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Power & Interest News Reports: ”The Arctic and Future Energy Resources”

EXTRACT:  With 45 billion barrels of offshore oil, Sakhalin Island is another key to Russia’s future wealth. In conjunction with Gazprom, Russia has contracted Royal Dutch Shell, BP and ExxonMobil to manage the Sakhalin II project that requires building a complete production facility in an area with extreme conditions and little or no preexisting energy infrastructure. Costs for this program, considered “a vanguard project for all of Russia” and maybe the most ambitious energy recovery plan to date, have already exceeded $20 billion.

21 August 2006

The recent decision by energy company BP to temporarily halve its output from Alaska’s Prudhoe Bay field has brought to attention the risks and rewards of Arctic oil production.

The sudden reduction by 200,000 barrels per day reflects the difficulty of extracting Arctic oil and gas. U.S. markets have withstood the cut without major repercussions, but with crude oil prices moving toward US$80 per barrel, gasoline averaging over $3 per gallon and no sign that costs will decrease, the United States continues to look for ways to diversify its energy sources. Meanwhile, Canada, Russia and the United States have sparred over territorial claims in the Arctic region, and record energy prices are creating renewed interest in projects that had not been considered cost-effective.

The Arctic region holds vast energy resources, possibly greater than 25 percent of global reserves, most of which is offshore beneath thick ice and deep water. The oil and gas contained in this area had been unreachable or far too costly and dangerous to extract. Rising global temperatures, however, are causing formerly impenetrable ice sheets to melt and access to Arctic energy resources is increasing.

Despite some national claims to ownership, the North Pole was traditionally considered international territory. Increased access to Arctic oil and gas has brought several territorial disputes. These include disagreements between Russia and Norway over the Barents Sea; Canada and the United States on several matters; Russia and the United States over the Bering Sea; and Canada and Denmark over Hans Island. Additionally, Denmark has gone so far as to claim the entire North Pole under the pretense that it is a natural continuation of Greenland. Thus far, these countries have looked to independent third parties for solutions.

Canada and the United States Clash Over the Arctic

The Northwest Passage connects the Atlantic and Pacific Oceans by way of waters around the Arctic Archipelago. During the next 20-30 years, continually melting Arctic ice will increase access to what will become a vital shipping lane. Climate studies have shown that temperatures are rising faster at the earth’s poles than the rest of the planet, which will increase annual navigation via the Northwest Passage from approximately 30 days to 120 days by century’s end. As such, the Northwest Passage could reduce the trip from London to Tokyo by some 5,000 kilometers (3,000 miles) compared to traveling through the Suez Canal, or by nearly 8,000 kilometers (5,000 miles) when going through the Panama Canal.

While the United States and the European Union designate the Northwest Passage as international waters, Canada claims it as an internal strait. Last year, Canadian Prime Minister Stephen Harper reprimanded the U.S. ambassador for criticizing his government’s intent to establish Canada’s ownership of the region. Likewise, after several instances in which U.S. commercial and military vessels passed through the disputed area without informing Canada, the Canadian military stated it will no longer refer to it as the Northwest Passage, but rather as Canadian Internal Waters. Another point of contention is over the Beaufort Sea, which contains significant energy resources. While it currently remains frozen year round, increasing temperatures are expected to open the Beaufort Sea to oil and gas exploration in the future.

Alaska and A.N.W.R.

BP’s shutdown of 26 kilometers (16 miles) of pipeline has returned attention to the issue of oil drilling in the Arctic National Wildlife Refuge (A.N.W.R.), a matter that has been debated since the 1979 oil crisis. Proponents of drilling in A.N.W.R. look to the area as a means to reduce U.S. dependence on foreign oil, citing U.S. Geological Survey estimates of 10.4 billion barrels of oil in the region. However, other U.S. agencies and private firms have performed surveys of A.N.W.R. that found only 4.3 to 7.7 billion barrels of recoverable oil. Opponents focus on environmental concerns and question the impact oil from A.N.W.R. will have on reducing import needs, as the United States consumes in excess of seven billion barrels of oil annually.

