Developing North American Arctic Offshore Oil and Gas: A Comparative Study - Part 2
Shell drilling ship drifts near shore near Dutch Harbor on Unalaska Island, Alaska. Photo: Kristjan B. Laxfoss
As mentioned in the Part 1 of this article, in the 1970s and 80s onshore development and rising oil prices in Alaska and the Northwest Territories led the U.S. and the Canadian governments to allow, and even push for, several exploratory drillings in the Chukchi and Beaufort Seas. These wells were eventually capped as prices fell and the findings did not warrant commercial activity at the time. New technology, melting sea ice, and a significant increase in petroleum prices worldwide have now led to the reconsideration of these and other Arctic offshore fields by governments and companies alike for economic development.
The development of North American Arctic offshore oil and gas is arguably not only a consequence of these international developments, but also determined by a number of internal factors that vary across the region. Simplified, they can be categorized accordingly:
- Federal/regional relationship
- Commercial interests and viability
- Civic interests and engagement
The specific pace of the development of new offshore oil and gas fields in Greenland, Canada and Alaska revolve around these factors, which will be outlined briefly in the following sections. The areas in question in this study are the Chukchi Sea in Alaska, the outer Beaufort Sea in Canada, and the offshore continental shelf of Greenland.
Federal/Regional Relationship
The relationship between the local/regional government where the specific Arctic offshore development is taking place and the federal/national level, often located far away from the Arctic, is crucial for the development of the Arctic oil and gas resources.
Of particular importance is:
- national interests in developing new Arctic offshore fields
- regional dependence on oil and gas revenues
- regional autonomy in oil and gas development
Alaska (Chukchi Sea) – The United States
The decision to include the Chukchi Sea in the 5-year Outer Continental Shelf (OCS) program for 2002-2007, made by the Bush administration and the Secretary of the Interior Gale A. Norton, was a political decision taken by an administration that has been characterized as industry friendly. The Chukchi Sea sale was eventually postponed to 2008, to be included in the 2007-2012 5-year program, as additional environmental considerations were needed. The lease sale, termed 193, became the most profitable lease sale ever conducted in Alaska, providing over $2.6 billion in high bids. At the federal level, the motivation to open up for lease sale stemmed from the renewed interest of commercial actors and a strong desire in the administration to decrease dependence on foreign oil imports as prices rose internationally.
In the United States, the decision to open up for lease sales and the subsequent exploratory drillings in the Chukchi Sea lies within the Bureau of Ocean Energy Management (BOEM), which is a part of the Department of Interior (DoI). The State of Alaska can only act as a facilitator and promote their specific interests when the federal government is making its decision. The state is, on the other hand, a very strong supporter of continued oil and gas exploration in the Arctic, as revenues from companies operating in the state and from the Trans Alaskan Pipeline System (TAPS) are essential for the state economy. As the throughput of the TAPS is declining, Alaskan governors and senators from both parties have been pushing for increased Arctic offshore development. In combination, both the federal and the regional level desired the opening up for a lease sale in the Chukchi Sea.
Northwest Territories (Beaufort Sea) – Canada
In Canada, the Department for Aboriginal Affairs and Northern Development (AAND) is in charge of conducting outer continental shelf lease sales, but only in the Arctic part of Canada. Any subsequent approval of exploratory drilling plans is then to be made by the semi-independent National Energy Board (NEB), which also covers only the Arctic region. This board is subject to the nation-wide body National Resources Canada. The structure for conducting lease sales in the Beaufort Sea is arguably less politicised and more geographically separated in Canada than in the United States, where the Department of Interior manages the whole process.
With regards to autonomy, the Northwest Territories has less than its American counterpart of Alaska, as the AAND manages any potential national resource development. There are ongoing debates on the transfer of regional governance to the Territories, but currently the federal government is very much in control of developments both onshore and offshore. The region is, on the other hand, also less dependent on revenues from oil and gas production when compared to Alaska, as the current production levels are very low. Consequently, the decision to open offshore lease sales and approve exploratory drillings in the Beaufort Sea is more closely linked to interests in Ottawa than locally. These interests without a doubt play into the fact that Canada is already developing into an international heavy weight in oil and gas production, due to oil sands in Alberta and oil and gas production in the provinces of New Brunswick and Newfoundland. A federal push, similar to the one seen in the 1970s, to develop costly and remote Arctic gas fields is therefore not given, as Canada is not largely dependent on developing these resources.
