is rather on than off. In a recent Nature Article, Quirin Schiermeier metaphorically referred to Dodson’s statement as starting signal for resource development and exploitation.[1] Heather Exner-Pirot provocatively stated that the five biggest global oilcompanies would replace the five Arctic Ocean coastal sates (A5) as primary Arctic actors by the next decade.[2]

Yet there are alternatives to how one can interpret the development of the region. This article presents a scenario where hydrocarbon resources may not be the key driver of near-future Arctic development.

Many studies, most prominently the U.S. Geological Survey (USGS) Circum-Arctic Resource Appraisal (2008), portray the area as one of the biggest unexplored energy region in the world. The USGS estimated that 90 billion barrels of oil, 1,669 trillion cubic feet of natural gas (approximately 30% of the world’s undiscovered conventional gas) and 44 billion barrels of natural gas liquids might remain undiscovered in the Arctic.[3] Yet the USGS emphasized the low data density and the high geological uncertainty. Additionally, economic considerations (e.g. reference to costs of exploration and development) were not included in the initial estimates. Nevertheless, these figures are often used in Arctic energy debates to support theories for the likelihood of a new Cold War period and the battle for energy resources in a purportedly lawless area.

Recent drillings confirmed the appraisal’s suggestions that the Arctic is gas-prone, with the highest potential in the Russian South Kara Sea. With regard to undiscovered oil, the Alaska Platform holds the largest estimates. Yet the actual oil estimates will not shift the concerned global production balance.[4]

Arctic hydrocarbon resources may account for a bigger share of the world’s hydrocarbon production in the future if the reserves can be exploited in an economically viable way. In this context technical challenges must be addressed and the actual costs for infrastructure (e.g. exploration, exploitation, and transportation) lowered.[5] Future development of Arctic energy resources will also be dependent on the actual energy price, climate conditions, production from other regions, alternative fuels developments, and the way in which climate change will alter the accessibility of the High North. All-encompassing cost-benefit analyses will be required to determine the economic feasibility of Arctic drilling. With regard to the Russian territory, the International Energy Agency’s (IEA) World Energy Outlook 2011 already stated that due to logistical challenges the Russian Arctic continental shelf might not become a major production area until 2035.[6]

Additionally, justified environmental concerns represent an obstacle for resource developments in the region. Oil spill recovery efforts would be challenged by low temperatures, icy conditions, lack of daylight and visibility during the winter months, wave heights, rough sea conditions, limited infrastructure and the lack of available personnel resources.

These uncertainties will significantly reduce the economic incentives for oil companies to invest in the region. Consequently future scenarios are hard to predict. Alternative fuel developments such as unconventional gas resources (e.g. shale gas, coal bed methane, tight gas, natural gas hydrates) can be considered a dark horse for the future development of Arctic hydrocarbon resources. An economically viable exploitation of shale gas resources is still considered a rather new phenomenon.[7] Yet since the U.S. Energy Information Administration (EIA) published a first initial assessment on world shale gas resources [8], one question has often been raised: “is shale gas a game changer in the global energy play?” In a previous TAI article [9], Kathrin Keil already argued that Arctic gas reserves are becoming less and less attractive for the U.S. market, because shale gas has proven to be a crucial game changer. Two technological developments, 1) horizontal drilling and 2) hydraulic fracturing (=fracking) have made shale gas exploitation easier and essentially more cost-effective. Shale gas fields, which have previously been deemed unprofitable to develop, have now become highly attractive.

The EIA concluded that the significant international potential of shale gas could play an increasingly important role in global natural gas markets. In addition to the U.S., China, Europe and South Africa are considered the most promising regions; yet the Middle East and Russia were not included in the study. The initial estimate of technically recoverable shale gas resources currently accounts for 6,622 trillion cubic feet (tcf). The worldwide technically recoverable gas resources, excluding shale gas, are roughly 16,000 trillion cubic feet.[10] However, technical feasibility does not equate to economic viability. The U.S. and Europe, both considered the two main markets for Norwegian[11] and Russian (Arctic) gas and oil, hold similar reserves (862 tcf and 639 tcf, respectively).

Yet, due to a multitude of issues, e.g. economic and environmental concerns, different regulatory regimes, and the basic problem of actual space, due to high population density in Europe, one has to be more critical about the European prospects of shale gas. In addition analysts have already started to question the shale gas production forecasts in the U.S. and criticized the optimistic perception of the country’s resources and stressed the long-term costs of extracting shale gas.[12] Currently prices are too low to make shale gas production profitable on a long-term scale. Furthermore, environmental concerns with regard to fracking, including the potential contamination of ground water, minor earthquakes, and risks to air quality, prominently influence the debate. A recent study asserts that emissions from shale gas rival those from coal.[13]

The development of conventional gas in the Arctic and unconventional gas elsewhere will ultimately be decided by the rate of increasing demand and the future market price.

