No Race for Arctic Hydrocarbon Resources?
Oil refinery in North Pole Alaska. Photo: Ericajoy
Polar Might – Energies of the High North: this year’s Arctic Frontiers Conference prominently addressed the issue of hydrocarbon energy resources in the Arctic region. Statoil’s representative, executive vice-president Tim Dodson explicitly stressed that recent developments indicate that an often-understated race for Arctic oil and gas resources is rather on than off. In a recent Nature Article, Quirin Schiermeier metaphorically referred to Dodson’s statement as starting signal for resource development and exploitation.1) Heather Exner-Pirot provocatively stated that the five biggest global oil companies would replace the five Arctic Ocean coastal states (A5) as primary Arctic actors by the next decade.2)
Yet, there are alternatives to how one can interpret the development of the region. This article presents a scenario where hydrocarbon resources may not be the key driver of near-future Arctic development.
Many studies, most prominently the U.S. Geological Survey (USGS) Circum-Arctic Resource Appraisal (2008), portray the area as one of the biggest unexplored energy region in the world. The USGS estimated that 90 billion barrels of oil, 1,669 trillion cubic feet of natural gas (approximately 30% of the world’s undiscovered conventional gas) and 44 billion barrels of natural gas liquids might remain undiscovered in the Arctic.3) Yet, the USGS emphasized the low data density and the high geological uncertainty. Additionally, economic considerations (e.g. reference to costs of exploration and development) were not included in the initial estimates. Nevertheless, these figures are often used in Arctic energy debates to support theories for the likelihood of a new Cold War period and the battle for energy resources in a purportedly lawless area.
Recent drillings confirmed the appraisal’s suggestions that the Arctic is gas-prone, with the highest potential in the Russian South Kara Sea. With regard to undiscovered oil, the Alaska Platform holds the largest estimates. Yet the actual oil estimates will not shift the concerned global production balance.4)
Arctic hydrocarbon resources may account for a bigger share of the world’s hydrocarbon production in the future if the reserves can be exploited in an economically viable way. In this context technical challenges must be addressed and the actual costs for infrastructure (e.g. exploration, exploitation, and transportation) lowered.5) Future development of Arctic energy resources will also be dependent on the actual energy price, climate conditions, production from other regions, alternative fuels developments, and the way in which climate change will alter the accessibility of the High North. All-encompassing cost-benefit analyses will be required to determine the economic feasibility of Arctic drilling. With regard to the Russian territory, the International Energy Agency’s (IEA) World Energy Outlook 2011 already stated that due to logistical challenges the Russian Arctic continental shelf might not become a major production area until 2035.6)
Additionally, justified environmental concerns represent an obstacle for resource developments in the region. Oil spill recovery efforts would be challenged by low temperatures, icy conditions, lack of daylight and visibility during the winter months, wave heights, rough sea conditions, limited infrastructure and the lack of available personnel resources.
These uncertainties will significantly reduce the economic incentives for oil companies to invest in the region. Consequently future scenarios are hard to predict. Alternative fuel developments such as unconventional gas resources (e.g. shale gas, coal bed methane, tight gas, natural gas hydrates) can be considered a dark horse for the future development of Arctic hydrocarbon resources. An economically viable exploitation of shale gas resources is still considered a rather new phenomenon.7) Yet, since the U.S. Energy Information Administration (EIA) published a first initial assessment on world shale gas resources,8) one question has often been raised: “is shale gas a game changer in the global energy play?” In a previous TAI article, Kathrin Keil already argued that Arctic gas reserves are becoming less and less attractive for the U.S. market, because shale gas has proven to be a crucial game changer. Two technological developments, 1) horizontal drilling and 2) hydraulic fracturing (=fracking) have made shale gas exploitation easier and essentially more cost-effective. Shale gas fields, which have previously been deemed unprofitable to develop, have now become highly attractive.
The EIA concluded that the significant international potential of shale gas could play an increasingly important role in global natural gas markets. In addition to the U.S., China, Europe and South Africa are considered the most promising regions; yet the Middle East and Russia were not included in the study. The initial estimate of technically recoverable shale gas resources currently accounts for 6,622 trillion cubic feet (tcf). The worldwide technically recoverable gas resources, excluding shale gas, are roughly 16,000 trillion cubic feet.9) However, technical feasibility does not equate to economic viability. The U.S. and Europe, both considered the two main markets for Norwegian10) and Russian (Arctic) gas and oil, hold similar reserves (862 tcf and 639 tcf, respectively).
Yet, due to a multitude of issues, e.g. economic and environmental concerns, different regulatory regimes, and the basic problem of actual space, due to high population density in Europe, one has to be more critical about the European prospects of shale gas. In addition analysts have already started to question the shale gas production forecasts in the U.S. and criticized the optimistic perception of the country’s resources and stressed the long-term costs of extracting shale gas. Currently prices are too low to make shale gas production profitable on a long-term scale. Furthermore, environmental concerns with regard to fracking, including the potential contamination of groundwater, minor earthquakes, and risks to air quality, prominently influence the debate. A recent study asserts that emissions from shale gas rival those from coal.11) The development of conventional gas in the Arctic and unconventional gas elsewhere will ultimately be decided by the rate of increasing demand and the future market price.
According to the IEA conventional gas will still account for the bulk of gas production in 2035, but the share of unconventional gas will rise to 22% in 2035 (compared to 13% in 2009). This increase is mainly expected to come from shale gas and coal bed methane. The U.S. is slated to become the second-largest global gas producer throughout the projected period (2010 –2035).12) In 2008 Lars Lindholt and Solveig Glomsrød projected that the global gas production outside the Arctic will increase until 2030. Consequently their model predicts a decline of the Arctic share of global gas production from 21% in 2008 to 9% in 2030.13)
The true value and potential of global shale gas resources is clouded in uncertainty and alarming environmental concerns. Yet, technological innovation could alleviate some or all of these concerns. Consequently shale gas production can either end up as a mere “gas” blip or a long-term global changer. However, precisely this vagueness can have a fundamental impact on continuous Arctic gas development.
The word prediction derives from the Latin præ and dicere. Yet with regard to the interaction of Arctic gas resources and global shale gas resources it is hard to say before what will happen in the future. Shale gas production has certainly changed the U.S. natural gas market and simultaneously affected the global market. Why shouldn’t it be considered a turning point for a too optimistic Arctic gas development prediction?
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