U.S. to Open More of the Arctic Ocean to Exploration as Part of 5-Year Drilling Plan

By Kathrin Keil While Shell is preparing for the start of its drilling activities in the Alaskan Arctic in July 2012, US policymakers are already outlining plans for the post-2012 development of hydrocarbons in their Arctic waters. 

On 26 June 2012 Ken Salazar announced the ‘Five Year Outer Continental Shelf Oil and Gas Leasing Program’, at the Norway Arctic Roundtable in Trondheim, Norway, which will open more of the Arctic Ocean to exploration. Chukchi Sea leases are scheduled to open in 2016, and Beaufort Sea leases one year later. Until then, the waiting period shall be used to “gather information from industry, Native Alaskan communities, the scientific community, and the public to identify specific high-resource, low-conflict areas that are best suited for exploration and development.” The leases are intended to be part of the “all of the above” energy strategy to expand US energy production that President Obama recently announced.

Mr. Salazar emphasized the novelty of the approach, from a "one-size-fits-all" to a "targeted leasing" approach, i.e. singling out the most promising hydrocarbon areas for development and excluding highly sensitive areas from drilling activities, instead of opening large areas of sea floor at once.

This approach is surely also a response to the difficulties Shell has had since it purchased its Chukchi and Beaufort Sea leases in 2005. Over the last seven years, Shell has spent more than US$ 4 billion to explore and exploit oil and natural gas resources in the Beaufort and Chukchi Seas. The company’s plans have been held up by lengthy US regulatory processes to obtain the necessary permits, a federal court ruling ordering the reassessment of the risks and the handling of a large oil spill for a 2008 Chukchi Sea lease sale, legal challenges brought forward from environmental groups and the native Alaskan population, and a Presidential moratorium that was issued after the 2010 Deepwater Horizon accident in the Gulf of Mexico.

The announced integrated or strategic leasing approach, i.e. taking into consideration environmental and social concerns especially of the indigenous people living in the Arctic before granting leases, and excluding certain areas completely from drilling, has been welcomed by some environmental advocate groups. The step-by-step approach of first gathering scientific data about the risks, challenges and demands of Arctic offshore development before granting leases, appears to meet a core demand of environmental advocates. But critical voices remain, who still believe the leases are being issued far too early against the background of limited knowledge and capabilities for large-scale Arctic development.

And indeed, in view of the report released by the National Commission on the BP Deepwater Horizon and Offshore Drilling, these concerns have a strong point. The report concluded that appropriate clean-up capabilities are nonexistent in the Alaskan Arctic and generally 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. The time until 2016 indeed seems remarkably short to address all the shortcomings listed in the Gulf spill report and then to also apply them to the harsh and special conditions of the Arctic.

On the other hand, the announced leasing plan is surely good news for the Alaskan economy. Alaskan politicians feel their calls for more development of Alaska’s shelf have finally been heard, given that according to the USGS the biggest share as of yet undiscovered Arctic oil is presumed to be in Alaska. According to the Alaska Oil and Gas Association, the petroleum industry supports one-third of all Alaskan jobs and oil and gas revenues continue to dominate Alaska’s economy, accounting for almost 90% of its unrestricted revenue in 2010. The biggest portion is provided by oil tax revenue, which has a significant effect on the state’s ability to provide services to Alaskans. Also, new supplies from increased development would keep the Trans-Alaska Pipeline running, which transports oil from the North Slope to the port at Valdez, but which is currently running far below its capacity.

The Prudhoe Bay oil field on Alaska’s North Slope is the highest yielding oil field in the US, and Alaska has long been the second-ranked oil-producing state after Texas. However, since its peak in 1988, when it was producing 738 million barrels or 25% of total US production, output of the field has declined by more than two-thirds. Due to this decrease, in March 2012, North Dakota overtook Alaska in terms of monthly oil production and became the second-highest yielding oil state.

While these numbers show the significant  value of the oil and gas industry for Alaska and thus a substantial interest in increased leasing of offshore areas, the northern state’s share of the whole US is rather limited. Texas is the most important oil and gas state, providing 20% of total direct US employment in the oil and gas industry, 39% of direct labour income, and 41% of direct value added. By comparison, Alaska provides 0.8% of direct employment, 1% of direct labour income, and 0.9% of direct value added. [1]

The Gulf of Mexico area is the most important region for US oil production. It provides half of liquid fuel production, 29% of total US crude production, and over 40% of the total US refining capacity is located along the Gulf coast. A dense pipeline system allows Texas petroleum products to reach major consumption markets. [2]

Additionally, new Alaskan oil is likely to face competition from other oil sources, especially Canada’s oil sands, production of which is expected to triple by 2035 constituting the majority of Canada’s oil output. [3]

While there is certainly potential, and infrastructure is in place for increased Alaskan oil production, the economic prospects for Alaskan gas are very meagre. The ongoing shale gas boom, which is produced predominantly in Texas and in eastern US states, continues to push gas prices down. This makes the exploitation of conventional hydrocarbons, particularly in such remote and challenging regions as the Arctic, less profitable and thus less likely. Taking these conditions into account and because of the limited gas transport infrastructure available in Alaska, Alaskan gas has no way of reaching consumption markets.