According to the IEA conventional gas will still account for the bulk of gas production in 2035, but the share of unconventional gas will rise to 22% in 2035 (compared to 13% in 2009). This increase is mainly expected to come from shale gas and coal bed methane. The U.S. is slated to become the second-largest global gas producer throughout the projected period (2010 –2035).[14] In 2008 Lars Lindholt and Solveig Glomsrød projected that the global gas production outside the Arctic will increase until 2030. Consequently their model predicts a decline of the Arctic share of global gas production from 21% in 2008 to 9% in 2030.[15]

The true value and potential of global shale gas resources is clouded in uncertainty and alarming environmental concerns. Yet technological innovation could alleviate some or all of these concerns. Consequently shale gas production can either end up as a mere “gas” blip or a long-term global changer. Yet precisely this vagueness can have a fundamental impact on continuous Arctic gas development.

The word prediction derives from the Latin præ and dicere. Yet with regard to the interaction of Arctic gas resources and global shale gas resources it is hard to say before what will happen in the future. Shale gas production has certainly changed the U.S. natural gas market and simultaneously affected the global market. Why shouldn’t it be considered a turning point for a too optimistic Arctic gas development prediction?

---

[1] Retrieved February 8^th 2012 from:http://www.nature.com/news/the-great-arctic-oil-race-begins-1.9932

[2] Retrieved February 8^th 2012 from:http://www.alaskadispatch.com/article/next-arctic-five-will-be-oil-companies-not-nations

[3] Retrieved February 8^th 2012 from: http://pubs.usgs.gov/fs/2008/3049/

[4] Marcia McNutt, U.S. Geological Survey. Presentation held at the Arctic Frontiers 2012 23 January 2012. Presentation retrieved February 15^th 2012 from: http://www.arcticfrontiers.com/index.php?option=com_docman&task=doc_download&gid=553&Itemid=306&lang=en

[5] Both the exploitation and transportation of Arctic resources require specific and expensive infrastructure and long supply lines, e.g. pipelines, ports, roads, which all have to resist the harsh Arctic climate conditions. With regard to infrastructure conditions, the Arctic Institute will publish a first comprehensive report in Fall 2012, outlining the state of the art.

[6] International Energy Agency (IEA) (2011). World Energy Outlook 2011, p. 295

[7] U.S. Energy Information Administration (2011). World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, p. 1; Øverland, Indra (2010). The surge in unconventional gas - implications for Russian export strategies, in: Baltic Rim Economies, ExpertArticles 1/2010. Retrieved February 15^th 2012 from http://www.tse.fi/FI/yksikot/erillislaitokset/pei/Documents/BRE2010/BRE%201-2010%20artikkelit/BRE_2_2010__18_19.pdf

[8] U.S. Energy Information Administration (2011). World Shale Gas Resources: An InitialAssessment of 14 Regions Outside the United States

[9]http://www.thearcticinstitute.org/2011/08/us-waking-up-to-arctic-riches.html#more

[10] U.S. Energy Information Administration (2011). World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, p. 2 and 3

[11] The Norwegian natural gas Snøhvit, including its LNG terminal on the island of Melkøya was initially destined for the east coast of the U.S. (e.g. Maryland).

[12] Retrieved February 8^th 2012 from: http://www.arcticgas.gov/Analyst-questions-shale-production-claims

[13] Howarth, Robert.W., Santoro, Renee and Ingraffea, Anthony (2011). Methane and the greenhouse-gas footprint of natural gas from shale formations, in: Climatic Change, Vol. 106:4, p. 679-690. Retrieved February 9^th 2012 from:http://www.springerlink.com/content/e384226wr4160653/fulltext.pdf

[14] International Energy Agency (IEA) (2011). World Energy Outlook 2011, p. 163

[15] Lindholt, Larsand Glomsrød, Solveig (2008). Future production of petroleum in the Arctic under alternative oil prices, in: The Economy of the North 2008. Retrieved February 8^th 2012 from:http://www.ssb.no/english/subjects/00/00/30/sa_economy_north/sa112_en/kap5.pdf
[16] Chris Arsenault. Retrieved February 20^th 2012 from snippits-and-slappits.blogspot.com/2011/05/wikileaks-battle-to-carve-up-arctic.html
[17] Nick Jardine. Retrieved February 20^th 2012 from http://articles.businessinsider.com/2011-09-21/europe/30183508_1_shale-gas-fracking-process-natural-gas
[18] Kieron Allen. Retrieved February 20^th 2012 from http://sciencefocus.com/blog/how-it-works-shale-gas-fracking

EU Arctic Policy: Caught between Energy Security and Climate Change

by Kathrin Keil A number of opportunities for the European Union to get involved in Arctic affairs exist, one of them being a strengthened energy-partnership with Norway. The EU has indeed put a focus on the Arctic’s energy potential. As the 2008 Communication from the Commission to the European Parliament and the Council reads: “Arctic resources could contribute to enhancing the EU’s security of supply concerning energy and raw materials in general.” However, when reading the official EU documents on the Arctic (there have not been many: the previously mentioned Commission Communication in 2008, a Parliament resolution in 2009, a Report in 2010, and Council Conclusions on Arctic issues in 2009), it becomes clear that the EU has overall remained pretty general and vague about its envisioned EU Arctic Policy.

