31/08/2004 A quarter of the world's total undiscovered petroleum resources could lie in the Arctic. But the question is how much oil and gas it will be possible to produce in these far northern regions.
By Øyvind Midttun
No boundary markers exist for the Arctic, but one of the commonest definitions today is that it covers all the areas north of the tree line. That coincides roughly with the isotherm connecting a mean July temperature of 10°C. Defined in this way, the Arctic covers about 26 million square kilometres or five per cent of the Earth's surface.
In many respects, the circumpolar continental shelf represents a new oil province in the sense that the Cold War only ended there just over a decade ago. That in turn gave market forces and international competition access to formerly strategic areas. Estimates of petroleum resources have also been updated with previously secret data.
The exploration potential of the Arctic is substantial. An overview of global oil resources by the US Geological Survey (USGS) suggests that it could conceal as much as 25 per cent of the world's total remaining petroleum resources.Where Norway is concerned, the NPD has calculated that the northernmost part of its continental shelf might hold a third of the country's undiscovered oil and gas.
Petroleum operations in the Arctic are nothing new. Russians, Americans and Canadians have drilled there for many years, and the region already contains two core areas for world oil and gas output - Alaska and Siberia.
The first of these accounts for roughly a fifth of total US petroleum production, partly from the country's largest oil field at Prudhoe Bay. Siberia is also a heavyweight, and has long formed the backbone of Russian oil and gas output.Apart from these areas, however, where operations have largely been pursued on land, the Arctic and its waters represent fairly virgin territory.
A start has been made to offshore activities in several places, but technology - and resource requirements - have first focused attention on far northern waters over the past decade. The Arctic climate is demanding enough on land, with cold, wind, permafrost and 24-hour winter darkness as powerful opponents. Conditions are hardly better at sea.
Such a tough environment makes very special demands on technology, equipment and routines - which is reflected in the level of costs. Exploration wells are expensive when drilled from ice floes or vessels specially designed for icy waters. Costs are far higher than in well-developed petroleum provinces further south.
The Arctic Ocean surrounding the geographical North Pole is the core of the region, and has an average depth of 1 300 metres. Its deepest part goes down to almost 5 500 metres. But the surrounding continental shelf is wide and shallow off Europe and Asia, all the way from the Barents Sea in the west to the Bering Strait. In some areas, it extends a long way towards the pole. The corresponding areas off Alaska, Canada and Greenland are significantly narrower.
Six countries have an Arctic continental shelf - Norway, Russia, the USA, Iceland and Denmark via Greenland. Russia embraces by far the largest area, with more than 50 per cent of the Arctic offshore and on land, and has a big proportion of the world's remaining oil and gas resources. Its share may be as high as 15 per cent, with much of this concentrated in the far north.
Oil output in Russia has risen by 50 per cent since 1999. Setting new production records annually for the five years up to 2003, it has become the world's largest gas exporter and second-biggest source of oil exports. According to the International Energy Agency (IEA), Russian oil and gas sales are also set to continue rising sharply. But the rapid growth has also opened a gap between resources produced and those added through new discoveries, and Moscow has signalled a desire to intensify exploration. Among the areas specified for such expansion are north-western Russia and the Arctic continental shelf in the Barents and Kara Seas.
The best-known discovery off northern Russia is Shtokmanovskoye in the Barents Sea. One of the world's largest gas fields, it holds estimated resources of 3 200 billion cubic metres - almost 2.5 times the volume in Troll, Norway's biggest gas field.
Proven as early as 1988, Shtokmanovskoye is still not ready for development. But rights to this massive find have brought state-owned Gazprom and part-privatised Rosneft many foreign suitors over the years. Norway's Norsk Hydro has been among these on several occasions, most recently with such companies as ConocoPhillips and Total. This long-standing partnership dissolved in 2001 after disagreements over deve-lopment and sales solutions.
Russia's rising production curve and the expansion in its northern exploration activity have coincided with growing demand for imported oil and gas in the USA. A half-century of Cold War and military strategic thinking has been replaced by ever close market-economy ties between these two countries.Alaska is the American Siberia. A lot of major discoveries were made there in the late 1960s, and it now ranks second only to Texas for oil production by US states.
With crude prices high, America's car owners are being afflicted this summer by unusually expensive petrol. That represents a domestic political problem for the authorities. They want to open up more than 1 400 square metres off Alaska in the Arctic National Wildlife Refuge and an adjacent 2 700-kilometre section of the National Petroleum Reserve - Alaska. But these proposals have run into tough opposition from environmentalists who believe that petroleum operations will cause lasting damage to vulnerable Arctic ecosystems.
The areas in question lie along the north Alaskan coast, east of Prudhoe Bay, and are regarded as highly promising for major oil and gas discoveries. According to the White House, increased output from Alaska could help to lower US dependence on oil and gas imports and cut petrol prices to more familiar levels. It would also make the country's economy less susceptible to international economic fluctuations, and contribute to reducing US energy reliance on the Middle East.
Regardless of plans for an Arctic offensive, American consumption is so high that the US can never expect to be self-sufficient in petroleum. But it has never previously bought so much oil and gas from abroad, the federal Department of Energy reports. The ever-stronger petroeconomic ties being forged by America with Russia are an indication of the need for secure energy supplies. In the US view, such security is lower in the Middle East.