Greenland (offshore) – Kingdom of Denmark
Greenland has, as a part of Denmark, gradually acquired more and more autonomy starting with Home Rule in 1979, and continuing with more self-determination transferred in 2009. This included the management of Greenlandic natural resources, including outer continental shelf oil and gas. In comparison with both Alaska and the Northwest Territories, Greenland can therefore exploit potential resources as they see fit, without having to balance interests in Copenhagen. However, due to being connected to, but not part of, the European Union, Greenlanders have experienced the effect of Brussels-based interests trying to meddle in the island’s resource management.
The 2008 EU import ban on seal products, as well as negative statements against Greenlandic Arctic petroleum exploration, have caused resentment amongst a population that perceives resource development to constitute the fastest way for economic development. In the current situation, Greenland is heavily dependent on economic transfers from Denmark. The self-government has therefore been very positive towards oil and gas exploration, hoping to provide means for economic, and maybe full-fledged, independence.
Commercial Interests and Viability
Naturally, the commercial prospects for oil and gas development is a given for any exploratory drilling discussions to occur. However, the amount of interest, and the nature of this interest in combination with commercial viability and infrastructure, arguably determines a great portion of the development pace.
Of particular importance is:
- Infrastructure/transport
- Lease sales and sunk investment
- Previous commercial activities
Alaska (Chukchi Sea) – The United States
The commercial interests in developing the Chukchi Sea should not be underestimated – Shell in particular, as well as some other onshore companies in Alaska, perceives there to be vast economic potential under the seabed. Out of the five exploratory drillings that were conducted in the 1980s, four were drilled by Shell. They undoubtedly hold a unique knowledge of the area, which should explain why Shell has spent more than $3 billion acquiring and developing their offshore leases from the 2008 lease sale. ConocoPhillips and Statoil follow closely behind, seeing Shell’s struggle for exploratory drilling approval as the litmus test for the region. Onshore in Alaska the mentioned TAPS pipeline from the North Slope to Valdez constitutes a commercial interest on its own, as declining throughput has caused the operator, Alyeska pipeline, to proclaim that new oil-field production will be essential to keep the pipeline running. Although Chukchi development has a long term time frame, it seems clear that commercial interests stemming from both drilling companies and from operators onshore are driving the development in the area.
Northwest Territories (Beaufort Sea) – Canada
Although many companies, including ExxonMobil, Chevron, BP, Statoil, and Imperial, have acquired numerous leases in the outer continental shelf parts of the Canadian Beaufort Sea, there are questions concerning the commercial viability of petroleum activity in the area. Especially important are transport and infrastructure issues. Canada never built a pipeline equivalent to the TAPS in Alaska, as indigenous and environmental concerns halted the process of building the Mackenzie Valley gas-pipeline throughout the 1970s and 1980s. As the Canadian Beaufort Sea is expected to contain mainly gas deposits, any development would be dependent on finding viable options for transportation. LNG facilities onshore have been mentioned as a possibility, as current gas prices might not warrant construction of the Mackenzie project should it clear its legal hurdles. Additionally, local communities in the region have focused extensively on developing mineral deposits instead of oil and gas, as they are perceived to provide more direct benefits for the communities. It seems clear that although commercial petroleum interests undoubtedly exist in the region, they are not as defined nor as strong as those found in the Chukchi Sea development in Alaska.
Greenland (offshore) – Kingdom of Denmark
In contrast to the other two regions, Greenland has not had extensive experience with oil and gas production. There were exploratory wells drilled in the 1970s, but they did not warrant any further development. As prices rose internationally, and the United States Geological Survey published their resource appraisal in 2008 stating huge deposits in the waters around Greenland, the Greenlandic government actively went out internationally and promoted the oil and gas potential in their region. The aim was to attract multinational companies that could supplement local companies and provide capital and experience. Scottish Cairn Energy has been the most active since then, drilling exploratory wells in 2010 and 2011. Their findings did not justify development, but other companies like Shell, Huskey, Dong, and Statoil are conducting seismic studies further north along the west coast in 2012 and 2013. Potential oil findings seem the most likely to be developed, given that any resource production would need to be exported to the international market.