In particular the general nature of these documents depicts a harmony that is not realistic. The papers fail to expand upon potentially contradicting policy issues that the EU faces in its current, premature Arctic policy approach. The most apparent contradiction comes to light when considering the two policy-areas the EU emphasizes the most when presenting its interests and ambitions in the region: energy security – mainly understood in terms of security of supply – and climate change.

First, it is important to note that these issue areas are highly interconnected. The reliance on fossil fuels for energy generation contributes to the changing climate and is responsible for most of today's and future GHG emissions. The effects of climate chance will be felt first and foremost in the Arctic region where temperatures are slated to increase at twice the rate of lower latitudes. The EU's decision  to reduce greenhouse gas emissions by 20%, increase the share of renewable energy to 20%, and improve energy efficiency by 20% , represents the first steps to limiting future GHG emissions [1].

The EU’s goals in the Arctic when compared to the EU's climate change agenda clearly illustrates the Union's contradictory policy approaches. Energy security for the EU must be understood in terms of security of supply. In order to address growing energy scarcity and dependence the EU aims to find new and diversified energy sources. The Arctic holds significant amounts of conventional energy resources – mainly oil and natural gas. The  increasing reliance on hydrocarbon resources in the Arctic contradicts the goals of the EU’s climate change policy to achieve reduction of GHG emissions and rapid growth of the renewable energy sector. These divergent approaches may lead to questions about the region's leadership role in the fight against climate change. The Swedish government in its evaluation of the Commission’s Communication points out this contradiction.

The EU's continued financial support of Carbon Capture and Storage (CCS) may also weaken the EU's support of and focus on spurring investments in renewable energies and promotion research on alternative low-emission energy production.

Additionally, the exploitation of Arctic resources is very energy intensive – running counter to the EU’s goals to improve energy efficiency – and could potentially damage the local environment and contribute to GHG emissions.

The EU's goal to profit from newly discovered energy resources in the High North, which are predominantly expected in the Russian part of the Arctic, runs counter the current ambition of many EU member states seeking to reduce their energy dependence on Russia. An increased energy partnership with Norway and its Arctic hydrocarbon resources could help the EU to diversify its supply away from Russia. However, the EU cannot ignore Russia as the most important Arctic hydrocarbon actor, given that the Russian shelf holds more than half the expected oil and gas reserves in the Arctic.

The EU can certainly become a important actor and partner in Arctic issues, but the Union must more clearly define its preferences and values when entering a new regional policy field. In short, policy-makers in Brussels have to ensure that the prospective EU Arctic Policy does not contain contradictory policy preferences, with regard to climate change and energy security, but rather follows a coherent set of goals and values directed at the Arctic’s possibilities and challenges.

sources:

[1] Communication from the Commission to the European Council and the European Parliament - an energy policy for Europe {SEC(2007) 12}, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2007:0001:FIN:EN:PDF).

Is the European Union Missing Another Window of Opportunity for Arctic Energy Resources?

by Andreas Raspotnik On November 18th the Norwegian Ministry of Foreign Affairs presented its White Paper on the High North - “The High North – Visions and Strategies”. This strategic policy update is supposed to set the course for the Norwegian High North Policy for the next 20 to 30 years. 

The region has been identified as an essential new energy province in Europe, embedded in an environment of geopolitical considerations, upcoming challenges and widespread opportunities. The European Union and its member states have been mentioned in the context of several cooperation mechanisms, e.g. the Nordic Dimension, bilateral (energy) cooperation between Norway and EU member states (in particular France and Germany) and enhanced forms of dialogue between Norway and the EU’s institutions [1]. 

Simultaneously, the Norwegian Minister of Petroleum and Energy, Ola Borten Moe launched the first impact assessment study in the Norwegian sector of the earlier disputed Barents Sea area with the aim to open the concerned waters for offshore drilling. The bilateral maritime delimitation dispute between Norway and the Russian Federation was settled on September 15th 2010. Besides specifying the maritime boundary, the treaty also sets out procedures for the development of any gas or oil field straddling the new boundary. The treaty entered into force on July 7th 2011.

The next day, Norway started its first expedition, engaging in data collection and seismic mapping in the newly established border area [2]. The Norwegian Petroleum Directorate expects the first significant results to be obtained by winter 2013. In addition, Statoil, Norway’s leading Energy Company, just announced efforts to reinforce its investments in Arctic projects, focusing particularly in the recently discovered and highly assessed Skrugard oil field [3].