Russia has been offered American support to finance a new pipeline from Siberia to an ice-free port on the Barents Sea, for instance. While western and central Europe are set to remain the core markets for Russian oil and gas, increased sales to the USA are a clear target in Moscow's long-term strategy for its north-western petroleum resources. The Americans could become a leading customer for Russian liquefied natural gas.
The Barents Sea is the least explored part of the Norwegian continental shelf. Since its southern area was opened for exploration by the Storting (parliament) in 1979, only 61 wells have been drilled. Estimates of how much oil and gas this region contains are uncertain, but the probability of making big discoveries is regarded as good. Undiscovered resources in the Norwegian Barents Sea are put at just under a billion standard cubic metres (scm) of oil equivalent, or almost 30 per cent of the NCS total. That excludes the [area of overlapping claims].
Exploration in the Norwegian sector of this sea has yielded a number of discoveries, including the Snøhvit gas field now under development. That project involves subsea-completed wells, a process plant for gas liquefaction and export on land, and a closed system to separate out carbon dioxide and inject it back into the reservoir.
When the field comes on stream in 2006, 22 years will have passed since it was first discovered.
That is a long time, but Snøhvit provides a good example of the considerations and reservations involved when entering Arctic waters. It also illustrates the challenges and issues faced by the industry, while showing that prudent resource management can be reconciled with environmental, biological and fishing concerns. Many people regard the Barents Sea as Europe's last large, clean and relatively untouched marine ecosystem.
For this reason, the government halted petroleum operations in these waters in 2001.
That ban has now been partly lifted, even though exploration and possible production will be pursued close to key areas for fishing - the country's second-biggest export industry after oil. The detailed assessments which underpinned this decision were based on a broad range of studies and analyses, including the potential harm to fish, seabirds and marine mammals. Submitted to the government last autumn, this ULB impact assessment covered year-round petroleum operations in the Lofoten area of the Norwegian Sea and Barents Sea South. It prompted the government to stress and tighten requirements for environment-friendly operation and for coexistence between the oil industry and other Barents Sea users.
Technology developed to cope with conditions in the North and Norwegian Seas is also being applied in these northerly waters. In many cases, Norwegian government reguirements for petroleum activity in the Barents Sea can be met with existing solutions.
The bulk of the Arctic NCS remains closed to petroleum activities, including the area around Bear Island, waters further north, the Tromsø Patch and the edge of the pack ice. Norway administers a sea area six times larger than its mainland territory. Most of its exclusive economic zone and a third of the mainland coast lie north of the Arctic Circle. Possession of Svalbard extends the NCS far into the Arctic Ocean. These northern regions have been called a land of opportunity, but they also present major challenges.
These take the form of environmental considerations, technology, climate and coexistence, as well as political and administrative collaboration between nations bordering the Arctic.
This part of the world is remote from the main markets for oil and gas, which has long combined with lack of infrastructure to curb exploration, development and production there. That applies particularly to gas, which traditionally faces much higher transport costs than oil. But technological progress is surmounting this barrier. Construction of the Snøhvit liquefaction and export facility at Melkøya outside Hammerfest in northern Norway will allow gas from the far north to find its way to market.
Russia has traditionally favoured national suppliers, but is making an exception for petroleum. The government
accepts that foreign expertise and technology are essential to moving out from the coast.
Norway is among the world leaders for expertise and experience with offshore petroleum activities. Although the technology used may have been developed elsewhere, the NCS has often served as a showcase for technical advances.
Put simply, a big resource potential made these waters attractive to the world's oil majors. But these assets could only be exploited by concentrating expertise and financial strength. The resulting technological solutions have qualified their users to cope with the demands of the North, Norwegian and Barents Seas.
Russia's lack of offshore expertise can be attributed to national petroleum policy rather than any shortage of oil or gas beneath its waters. Prospectivity and resources on land have simply been so great that the authorities have found no need so far to exploit offshore assets.
However, Gazprom signalled early this summer that it plans to develop Shtokmanovskoye using the same model applied on Snøhvit. Markets for LNG from the Russian field would include the USA. Talks were also initiated with Hydro over collaboration on the project. Access to the technology and development solution being used by the latter company on its Ormen Lange development off mid-Norway is a particular attraction. The question for the Russians is not whether but when petroleum activities will be stepped up in their northern seas with the aid of western capital, knowledge and expertise.
Equally interesting will be an export route along the Norwegian coast, currently utilised for only a small part of Russia's petroleum exports. Just over 12 million tonnes of crude was shipped out this way in 2003 - tiny in relation to the dominant channels through the Baltic and the Black Sea/Bosporous/Mediterranean. With offshore fields on stream in the far north and a new pipeline from Siberian fields to the coast at Murmansk, however, shipments are likely to increase many times over.
The Arctic has moved over 15 years from being a focus of bipolar tension between the superpowers to a crossroads for international political cooperation.
Norway participates in a number of multilateral councils and committees dealing with the Arctic environment, politics and industry. And regional bilateral collaboration in the Barents Sea has grown to embrace a broad array of channels. Such cooperation helps to harmonise guidelines, integrate interests and influence northern developments.
Global oil consumption in 2002 was four times higher than resources added by new discoveries. USGS figures show that 23 per cent of the world's total petroleum resources have already been consumed.
Growing demand for energy, high oil prices and the development of new cost-effective technology could make it commercially profitable to produce Arctic oil and gas far out to sea. Only time will tell how much of these resources are recoverable in technological, commercial and environmentally-acceptable terms.
This article was first published in Norwegian Continental Shelf (no. 1-2004)
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