Civic Interests and Engagement
Any local, regional, and national government, in addition to the private companies in question, have to take into consideration the political and civic environment in which the debate of whether or not to open up for oil and gas development is taking place.
Of particular importance is:
- Dynamics between NGOs and public/private actors
- Role of indigenous communities
- Popular opinion
Alaska (Chukchi Sea) – The United States
Of the three parts of the North American Arctic, Alaskan development is arguably the most contentious. Popular engagement has been intense in both the state of Alaska and in the lower 48. After the 193-lease sale in 2008, litigation from environmental NGOs has halted the process. Daily news coverage from different interest groups continuously criticize the federal government’s decision to uphold the lease sale and award Shell the permits needed to commence drilling in 2012. As mentioned, a recent lawsuit against Arctic offshore drilling attracted 1 million signatories across the United States. Parts of the resentment stems from lack of cohesion amongst the indigenous population inhabiting the northern parts of Alaska. There are almost as many viewpoints on offshore development as there are communities, and the most negative are joining together with NGOs to contend government decisions that favor the oil companies.
Northwest Territories (Beaufort Sea) – Canada
In Canada the popular environment has, until now, been less volatile than in the United States. The Canadian government argues that a continuous dialogue between the Territory, the indigenous population and the federal department in question, the AAND, has led to less tension and common solutions. One could also argue that it is a natural consequence of a slower development pace, where no company is set to drill exploratory wells yet. A more geographically divided and less politicized governmental structure for Arctic oil and gas might also be another factor. However, this does not mean that there has been no popular resentment against Arctic drilling. But only the future processes will show if it is going to be as controversial for companies to acquire the final drilling permits as in the U.S.
Greenland (offshore) – Kingdom of Denmark
With a population of 57,000 and almost complete self-determination, Greenland is no doubt better placed to make executive popular decisions than its regional counterparts. In contrast to the other two regions, Inuit comprise the majority in the country therefore the government is representing the interests of the indigenous population. They are also the ones deciding whether to open up for oil and gas development or not. You therefore bypass some of the internal dispute, although there has been tension between some of the smaller traditional communities and the larger regional capital of Nuuk. Devolving the final development decision to the local population has undoubtedly set the rapid pace of the development, although there have been critical external voices. Greenpeace especially has been active through illegal actions trying to block drilling platforms, highlighting that even though there is internal homogeneity on Greenland, Arctic drilling cause popular resentment outside of the region.
Summary
Looking at the Arctic offshore development pace, Greenland is no doubt further ahead than Canada, while the U.S. finds itself in between the two. Although renewed Arctic interest can be attributed to rising commodity prices and cheaper technology, this does not account for the internal differences in the region. This article is based on a study that analyses the internal drivers and hinderers of offshore development in this particular region.
As highlighted in the previous sections, three dominant factors seem to stand out. In the U.S., the combination of an industry friendly administration, strong commercial interests, Alaskan-state pressure, and the potential role of Arctic resources for enhanced national energy security have all driven the potential exploration of the Chukchi Sea by Shell this summer. The development is, however, hindered by a very active civic environment which constrains the federal and the regional governments.
In Canada, the dividing of competencies between governmental agencies, lack of commercial infrastructure and regional pressure, and a varied national energy mix, has led to a slower development pace in the Beaufort Sea than in Alaska. Greenland has, as the odd one out, experienced more rapid development due to internal homogeneity, regional self-government, and agreement with regards to the need for resource development, motivated by economic independence.
In conclusion, it is in the interest of the general public, and media and politicians in particular, to disperse of the traditional one-size-fits-all attitude when discussing Arctic offshore development and look rather at the internal, nation-specific factors actually driving development.
The article is based on an ongoing study that the author is conducting within the international research programme Geopolitics in the High North.