The Barents Sea, an area considered to be both economically valuable and strategically important, is on the verge to be internationally revitalized after 40 years of economic stagnation and regional significance.

The EU is fully aware of the recent developments and manifold opportunities the Barents Sea and Arctic region in general provide [4]. Maria Damanaki, the European Commissioner for Maritime Affairs and Fisheries, recently addressed Arctic challenges, emphasizing the strategic partnership between the EU and Norway and clarifying the EU’s position to become an influential actor in the Arctic – “the golden rule is to get in early” [5].

Currently, Norway supplies 20 percent of the gas consumed in EU member states, making it the Union’s second largest supplier of gas. Most of the exports go to Germany, the UK, Belgium and France, where Norwegian gas accounts for between 20 and 35 percent of the total gas consumption [6]. For the current decade the Norwegian gas production is supposed to reach between 125 and 140 billion cubic meters, compared to almost 100 billion cubic meters in the last decade [7].

Natural gas will continue to play a key role in the EU’s energy mix, as outlined in Energy 2020, the EU’s 10-year energy strategy. The strategy emphasizes the necessity of a strong international energy partnership, notably with the EU’s neighbours, calling for the establishment of privileged energy partnerships with key partners [8]. 

Norway features prominently in most of the policy documents that describe the process toward a common energy policy for the EU. Long term energy cooperation, facilitating sustainable and environmentally friendly exploration, was already considered by the Commission in 2008 [9] and further addressed by the President of the European Commission, José Manuel Barroso [10]. “The EU definitely wants to expand cooperation with Norway”, János Herman, the EU Ambassador to Norway, reconfirmed at the recent Arctic and Northern Areas Conference in Bodø (Norway) [11].

Yet only a bilateral EU-Norwegian Energy Dialogue, with annual meetings at Commissioner/Minister level, was established in 2002. This dialogue principally aims at the coordination of energy policies, including research and technical development and the possible exploration of hydrocarbon resources in the High North. However the High North was only added to the European political discourse in 2006.

In September 2011 the European Commission adopted its Communication on security of energy supply and international cooperation. This Communication is supposed to set out the first comprehensive and coherent strategy for EU external energy policy. Focusing on the establishment of EU partnerships with its key energy suppliers, the Commission emphasizes the potential of the EU-Norway Energy Dialogue to be further enhanced and extended [12]. Energy partnerships are aimed to promote EU’s key principles, including energy security, safety standards, regulatory cooperation, energy efficiency and research and innovation.

The current developments in the Barents Sea can be regarded as both a temporal and structural “window of opportunity” for the development of a privileged energy partnership between the EU and Norway, with obvious advantages for the EU.

• Upgrade the relationship with Norway and enhance its cooperation:
  
  A strategic energy partnership, e.g. called the “new framework agreement on strategic partnership and cooperation in the 21st century”, could be based on several key points, inter alia: confidence, security and predictability. This envisaged framework agreement could continue to develop the cooperation efforts, outlined in the EU-Norway energy dialogue, and further set out general obligations and specifically define elaborated goals of cooperation.
  
  Both the EU and Norway share similar visions, values and norms with regard to resource exploitation, energy efficiency and environmental protection: affordable – reliable – clean. It is in the strategic interest of the EU to strengthen the cooperation efforts and ensure that international/European environmental standards are implemented at all times. An energy partnership agreement could design specific policy approaches and instruments regarding the European Arctic, encapsulating energy needs and environmental concerns.
  
  European officials have to answer the following question: how can the EU, which assumes a leadership role in fighting global climate change and in promoting sustainable development, influence relevant external actors to act consistently with the EU policy pertaining to energy (security of supply agenda) and climate policy?
  
  
• Strengthen Arctic cooperation and draw on your allies
  
  Norway is considered the most logical ally to cooperate regarding a more committed and coherent EU Arctic strategy. The bilateral relationship is governed by the EEA-agreement (European Economic Area), obliging Norway among other things to implement the EU’s internal energy market legislation. The country further supports the Commissions application as a permanent observer to the Arctic Council.
  
  A privileged energy partnership could not only strengthen the necessary cooperation, it could further be identified as a strong political commitment of the EU to the Arctic region. The two partners could act with one powerful voice with regard to the implementation of common international environmental standards concerning hydrocarbon resource exploitation, fisheries and navigation. The purpose of the framework agreement is to agree on joint actions to implement the measures required.
  
  Hence, the current developments in the Barents Sea could also function as an initial point for a trilateral economic cooperation between the EU, Norway and the Russian Federation.

High North energy has yet not been perceived as an essential foreign policy asset for Norway. The Scandinavian country foreign policy builds upon a pragmatic external policy style, favouring bilateral ties and the primacy of Norwegian national sovereignty. A privileged energy partnership would not counteract that notion but additionally comply with Norwegian interests and combine High North diplomacy with the EU’s focus on energy security. A close cooperation with the EU could strengthen the Norwegian position on political, economic, environmental, and social issues.

