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Isolation and Resilience of Arctic Oil Exploration during COVID-19: Business as usual or Structural Shift?

By | Article
December 22, 2020
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Industrial buildings in snow

Industrial building at the Chayandinskoye field in Yakutia, Russia. Photo: Gazprom

With the onset of the coronavirus (COVID-19) pandemic, the world has found itself in a global health emergency, which has caused a dramatic loss of human life worldwide and brought normal life around the world to a halt for the better part of a year. The Arctic Institute’s COVID-19 Series offers an interesting compilation of best practices, challenges and diverse approaches to the pandemic applied by various Arctic states, regions, and communities. We hope that this series will contribute to our understanding of how the region has coped with this unprecedented crisis as well as provide food for thought about possibilities and potential of development of regional cooperation.

The Arctic Institute COVID19 Series 2020-2021

The coronavirus pandemic, like plagues of the past, has cut through all social divisions. Regardless of profession, seniority, class, gender or nationality, all are vulnerable to infection. Government measures have focused on limiting physical contact in a highly interconnected world, but what effect has the pandemic had on those Arctic economic activities that are already isolated by their very nature? In the short term, the resilience required of Arctic workers to work weeks-long shifts in inhospitable regions may have prepared them well for the additional measures imposed to combat the pandemic. This article examines how the pandemic has affected a key sphere of Arctic economic activity: Arctic oil exploration.

Arctic oil exploration brings significant monetary value to remote Arctic regions and national budgets of Arctic nations, but is under pressure as the pandemic exacerbates and accelerates economic strain. Many Arctic nations address environmental and climate objectives in their Arctic development strategies,1) however climate issues are conspicuously neglected in Russia’s Arctic policy out to 2035.2) Following the election of a US president with a robust climate agenda and China’s announcement of a 2060 carbon-neutrality target, it is clear that the climate change issue is becoming increasingly difficult for reluctant states to ignore. In contrast to the uncertainties of the pandemic, it is already clear which high-emission economic sectors will be affected by the transition to a climate-neutral economy.

Oil being one such high-emission sector, it is paramount that Arctic regions that are economically reliant on oil begin diversifying their economic activity as early as possible. Both within the scope of the pandemic and in the longer term, it is clear that the underlying dynamics of Arctic resource development are undergoing rapid changes. This article argues that remote Arctic oil production will struggle to return to business as usual, as the shorter-term economic shocks of the pandemic exacerbate oil demand uncertainty, while accelerating policy decisions on structural change and decarbonisation.

This article first discusses the micro-level operational and health effects of the pandemic on remote Arctic facilities, taking the Russian Chayandinskoye oil and gas field as a case study. It argues that this case-study field stuck to its business-as-usual defences against the pandemic, reinforcing its perimeter defence strategy. Much discussed in the field of cyber-security, perimeter defence strategy has become the poster child of flawed defence strategy as once the threat, in this case Covid-19, breaches the single external perimeter, it is then difficult to stop. This article then analyses the macro-level effects of the pandemic on the economic outlook for Arctic oil production after the pandemic. Although the chosen case-study oil field produces both natural gas and oil, this article focuses on the distinct challenges and pressures faced by the oil sector.

Micro Perspective

This section examines the practical and health effects of the pandemic on Russia’s Chayandinskoye oil and gas field and evaluates the measures implemented at the field to combat the pandemic. It classifies the safety and security strategy of remote Arctic facilities as a perimeter defence strategy, as workers are retained on long shifts in a safe, closed system with a single, strong external line of defence. A perimeter defence strategy seeks to defend a system by constructing a single, strong external line of defence. It concentrates all its defence efforts in this external line of defence and generally neglects any secondary lines of defence within the external border. The advantage of such a strategy is that its strong external boundary is difficult to breach. The disadvantage is that if this external boundary is breached, there are no further lines of defence stopping the external threat accessing the entire internal system. Remote facilities often adhere to this model, as the points of entry to the facility is a natural physical boundary at which to screen personnel, information and goods. A competing strategy is a layered defence strategy, which envisages a system having additional layers of internal defence within the external boundary.3)

The Chayandinskoye oil and gas field, named after the nearby Chayanda River in the eastern Sakha Republic, claims to hold vast reserves of around 1.2 trillion cubic metres of gas and 61.6 million tonnes (mt) of oil and condensate. The field drew first oil in 2014 but has been fully commercially operational since December 2019, with an annual production capacity of 25 billion cubic metres (bcm) of gas, 1.9mt of oil and 0.4mt of condensate.4)