In summary, while the announced Five Year Outer Continental Shelf Oil and Gas Leasing Program is certainly good news for the Alaskan economy, the overall limited relevance of Alaskan hydrocarbons, especially gas, for the overall US hydrocarbon industry puts the applicability of this announcement into perspective. Furthermore, despite the novelty of US hydrocarbon development approaches, the lingering environmental concerns and the doubts about industry preparedness to address all safety and environmental concerns by 2016/17, have to be taken seriously. Shell’s drilling activities in Alaskan waters that are due to commence in July 2012, will be a crucial test case for Alaska’s further offshore development and may have substantial effects on the five year plan depending on the course of the 2012 drilling season.

[1] Price Waterhouse Coopers. (2009). The Economic Impacts of the Oil and Natural Gas Industry on the U.S. Economy: Employment, Labor Income and Value Added. Retrieved from http://www.api.org/newsroom/upload/industry_economic_contributions_report.pdf

[2] U.S. Energy Information Administration. (2010). Gulf of Mexico Fact Sheet. Washington, DC. Retrieved from http://www.eia.gov/special/gulf_of_mexico/data.cfm#petroleum_fuel_facts.

[3] National Energy Board. (2011). Canada’s Energy Future: Energy Supply and Demand Projections to 2035. Ottawa. Retrieved from http://www.neb-one.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/nrgyftr/2011/nrgsppldmndprjctn2035-eng.pdf.

To Drill or Not to Drill: Arctic Petroleum Development and Environmental Concerns

By Andreas Østhagen As the effects of climate change are becoming increasingly obvious, the Arctic has gained particular attention as being one of the most vulnerable places to the influence of increasing temperatures and changing conditions [1]. Oil and gas activities are simultaneously increasing in the region due to the region’s untapped potential, rising global demand for these resources, and new technological advances.

With the expansion of these activities in northern Alaska, there have been concerns about the effects of noise pollution on marine life and the lack of oil spill preparedness [2]. To map the consequences of such activities, the US government and oil and gas companies have conducted research; the conclusions, however, have been ambiguous [3]. In the European Arctic, there are comprehensive studies exploring the effect of industrial activities stemming from onshore industries, fishing vessels, and oil and gas activity in the Barents Sea.

In addition, the vulnerability of the different organisms and species in the Arctic Sea is higher than in waters further south, because of greater expected temperature variation and Ph-alterations [4]. However, the US Geological Survey’s Report on the “Science Needs for Developing Oil and Gas in the Arctic”, concludes that there are severe gaps in knowledge about the region at large [5]. Due to the lack of scientific evidence and consensus it is therefore unclear how increased oil and gas activity will influence the Arctic environment [6]. It is also important to differentiate between the different parts of the Arctic, as there are huge variations in climatic conditions amongst the European, the Russian/Asian and the North American parts of the Arctic (see article).

The consequences of the Exxon Valdez and the Deepwater Horizon oil spill have, on the other hand, made clear the devastating result of human error combined with poorly developed safety plans. As stated by the director of the Norwegian Petroleum Safety Authority; “This disaster [the Deepwater Horizon] affects all types of activity and all players in the national and international petroleum sector. And it must lead to improvements in the industry as a whole” [7]. The subsequent safety reports following these two disasters have been a huge step in the right direction for both industry and government oversight.

Taking this to the extreme, non-governmental environmental organizations like Greenpeace and Bellona have actively promoted an Arctic region free of petroleum activity. Political engagement and legal and illegal protests, have highlighted what they perceive to be exploitation of a pristine environment by oil companies only seeking profits. As Scottish Cairn Energy conducted exploratory drillings off the coast of Greenland in 2010 and 2011, Greenpeace staged extensive illegal protests and occupied an oil rig to emphasize the dangers of drilling in Arctic waters [8].

These actions have caused great resentment amongst the Greenlandic population at large, as Greenpeace is perceived to interfere with Greenland’s recently acquired right to self-government. Different environmental organizations and private individuals have also used litigation as a way to halt the oil and gas development in Alaska. In Norway the proposal to open up the southern Arctic regions of Lofoten and Vesterålen caused internal conflict in the current coalition government, while at the same time triggering a national oil and gas debate. Ultimately the topic of when and how to allow offshore Arctic drilling has caused heated debate in most of the Arctic nations.