EU-Norwegian energy cooperation would not have to start from scratch. Its Energy Dialogue already outlines the coordination of energy policies. Yet recent developments in the European Arctic and the European Commission’s strategy for a comprehensive EU external energy policy could be considered as influential incentives to strengthen the energy cooperation.

Sources: 

[1] Ministry of Foreign Affairs, Norway (2011). Nordområdene - Visjon og virkemidler. Retrieved December 1st 2011 from Reports to the Storting: http://www.regjeringen.no/pages/35878716/PDFS/STM201120120007000DDDPDFS.pdf
[2] Staalesen, Atle (2011). Collecting seismic data from border area. Retrieved December 1st 2011 from Barentsobserver.com (July 8th 2011): http://www.barentsobserver.com/collecting-seismic-data-from-border-area.4941208-16178.html
[3] Nilsen, Thomas (2011). Finally large Barents oil discovery. Retrived December 1st 2011 from Barentsobserver.com (April 1st 2011): http://www.barentsobserver.com/finally-large-barents-oil-discovery.4905101-16149.html
[4] For a more comprehensive overview regarding the European Union’s role in the Arctic, see Andreas Østhagen. The European Union and the Development of an Arctic Policy: http://www.thearcticinstitute.org/2011/11/2356-eus-role-in-arctic.html#more

[5] Damanaki, Maria, European Commissioner for Maritime Affairs and Fisheries (2011). The EU and Norway: addressing Arctic and maritime challenges Seminar High North Oslo, 17 October 2011. Retrieved December 1st 2011 from Press Releases (Speech/11/673): http://europa.eu/rapid/pressReleasesAction.doreference=SPEECH/11/673&format=HTML&aged=0&language=EN&guiLanguage=en
[6] Ministry of Petroleum and Energy, Norway (2011). FACTS 2011 – The Norwegian Petroleum Sector. Retrieved December 1st 2011 from Norwegian Petroleum Directorate: http://www.npd.no/Global/Engelsk/3%20%20Publications/Facts/Facts2011/Facts_2011_hele_rettet.pdf
[7] Ministry of Petroleum and Energy, Norway (2009). Norway: Providing Energy Security for Europe, Speech/Article by Terje Riis-Johansen, February 2nd 2009. Retrieved December 1st 2011 from The Ministers speeches and articles: http://www.regjeringen.no/en/dep/oed/aktuelt/taler_artikler/minister/olje--og-energiminister-terje-riis-johan/2009/norway-providing-energy-security-for-eur.html?id=545514
[8] European Commission (2011). Energy 2020 - A strategy for competitive, sustainable and secure energy. Retrieved December 1st 2011 from: http://ec.europa.eu/energy/publications/doc/2011_energy2020_en.pdf
[9] European Commission (2008). The European Union and the Arctic region. Communication from the Commission to the European Parliament and the Council. COM(2008) 763 final. Retrieved December 1st 2011 from: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52008DC0763:EN:HTML
[10] Barroso, José Manuel, President of the European Commission (2008). The EU/Norway Partnership: a European Approach to Energy Security and Climate Change, Europe Conference, Oslo 25 February 2008. Retrieved December 1st 2011 from Press Releases (Speech/08/98): http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/08/98&format=HTML&aged=0&language=EN&guiLanguage=en

[11] The Research Council of Norway (2011). International focus on the northern areas. Retrieved December 1st 2011 from: http://www.forskningsradet.no/en/Newsarticle/International_focus_on_the_northern_areas/1253969965509?WT.mc_id=nyhetsbrev-ForskningsradetEngelsk
[12] European Commission (2011). On security of energy supply and international cooperation - "The EU Energy Policy: Engaging with Partners beyond Our Borders". Retrieved December 1st 2011 from: http://ec.europa.eu/energy/international/security_of_supply/cooperation_en.htm

It’s not just the Market – Drivers of Arctic Interest

by Kathrin Keil The recent debate about a rush for the Arctic’s resources has primarily focused on the economic benefits, especially from hydrocarbon revenues in a situation of sufficiently high international commodity prices for oil and gas. The prospect of increasing energy demand in a world dependent on fossil fuels would spur hydrocarbon exploitation in the High North. 

And indeed, the instable situation in the Maghreb countries and the debate surrounding nuclear energy after the Fukushima accident have already resulted in increasing oil and gas prices, which is a crucial factor for the exploration and development of Arctic oil and gas resources. Energy companies respond to high oil and gas prices with an increasing interest in developing new discoveries, and the higher the prices, the more companies are willing to invest in exploration and exploitation activities even in inhospitable and remote regions like the High North.

