Lloyds List: The new cold war

Martyn Wingrove,
Published: Aug 16, 2007

THE countries that surround the Arctic are set for confrontation, as a race to secure the potential resources under the ice cap sets off a new cold war.

The implications for energy and shipping are new streams of production and cargo. But the disputed claims, the nationalism of the contenders and the environmental impact mean that the temperature has been raised in more ways than one.

As the world enters an era of dwindling hydrocarbon resources, and global warming provides better access to Arctic areas for exploration, nations staking a claim to the Arctic are seeking to exploit its potentially huge mineral rights and shipping routes.

Russia’s recent expedition to the Arctic has been followed by moves from Canada and Denmark (which claims a stake through its ownership of Greenland). These countries along with the US and Norway as the nations surrounding the pole, are all seeking to exploit what some scientists predict could be a quarter of the world’s untapped hydrocarbons, as well as huge mineral resources.

These deposits could be sitting under the sea bed in deep water below metres of ice. But as soon as 2040, the Arctic Ocean could be ice-free in the summer, allowing oil companies to explore and ship out hydrocarbons.

Russian geologists believe the 460,000 sq mile area of Arctic shelf their nation is claiming could hold 10-100bn tonnes of oil equivalent of hydrocarbon resources.

With control over these deposits, its dominance over European gas markets and its growing influence in Asia, Russia could geographically and economically be sitting at the top of the world.

If its territorial claims are accepted, or uncontested, then state oil companies Gazprom and Rosneft, with the help of international oil companies such as BP, Statoil and Total, could push into the Arctic with oil exploration equipment.

Norway has already explored in its Arctic waters and developed oil and gas fields inside the Arctic Circle. The first gas to be produced from the Barents Sea will be exported from a new liquefied natural gas plant near Hammerfest before the end of this year.

Shipowners will also benefit if exploration and exploitation of the potential hydrocarbon resources proves successful. London-based analysts suggest Norwegian companies such as Havila and Solstad, plus the major subsea contractors, including Acergy and Subsea 7, are considering building vessels specifically designed to capitalise on these new marketing opportunities.

Some owners, such as Acergy and Havila, have already ordered new ice-class offshore construction vessels for Arctic oil and gas activities, based on their experience in the Norwegian and Barents Seas.

Oil companies are also building up experience of working in Arctic offshore conditions in the Beaufort Sea, Barents Sea and off Sakhalin Island, and ice is a constant seasonal problem in operating in the northern Caspian and in the Baltic Sea.

The Russian companies and those operating in Alaska already have considerable experience of working in cold environments onshore, but only the Norwegians have successfully developed offshore fields in the Arctic Circle.

There has been considerable investment in exploring for oil and gas fields in the Beaufort Sea, off northern Alaska, although with little in the way of success so far. Anglo-Dutch group Royal Dutch Shell hoped to begin a new exploration drilling campaign this summer, but its moves were blocked by environmentalists.

Environmental concerns aside, the melting of the polar ice caps will make Arctic resources more accessible, and subsea technology development will improve the economic viability of any oil and gas development. ‘There is very strong scientific evidence to suggest that the polar oceans are going to be ice free in summer by 2040,’ says Rosemary Rayfuse, an expert on the law of the sea from the University of New South Wales. ‘The Russians are out there trying to make sure they are the first exploiting the resources that may become exploitable because of the disappearing sea ice.’

What is less clear is the politics surrounding the competing claims. There is no internationally accepted sovereign claim to the Arctic Ocean, apart from the 1997 United Nations Convention on the Law of the Sea, which limits countries’ control to the 200 miles of territorial waters.

Russia ratified this convention but has used an amendment to file its larger territorial claim.

The US has not ratified the agreement, though it signalled earlier this year that it would accede to Unclos, so it will be missing around the near-term negotiations but Canada, Norway and Denmark have signed up and are willing to put forward their own claims.

There may be political and economic reasons for winning ownership of the Arctic, but the mineral resource potential depends on the planet’s geology and a lot of luck.

Manouchehr Takin, of the Centre of Global Energy Studies, said if Russia’s continental shelf extends to the Lomonosov Ridge, then there is the potential for oil and gas. ‘The continental crust must have a lot of sediment to have plenty of oil and gas potential. There could be significant resources, but unless a well is drilled, we will not know what is there. There could be positive and negative surprises,’ said Mr Takin.