Onset of the pandemic

From March 2020, Gazprom had enacted a number of new policies to protect its workers from COVID-19, including limiting foreign travel and setting mitigation measures into motion, such as an ultimate target of 80 percent of administrative staff working from home,5) or holding all meetings of over 10 participants in video format.6)

While this was all very well for administrative staff, protecting the operational workforce of an active field while minimising operational disruption was less simple. The first measure was to extend shifts at remote facilities to 60 days in length to reduce the number of changeovers of personnel. Gazprom also reported further measures such as the disinfection of communal surfaces, installation of virucidal filters in ventilation systems and daily temperature monitoring for employees.7) Nonetheless, twenty people were isolated in mid-April after six Gazprom Neft employees were hospitalised with suspected or confirmed COVID-19 infections.8)

As the pandemic took hold in April, fourteen people were airlifted from the field to a nearby hospital. Shift length was further extended to 90 days and a second key measure was introduced: mass testing of operational employees at the field. This specifically aimed to catch and isolate asymptomatic cases in order to prevent the unchecked spread of the virus in areas of the business where operational presence is required. Gazprom Neft claimed to have tested over half of its nearly 80,000 industrial employees at all sites in the first phase of testing.9) Gazprom began testing all staff at the Chayandinskoye field, including its subcontractors. Nine medical personnel on site had to isolate and treat those with no or mild symptoms, while those needing urgent medical attention were to be evacuated from the field.10) A third key measure was the introduction of a system of contactless transfer between shifts. Employees due to go on shift would first enter a ‘buffer zone’ where they underwent a test and sat out a fourteen-day quarantine period under medical observation, before being sent out to site in specially cleaned vehicles.11)

These corporate measures by Gazprom were influenced by the regional authorities in Sakha, which addressed detailed recommendations to Gazprom regarding the field and imposed a specific, localised quarantine on the territory of the field in mid-April. Additional measures restricted employees’ and locals’ movements and mandated both testing and physical distancing of 1 metre.12)

Worker dissatisfaction

At the end of April, however, reports from the field began to contradict the measures announced concerning the reality of prevailing conditions at the Chayandinskoye field.13) Workers at the field were displeased with a perceived gap between the measures announced and the actual conditions. Workers raised grievances about a basic lack of personal protective equipment and a significant delay in receiving the results of tests. They also claimed that workers awaiting virus test results were not being sufficiently isolated from the rest of the workforce, despite clear indications of a high infection rate at the field. On 27 April, worker dissatisfaction came to a head with several hundred shift workers gathering to protest, blocking a main road with logs.14) Gazprom claimed it held no responsibility for employees of its subcontractors and that most protesters were employees of the subcontractor GAS.15) Eventually, on 29 April the General Director of GAS met with protesting workers and indicated a willingness to evacuate workers from the field.16) By the following day, the protests had had their desired effect. The Russian Ministry of Emergency Situations subsequently delivered a ‘mobile hospital’ to the field to assist with safety measures.17)

Response to worker grievances

While it made attempts to distance itself from responsibility for the protests, Gazprom subsequently introduced additional measures that applied to all workers at the field, “including contractors.”18) One key additional measure separated workers into distinct ‘clean zones’, grouping workers in different operational areas together while on shift. A second key additional measure maintained a reserve group of 28 workers who could replace individual shift members if necessary.19) In spite of these measures, infection rates were still rising and by 6 May a Health Ministry official reported that around one-third of test results had a preliminary positive result. Subsequently, Sakhan authorities announced that 8,500 shift workers, mostly those employed by Gazprom’s subcontractors, would be withdrawn from the field, while 2,000 personnel would remain to ensure continued operation.20) In the first half of May alone, over 4,000 personnel were withdrawn from the field on a total of 42 flights.21) After this episode at the Chayandinskoye field, Gazprom began positioning itself for a return to work strategy in the second half of May.22) Given the recurrence of the pandemic, can the measures taken at the Chayandinskoye field in this first episode be considered a successful template for managing operations at remote Arctic facilities during pandemics?

Actions at the Chayandinskoye field can be classed as pursuing business as usual, as they simply reinforced the pre-existing perimeter defence strategy. Despite no significant disruption of production being reported at the field, the withdrawal of personnel from the field must constitute a failure of the perimeter defence strategy as it shows that the internal system had been breached and could no longer be safely operational.