For example, Russian oil firms are responding to the recent oil price increase by massively increasing their oil exports. Deputy Energy Minister Sergei Kudryashov is quoted to have said that Russia had exported 3 million tons of oil products in the first four months of 2011; the same amount which has been exported in all of 2010. This has even led to a gasoline shortage in some parts of Russia where fuel prices are kept low by the government due to the upcoming parliamentary elections in December 2011.

Also Norway’s Statoil has benefitted from higher oil and gas prices. As a press release from the company reads, Statoil’s first quarter 2011 net operating income was NOK50.7 billion (approx. €6.4 billion), which amounts to a 28 percent increase compared to NOK39.6 billion in the first quarter 2010. This is mainly due to a 33 percent increase in average oil prices and 20% increase in average gas prices since 2010.

Finally, Russia’s Gazprom had a record profit in 2010 of nearly one trillion rubles (RUB981 billion, up 27 percent from 2009 levels) or approximately €24.2 billion thanks to high prices, a higher profit than ExxonMobil or Chevron. But also ExxonMobil’s and Chevron’s earnings rose substantially, up 57 percent from 2009 for ExxonMobil ending 2010 with $30.5 billion (approx. €20.4 billion), and up 81 percent for Chevron to $19 billion.

While oil and gas prices impact the development of Arctic resources, this is by far not the whole story of the political economy of Arctic resource development, as Oran Young and Gail Osherenko reminded us already in 1989; rather, “governments regularly experience powerful incentives to encourage or discourage Arctic development, incentives that are not based exclusively on world market prices” [1]. 

A vivid example is Greenland where the increase of revenues from the island’s resources provides the possibility of independence from Denmark. Additionally, general economic development and investments in new industries such as agriculture could reduce Greenland’s dependency on foreign imports. So although economic gains from Arctic resources play a huge role for Greenland, they are nevertheless a means to a higher end.

The Canadian government’s main drive to encourage Arctic development is often connected to the higher aim of securing Canadian sovereignty in the Arctic. In other words, Arctic exploration projects are encouraged in order to prove Canada’s effective occupancy of its vast Arctic territory.

For the US, Alaskan resource exploitation is often interpreted as a means to reduce the country’s dependency on foreign oil imports. In 2010, about 49 percent of the petroleum consumed was imported, showing a high dependence on foreign petroleum. President Obama is under increasing pressure to boost domestic oil production and in March 2011 he set a target of reducing foreign oil imports by a third by 2025.

Both the US and Canada have strong incentives to boost development in their Northern regions in order to improve the economic and social conditions in these often remote communities, for example through the creation of jobs and better education and social welfare systems, which in turn pay out again in form of increased tax revenue.

In short, many Northern development projects would not have been implemented on the basis of strict market signals without government support, for example in form of subsidies or tax breaks. A recent example is Russian plans for a comprehensive package of tax breaks and other benefits for companies operating on the Russian continental shelf in order to attract and facilitate investments in the Russian North.

Also broader interests exist that boost Arctic development, especially concerning the future energy mix. Arctic energy resources are expected to provide compensation for decreasing production of nuclear energy in some, especially European, countries in response to the Fukushima nuclear power plant disaster in Japan following a severe earthquake in March 2011. If a number of countries decide to reduce or even phase out their nuclear power programs, other energy resources like natural gas, also from the High North, could replace nuclear energy.

In conclusion, the drivers of Arctic development are manifold and while oil and gas prices surely have a strong role to play, other factors can also trigger Northern activities. It is in any case important to be aware of more country-specific interests and incentives in order to understand the dynamics of Arctic development.

sources:

[1] Osherenko, G., Young, O. The Age of the Arctic, http://books.google.com/books/about/The_Age_of_the_Arctic.html?id=tdbLWUV1qKQC

U.S. Interests in Greenland - On a Path Towards Full Independence?

by Kathrin Keil June 21st 2011 marked the two year anniversary of the Greenlandic self-rule government and it now appears that complete autonomy might not be too far off. After having been a Danish colony for most of the 19th century, Greenland became part of the Kingdom of Denmark in 1953. 

In 1979, Greenlanders achieved a major breakthrough in terms of indigenous self-government with the creation of the Home Rule Government, meaning that Greenland administers matters relevant to its own domestic order. 

This autonomy has been expanded with Greenland obtaining self-rule in 2009 with responsibility for judicial affairs, policing and its natural resources. Greenlanders were also recognized as an independent people under international law and Greenlandic became the sole official language. Denmark, however, retains control of foreign affairs and defense matters.

The possibility to gain gull independence from Denmark is closely tied to the possibility to achieve financial autonomy, i.e. to reduce the annual grant from Copenhagen to zero by raising enough own Greenlandic revenues. The natural resource sector including mineral resources, fish and marine mammals, hydropower, and especially oil and gas offer the best prospect for raising revenues in the future. Thus, the recently published Danish Arctic Strategy puts a strong emphasis on Greenlandic economic independence, thereby prioritizing development over environmental concerns, which has been criticized by environmental groups.