The U.S. Geological Survey also estimates that 200,000 trillion cubic feet of methane hydrate gas exists under Alaskan territory outside of A.N.W.R. While only a fraction of this amount is extractable, to recover even one percent would double proven U.S. gas reserves. As such, the U.S. Interior Department announced on August 16 plans to open the National Petroleum Reserve-Alaska (N.P.R.A.) to drilling. Positioned west of Prudhoe Bay, N.P.R.A. is a 22 million acre area that was earmarked for oil and gas exploration in 1923. Bidding for leases in the area will begin in late 2006.

Russia and Norway Look to Settle their Differences

The 32nd G8 summit in St. Petersburg saw Russia seemingly indicate that the United States would be left out of efforts to develop the Shtokman gas field, which represents the potential of Arctic energy reserves. The Shtokman field lies under Russia’s portion of the Barents Sea and holds 3.2-3.7 trillion cubic meters of gas. It was discovered in 1988, but harsh conditions and extreme sea depth hindered development until now. A shortlist of five firms to develop the Shtokman field with Russian state-owned Gazprom includes American companies Chevron Corp. and ConocoPhillips, Norway’s Statoil and Norsk Hydro ASA, and France’s Total S.A.

While the official announcement will come no earlier than the end of 2006, Russian President Vladimir Putin seemed to favor the Norwegian firms when he stated, “They don’t go around with their noses in the air. They work objectively, very professionally.” This barb aimed at the United States came after the Kremlin announced in April that the opportunity to participate in the project was directly connected to Russia’s bid for W.T.O. membership, which the White House blocked. Russia, however, intends to sell 40-50 billion cubic feet of gas from Shtokman to the United States annually by 2010. To that end, Gazprom recently created Gazprom Marketing and Trading U.S.A., which will allow the world’s largest oil company to supply gas directly to U.S. consumers. Politics aside, Statoil and Norsk Hydro also have the advantage of experience in developing gas and oil fields in Arctic conditions, particularly in the Barents Sea. As such, Putin has made overtures to settle the boundary dispute so as to increase cooperation between Oslo and Moscow.

With 45 billion barrels of offshore oil, Sakhalin Island is another key to Russia’s future wealth. In conjunction with Gazprom, Russia has contracted Royal Dutch Shell, BP and ExxonMobil to manage the Sakhalin II project that requires building a complete production facility in an area with extreme conditions and little or no preexisting energy infrastructure. Costs for this program, considered “a vanguard project for all of Russia” and maybe the most ambitious energy recovery plan to date, have already exceeded $20 billion.

Conclusion

While extensive access to energy supplies and transportation routes in the Arctic will not come about for decades, the legal and political battle will only escalate in the near future. The countries involved seem content to settle their disputes through the United Nations and other international bodies. As Arctic oil and gas become readily available, however, it is likely that territorial claims and tension between states will increase.

The move toward increasingly expensive and dangerous projects highlights the changing approach that states and oil companies are taking to secure energy resources. Projects such as Sakhalin II and New Zealand’s Great South Basin, once seen as exceptional, will surely become the norm.

Short-term issues like development of the Shtokman field will be resolved in coming months. Even if Moscow selects Norwegian firms that are uniquely suited for the project, expect the United States, as the world’s largest energy consumer, to create opportunities for U.S. firms in the Russian project.

Meanwhile, the politically loaded matter of drilling in A.N.W.R. will be passed on to the next U.S. administration, as has been the case for nearly three decades.

Report Drafted By:
Michael Piskur

The Power and Interest News Report (PINR) is an independent organization that utilizes open source intelligence to provide conflict analysis services in the context of international relations. PINR approaches a subject based upon the powers and interests involved, leaving the moral judgments to the reader. All comments should be directed to [email protected].

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