Some measures at the field did move towards a more layered defence strategy of multiple layers of defence within the external boundary, such as isolating different groups of workers in ‘clean zones’ within the field itself. The perimeter defence strategy was reinforced too late by other measures such as contactless shift transfer towards mid-April. These measures were ultimately implemented in reaction to the failure of the pre-existing perimeter defence strategy, by which point the virus had already taken hold. It must therefore be concluded that the perimeter defence strategy at the Chayandinskoye field failed, as it did not keep the internal system sufficiently safe for personnel to remain there and the virus affected a significant number of workers at the field.

Macro perspective

From the micro perspective at Chayandinskoye, the measures implemented failed to prevent the pandemic from breaching the facility. From the macro perspective of remote Arctic oil exploration, the pandemic has exacerbated nascent vulnerabilities in the global oil sector. This section will first discuss the immediate economic effects of the pandemic on the oil sector, then the longer-term economic drivers and prospects for the sector.

Immediate effects

In the short term, the pandemic greatly increased uncertainty about near-term oil demand as it spread. The 2016 OPEC+ agreement, under which participating oil-producing countries had agreed to voluntarily limit their oil output in order to maintain a higher oil price, collapsed at the beginning of March.23) Countries began producing more oil, increasing global supply and lowering the price.24) At the same time, lockdown measures caused unprecedented oil demand destruction across the world by stifling the transportation of people and goods, a key source of oil demand. Road transport was heavily restricted and air travel sank to 95% lower than the 2019 average in April 2020,25) a trend which continued over the northern hemisphere’s summer period. Oil demand is expected to fall in 2020 for the first time since 2009,26) while the IEA noted in September that oil market uncertainty shows no sign of abating.27)

How do these shorter-term developments impact the oil price and affect Russian Arctic oil exploration relative to competitor producers? The demand destruction of February-June saw one specific type of oil contract for delivery in May trade below zero, at around -$40 per barrel (/bbl).28) While this is not entirely reflective of global demand, it is an indicator of the extreme conditions and uncertainty the pandemic is wreaking on oil markets. In April, a significant new OPEC+ production cut agreement was only sufficient to buoy the oil price at around $40/bbl, where it remained at the time of writing, despite a modest uptick following tangible progress towards a Covid-19 vaccine. The US Energy Information Administration expects no significant increase in the oil price in the coming year, forecasting $45/bbl for 2021.29) The IMF projects that virtually no Middle Eastern or Central Asian oil exporting country will be able to balance its budget in 2020 with an oil price of $40,30) while Russia claims to break even on its 2020 budget at an oil price of $42.40, which is by no means a certainty.31) Furthermore, this is an overall figure for Russia. Production costs in the Arctic are often higher than those of more hospitable regions due to the greater logistical challenges. Overall, then, the short-term threat to Russian oil production in general is less acute than that to its OPEC competitors but more acute to remote Arctic exploration.

Long-term effects

Over the longer term, the pandemic has accelerated several changes that darken the outlook for the oil industry. A prominent omen was the removal of ExxonMobil from the Dow Jones Industrial Average after almost a century, having joined the Average in 1928, leaving Chevron Corporation as the sole oil company in the Average – a tectonic shift.32) Lockdown measures have forced some conventions, practices and behaviours to change. The human preference for continuing existing behaviour over change, the status quo bias, will cause elements of these changes to remain more permanently, including their knock-on effects on oil demand.33) The broader acceptance of remotely participating in work, education and learning, while unlikely to entirely replace real-life experiences, will likely put downward pressure on oil demand by reducing travel to work, meetings abroad, school and university, as companies consider working from home as a permanent option. The forced switch to digital tools will accelerate the decline in physical services in favour of digital alternatives. Another long-term threat to Arctic oil comes from climate change becoming a mainstream political issue. Next to the EU’s and the UK’s legally binding commitments to climate neutrality by 2050, China recently committed to carbon neutrality by 2060,34) along with other major Asian economies such as Japan and South Korea.35) These commitments are already trickling down into policies directly threatening oil demand, such as bans on the sale of new internal combustion engine (ICE) vehicles in many countries and regions from 2025 onwards.36) The UK recently brought forward its ICE vehicle ban to 2030,37) while California banned non-zero-emission cars and passenger trucks from 2035.38) China, already a significant electric vehicle market, also expressed intentions for a similar policy in 2017.39) The economic damage of the pandemic and associated recovery spending is a unique justification for governments to address painful decisions on structural change that are necessary to realign their economic trajectories with these targets.