Greenland seems to have found a strong helping hand on its way to autonomy. According to Wikileaks, the U.S. appears to be highly interested in investing in the resource base of the country and in tapping the vast expected hydrocarbons off the Greenlandic coast. One cable reads that: 

“Greenland is on a clear track toward independence, which could come more quickly than most outside the Kingdom of Denmark realize. […] With Greenlandic independence glinting on the horizon, the U.S. has a unique opportunity to shape the circumstances in which an independent nation may emerge. We have real security and growing economic interests in Greenland. […] American commercial investments, our continuing strategic military presence, and new high-level scientific and political interest in Greenland argue for establishing a small and seasonal American Presence Post in Greenland's capital as soon as practicable.”

Next to securing a bigger US presence in Greenland, the US seems also eager to establish itself as the primary partner of Greenland concerning economic and resource cooperation, joint scientific projects, as well as visitor invitations and English teaching programs: “Our intensified outreach to the Greenlanders will encourage them to resist any false choice between the United States and Europe. It will also strengthen our relationship with Greenland vis-a-vis the Chinese, who have shown increasing interest in Greenland's natural resource.”

Indeed, according to some Greenlandic independence might only be 10 to 20 years away. However, others are more skeptical. First, Copenhagen continues to send a significant annual grant to Nuuk every year. In 2010, financial transfers from Copenhagen accounted for about one-third of the Greenlandic budget, around 3.5 billion Danish kroner (ca. € 470 million) or € 8,300 per person. 

Second, Greenland lacks full-fledged governmental institutions and political capacity to act internally and externally. Progress in this area will not be possible without external support. Further difficulties include lack of spending on social security and education, high levels of domestic violence, record levels of suicides, unemployment, development of new and expulsion of old industries, loss of traditional ways of life through large influx of foreign workers, and continued support of remote settlements.

Third, Greenland is developing closer ties with the EU again. While the withdrawal from the EU in 1985 has been explained as rearing up against the forced accession to the European Community in 1973 by Danish colonial foreign rule, Greenlanders have become more positive towards the Union. Political ties to the EU allow Greenland to develop own foreign relations distinct from Denmark. Also, financial transfers from Brussels contribute substantially to the Greenlandic budget, and cooperation agreements span across a wide range of issue areas, such as fishing, education, environment, and sustainable development.

Lastly, Denmark will watch the development in Greenland carefully, given that with Greenlandic independence Denmark would cease to be an Arctic state. The same holds for the European Union, given the combination of Greenland’s strategic meaning – no other land mass is closer to the North Pole than Greenland – and the development of an stand-alone EU-Arctic policy. Consequently, Denmark and the EU have an interest in becoming essential partners for Greenland.

U.S. Waking Up to Arctic Resources?

by Kathrin Keil Since the end of the Cold War, U.S. interest in the Arctic has been steadily declining. While other countries have been eager to assert their position in the Arctic by issuing updated Arctic development and strategic plans, increasing military presence and planting flags, the Obama Administration has merely indicated that it generally agrees with the Arctic strategy already set forth by the preceding Bush government. In January 2009, the Bush administration released a new National/Homeland Security Presidential Directive on the Arctic during its very last days in office.

However, more recently Washington has shown some signs that it might want to join the group of countries vying for the Arctic’s resources, predominantly vast expected amounts of oil and gas. First, at the 7th Arctic Council Ministerial Meeting in Nuuk on 12 May 2011, for the first time a U.S. Secretary of State attended. Hillary Clinton was also accompanied by Secretary of the Interior Ken Salazar and Alaskan Senator Lisa Murkowski.

Second, there is a current debate in Alaska and within the U.S. government about opening up more state and federal land for resource development, and in June 2011 the House has passed legislation that would speed up approvals for drilling in the Arctic by removing regulatory hurdles.

Third, the U.S. is apparently interested in getting involved in the emerging hydrocarbon industry in Greenland as a number of Wikileaks cables from 2010 reveal that “Greenland might have reserves to rival Alaska’s North Slope”. And indeed, according to the United States Geological Survey (USGS), the U.S. has the second highest estimated Arctic oil and gas reserves with about 20% of the expected total. Furthermore, the largest Arctic oil deposits are expected in Arctic Alaska and the waters off Alaska’s coast in the Chukchi and Beaufort Sea rank behind only the Gulf of Mexico in estimated domestic resources. Alaska’s North Slope is the highest yielding oil field in the United States and Alaska is the second-ranked oil-producing state after Texas.

Given the country’s high dependency on foreign oil – 49% of petroleum consumed in 2010 was imported – and President Obama’s announcement to decrease this dependency by a third by 2025, Alaska could potentially play an important role to make the U.S. more self-reliant.