On the other hand, the Arctic states perceive the development of Arctic resources as integral to their own economies. Russia is dependent on huge oil and gas exports to sustain its economic growth, as gas exports to Europe constitute the backbone of the current Russian economy. These exports will dwindle if new Arctic fields are not put into production. Norway is in a similar situation, albeit to a lesser extent. Norway relies on petroleum exports, but the Arctic is not the only region of production, and neither is the oil and gas percentage of the GDP as high as in Russia [9]. Greenland is currently completely dependent on economic transfers from Denmark, and hope to develop economic independence through exploiting the potential for its Arctic petroleum activities [10]. The Alaskan state government and the Canadian Prime Minister Harper’s government are also pushing for oil and gas companies to invest in national Arctic offshore projects, boosting sluggish regional economies.

The littoral states are in a position where exploiting Arctic resources will be relevant to achieving both economic and political goals. At the same time the Arctic Five have continued to emphasize that each state is completely sovereign in their decision to exploit natural resources in their territories [11]. The states must, however, establish a balance between preservation and exploitation, with both domestic and international pressure coming from NGOs, multinational companies, electorates, and national economic needs [12].

The oil and gas companies themselves are naturally interested in the opening of new leases and access to the Arctic resources. On the other hand, there seems to be a clear understanding amongst the companies that any sizable incident will be devastating for future resource extraction in the region. Seeing the consequences of the Deepwater Horizon spill, all of the involved companies have produced a considerable number of safety reports and assurances that Arctic operations are done with the outmost focus on safety. To be able to operate in the Arctic environment, considerable initial investments are also needed in the form of pipelines, technology, and transport and production equipment, thereby initially excluding all but the largest and most experienced oil and gas companies.

The decision to proceed with development, however, has already been made in most parts of the Arctic. As in the case of Alaska and Russia, several oil and mining companies have been active for decades, providing invaluable growth to the region.

As long as there are commercial opportunities in the Arctic, local communities, governments, and companies will take advantage of them. Subsequently the question of relevance is not if oil and gas activity will take place, but rather how it will take place. As Shell has proven with their extended efforts in Alaska, providing extensive measures for preparedness and response, the oil and gas companies can play a vital role in addressing the lack of public capacity to deal with these issues in the Arctic. At the same time, economics of scale can be applied; new frameworks can be built among states to deal with common concerns related to increased oil and gas exploitation in all the Arctic nations.

The balance between the different interests is a challenging task for Arctic states that often have multiple, competing agendas. The exploratory drilling outside of Greenland serves as a fitting example of the comprehensive action that should be taken toward acknowledging corporate responsibility and environmental concerns; with an economy dependent on annual transfers from Denmark, the chance to develop their own resource-based economy will be crucial for the Greenlanders’ aspirations to acquire economic independence. At the same time, local interests as well as the disastrous consequence of any oil spill need to be considered. As an illustration of Arctic petroleum development, there are numerous factors influencing the decision to explore and exploit natural resources in the region.

[1] National Science Foundation, “IARPC”, 26.01.2011, http://www.nsf.gov/od/opp/arctic/iarpc/start.jsp

[2] Pew Environment Group, “Noise”, Oceans North U.S., http://oceansnorth.org/noise,

[3] National Research Council, Cumulative Environmental Effects of Oil and Gas Activities on Alaska's North Slope 2003, The National Academies Press, Washington, D.C.

[4] AMAP, “Arctic Pollution”, Arctic Monitoring and Assessment Programme (AMAP), 2011, Oslo

[5] Leslie Holland-Bartels and Brenda Pierce, eds., “An evaluation of the science needs to inform decisions

on Outer Continental Shelf energy development in the Chukchi and Beaufort Seas, Alaska”, 2011, U.S. Geological Survey, Circular 1370.

[6] Ibid.

[7] Petroleum Safety Authority Norway, “Whole Industry Must Learn From Accidents”, October 4, 2011, http://www.ptil.no/news/whole-industry-must-learn-from-accidents-article8116-79.html?lang=en_US

[8] CBS News, “Greenpeace activists arrested on Greenland oil rig”, June 2, 2011, http://www.cbc.ca/news/business/story/2011/06/02/cairn-greenpeace-activists-arrested.html

[9] Oil and gas production accounted for 30 percent of Russia’s GDP and 22 percent of Norway’s GDP in 2010, while 60 percent of Russia’s exports, and approximately 50 percent of Norway’s exports. Source: http://www.ssb.no/regnskap/ & http://www.thomaswhite.com/explore-the-world/bric-spotlight/2010/russia-oil-and-gas.aspx

[10] Denmark transfers approximately 3 billion Danish Kroner (DKK) to Greenland annually (2010)

[11] Arctic Ocean Conference, “The Ilulissat Declaration”, 2008.

[12] Jonas Gahr Støre, Speech, “Arctic Governance in a global world: is it time for an Arctic Charter?” May 7, 2008, http://www.regjeringen.no/en/dep/ud/Whats-new/Speechesandarticles/speeches_foreign/2008/ arctic_charter.html?id=511991. (Accessed on August 1, 2011).