Exploration in unprobed areas of the Arctic will still be risky and costly. It will require expensive marine equipment and each well could take several months to drill.

But it can be done. Exploration work in the Norwegian and Russian side of the Barents Sea already shows there are working hydrocarbon basins, structural traps and quantities of oil and gas that can be extracted economically.

Gazprom’s strategy of developing the giant Shtokman gas field in the Barents Sea to feed hungry European markets is testament to the region’s importance to the future offshore industry.

Statoil’s Snohvit LNG project in the Norwegian Arctic, which is set to begin exports this year, demonstrates that Arctic projects can be profitable for oil companies and their contractors. Work on Snohvit involved drilling rigs, survey ships, subsea construction and pipelay vessels, and a fleet of offshore supply vessels and anchor handlers. Additionally, most of the equipment delivered to the LNG plant site on Melkoya Island was transported on ships to Hammerfest. These services will be needed on future Barents Sea hydrocarbon projects, which is why contractors are preparing for the Arctic rush.

For Russia the stakes are high. Its political leadership believes obtaining ownership of the North Pole will give the nation enough resources to control European gas markets for decades and ensure it remains an oil exporter beyond 2030.

Russia has the world’s largest gas reserves and is the top oil producer, but its production growth is slowing and it is facing decades of declining output if fresh deposits are not found.

The National Resources Ministry estimates the country’s production levels will start declining from 2010, and its existing oil resources may be depleted by 2030, putting pressure on the nation’s economy and political stability.

Hence the determination of Russian President Vladimir Putin to prove that the Lomonosov mountain range in the middle of the Arctic Ocean is really an extension to the Siberian continental shelf a case he is willing to put before the UN.

But there are doubts as to whether the rocks, or lithology, of the seabed are part of the continental shelf or are relatively new oceanic crust formed by volcanic activity.

The US State Department noted that the Russians have not yet made public their research, so the best available scientific evidence suggests Lomonosov is oceanic in nature, meaning it is separate from the continental shelf.

If Russia’s claim is correct then there is potential for hydrocarbons in continental shelf sediment, but if the seabed is formed by oceanic crust then the likelihood of finding oil and natural gas close to the North Pole is minimal.

Arctic explorer and deputy speaker of the Russian Duma, Artur Chilingarov, led the expedition to the North Pole last month, in which a nuclear-powered icebreaker ploughed a path to the pole through the ice, clearing the way for the Akademik Fedorov research ship and its mini-submarines.

‘We must prove the North Pole is an extension of the Russian continental shelf. We will be the first to plant a flag there so the Arctic is ours,’ Mr Chilingarov said in July.

Russian Foreign Minister Sergey Lavrov said the expedition was more than just a symbolic act. ‘Concrete scientific methods are being used and I think that the expedition to the seabed of the North Pole allows us to obtain additional scientific proof in order to further our claim.’

But the potential for a stand-off is growing. Canada, Denmark, Norway and the US also have claims over the Arctic Ocean and its potential resources.

Canada’s Foreign Minister Peter MacKay describes the Russian expedition as a brazen political show of force. ‘This isn’t the 15th century. You can’t go around the world and just plant flags and say, ‘We’re claiming this territory’. Our claims over our Arctic are very well established, we have made very strong commitments. Even our Prime Minister Stephen Harper has been there recently,’ he said.

Mr Harper said Canada was investing C$7bn ($6.5bn) to build and operate eight Arctic patrol ships to secure its own territory and prevent unauthorised ship activities in the northwest passage.

‘In defending our nation’s sovereignty, nothing is as fundamental as protecting Canada’s territorial integrity at a time of rising oil, gas and mineral prices,’ said Mr Harper. His country is conducting a C$70m programme to map the seabed on its side of the Lomonosov Ridge in what is seen as a prelude to its own submission to the UN.

In the latest development, scientists from Denmark’s Ministry of Science, Technology and Innovation have set sail in icebreakers to conduct their own mapping studies. Off western Greenland, oil companies are competing to secure large exploration areas off the Disko coast.

What is clear is that if Russia’s journey to the top of the world was designed to provoke a reaction, it succeeded. Analysts agree that Russia has been audacious in its territorial claims, and is backing this up with hard evidence.

‘The Russians are asking to claim 45% of the Arctic Ocean. With this ability to mount a more aggressive research programme, Russia has made efforts to get additional data that will enable them to resubmit the claim,’ said George Newton, former head of the US Arctic Research Commission.

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