However, production of North Slope oil field has declined by more than two-thirds since its peak in 1988. This is part explains why oil companies have shown increasing interest in Alaska’s more promising offshore areas, for example Royal Dutch Shell’s drilling plans for the Beaufort and Chukchi Seas. But exploration activities are often hampered by court challenges and/or by the lengthy and often cumbersome process to obtain drilling licenses. This appears to be justified given that the ‘National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling’ set up after the Gulf of Mexico oil spill disaster has come to the conclusion that more and more stringent precautionary measures, monitoring, containment and response plans have to be set up before moving on with Arctic oil and gas exploitation.

On top of that, Arctic oil resources are not and are not expected to become a major part of U.S. oil production. The biggest part of U.S. crude oil production has been and will remain onshore production in the lower 48 states, although these sources are declining. In contrast, offshore resources in the lower 48 states are on the rise, especially due to production from deepwater wells in the Gulf of Mexico.

And what about Arctic gas? The U.S. currently satisfies the majority of its gas consumption with domestic resources. In 2009, 87% of the natural gas consumed in the U.S. was produced domestically. Further, gas estimates for Arctic gas in North America are far less impressive than the estimates for Eurasia. Most importantly, the U.S. energy market has in recent years experienced a major overhaul what some have called ‘America’s Natural Gas Revolution’.

Shale gas has proven to be the crucial game changer. U.S. production share of unconventional gas increased from 10% in 1990 to 40% today with more potential expected.New technologies such as horizontal drilling and so-called ‘fracking’ allow access to the plentiful natural gas reserves locked up in shale’s. The EIA’s Annual Energy Outlook 2011 estimated that the U.S. has recoverable unproved shale gas resources of 827 trillion cubic feet.

Hence, Arctic gas reserves, which are much harder to recover, become less attractive for the U.S. market. The current oversupply of the gas market as well as the aftereffects of the global financial and economic crisis in form of decreasing demand adds to the unattractiveness of Arctic gas. According to the US Energy Information Administration, Alaska has a substantial natural gas production most of which is associated gas extracted as a by-product of oil production in the North Slope; however, processing of this supply is not commercially feasible and thus has no way of reaching consumption markets.

Overall, the growing U.S. involvement in the Arctic does not seem to stem from its interest in the region’s untapped oil and gas resources. Given its large contribution to U.S. crude oil production and its expected remaining capacity, offshore production in the Gulf of Mexico is likely to be more effective to meet the government’s oil independence goals.

Arctic Shipping Expected to Double in 2011

The Northwest Passage and the Northern Sea Route in comparison to 
traditional shipping routes through the Panama and Suez canals

by Malte Humpert Arctic shipping along the Northern Sea Route (NSR) commenced about 10 days for the season and is expected to continue until the end of October. Arctic sea ice extent declined at a rapid pace through the first half of July, and is now tracking below the year 2007, which saw the record minimum September extent. Hence, the use of Arctic shipping routes is expected to double this year.

The first ship to pass through the NSR was a Singaporean tanker en route to China's eastern seaboard to deliver gas condensate. The journey will take 22 days, about half the normal voyage time via the Suez Canal. Tschudi Arctic, a Hong Kong registered cargo shipping company, is planning to make extensive use of the route this year.

The trajectories of all cargo ships bigger than 10,000 GT

Oil and gas developments in northern Russia have resulted in a higher demand for shipping to and from that area. Russia's Rosatomflot, the operator of a fleet of ice-breakers, is slated to profit from increase traffic in the Arctic. The usage of ice-breakers as an escort remains mandatory and chargeable, but still offer a cost-effective alternative than the Suez option.

Sovcomflot, another Russian shipping company, is in the process of raising money via an IPO to expand its Arctic shipping fleet and provide capacity for the growing gas deliveries between Russia and China. Two german merchant ships, the MV Beluga Fraternity and MV Beluga Foresight, were one of the first non-Russian vessels to traverse the NSR in 2009.

NEW Report on EU Arctic Policy

Download the report

The Arctic sea ice is melting rapidly, and within the next decade polar warming may transform the High North from an inaccessible frozen desert into a seasonally navigable ocean. The prospects of exploiting the Arctic Ocean’s rich natural resources and gaining access to vital new shipping routes, particularly between Europe and Asia, have led to increased economic and political interest in the region. Rapid environmental change and the Arctic’s emergent economic potential may challenge the geo-strategic balance in a region where institutions, boundaries, rules, and customary norms have yet to be established or remain weak.                                        

The European Union, as the world’s largest exporter of goods and largest importer of fossil fuel resources, has significant economic and energy security interests in the region. Yet it has failed to respond adequately to the changing political environment. The existing regulatory and governance regime, the Arctic Council, has become inadequate, and given the pace of change it is difficult to see how the Arctic can be managed effectively within this regime.                                                                                                     
This memorandum explores possible alternatives, including developing a new international framework for the region. It also provides policy recommendations on how the EU can best secure its strategic economic and energy security interests—including by incorporating Arctic policy into bilateral treaties.