How do these longer-term developments impact oil demand into the future? The IEA projected in June that 2020 would see the greatest annual fall in oil demand in history of 8.1 million barrels per day (mbd),40) S&P Global predicts 8.7mbd,41) while the most recent OPEC forecast anticipates an even greater fall of 9.5mbd.42) Most worryingly for Arctic oil producers, the latest longer-term post-pandemic prognoses from reputable sources such as BP expect that oil demand will never fully recover from the effects of the pandemic, as it has either peaked already or is predicted to peak in the coming years.43) Predictions are seldom precisely correct but the ball-park assumptions reveal the oil sector’s recognition of the uncertainty it faces. Although the relatively low production costs of Russian Arctic oil exploration position it well in the short term, clearly no oil company can protect itself from this structural shift of a long-term stagnation of oil demand.

Furthermore, the imminent change of regime in the United States suggests the country’s renewed international engagement on climate issues. Should the US complement the targets in Europe, China and other major Asian economies with its own commitments, oil demand could potentially be at risk of a structural oversupply that would require OPEC+ to limit output to unsustainably low levels. Unlike some emerging technology types, electric vehicles are already cost competitive and are sold on mature markets in huge numbers in China and Norway, paving the way for rapid uptake by other countries and asphyxiating a primary source of oil demand: transport. These developments together paint a rather isolated picture for Russia at next year’s United Nations Climate Change Conference, if it lacks a decisive commitment to reduce its emissions. It remains to be seen for how long Russia can protect its Arctic regions, and its oil industry more generally, from the current economic pressures, but the pandemic has exacerbated short-term uncertainty into serious long-term doubt.

It can therefore be argued that the pandemic has fundamentally altered the global oil outlook in the short and long term and caused substantial uncertainty. While competitive production costs position the Russian Arctic well in the short term, it cannot be immune to the expected long-term structural shift in oil demand up to 2050. Reluctance by Russia to act on climate change could ultimately obscure the challenge of economic diversification in remote Arctic regions that are dependent on the oil industry, delaying a transition that is seeming increasingly inevitable. The pandemic case-study provides a transferrable lesson for the challenge of decarbonisation: Business-as-usual procedures are often ineffective against unprecedented challenges, such as climate change.

Conclusion

This article has demonstrated and analysed the effect of the Covid-19 pandemic on a key economic sector for the Arctic: oil exploration. It first presented and evaluated the pandemic’s effects on the practical functioning of the Chayandinskoye oil field. It showed how the business-as-usual perimeter defence strategy failed to prevent the virus spreading through the remote facility, despite the implementation of some partially effective reactive measures which moved towards a more layered defence strategy. Although these measures seem to have succeeded in preventing significant disruption to output, perceptions of delayed and insufficient action to protect workers led to an organised protest at the field. This protest and the infection of a significant number of staff resulted in the evacuation of a majority of the workers, constituting a failure of the business-as-usual perimeter defence strategy.

This piece then analysed the broader, macro-level economic effects of the pandemic on oil exploration in the Russian Arctic. It noted that the Russian state budget would break even at an oil price around the $40/bbl price prevalent at the time of writing. However, remote Arctic fields would likely have higher production costs than other Russian fields and would face a more difficult struggle to remain economically viable under those conditions. Finally, this piece analysed some drivers of oil-sector vulnerability which the pandemic has accelerated and presented the bleak outlook of recent post-Covid-19 oil demand forecasts. As climate commitments on all political levels gain momentum, policies such as bans on new internal combustion engine cars further darken the prospect of a strong resurgence in oil demand in the years following the pandemic. The structural shift towards global decarbonisation is gathering pace. For Arctic regions economically dependent on oil production, the sooner their governments, business leaders and communities acknowledge this structural shift, the more likely they are to successfully diversify their regional economies and ensure an equitable transition for their Arctic regions.

Edward McDonald currently works at National Grid ESO, the electricity transmission system operator for Great Britain, but stresses that the views and considerations expressed in this article are his own and are in no way to be taken as being any position of any company in the National Grid Group.

References[+]

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