Getting ready for Arctic oil

A few weeks ago President Putin announced the first shipment of Arctic oil extracted from the Prirazlomnaya platform. What are the potential benefits and risks of the much debated Arctic oil? Are we ready to handle the impacts of Arctic energy?

Enthusiasm and scepticism

Some weeks ago, President Putin announced the first shipment of Arctic oil from the Prirazlomnaya platform. The Prirazlomnaya platform works offshore in the Pechora Sea. Gazprom Neft started production in late December 2013. The stationary installation can drill oil from estimated reserves of 72 million tons. The production target for 2014 is 300,000 tons, with a peak in annual production of six million tons expected by 2020 ^[1].

In August 2013, the platform was the theatre of a Greenpeace campaign against Gazprom. Greenpeace activists tried to climb the platform but were blocked by the Russian Coast Guard. The flow of the first Arctic oil to the global energy market cannot be ignored. Putin saluted the shipment as the beginning of production that will encourage Russia’s presence in the energy market and stimulate the economy^[2]. At the same time, activists from all over the world urge energy companies and governments alike to consider the risks of the “Arctic oil race”.

Attractive potential

It is estimated that the Arctic contains up to 30% of the world’s oil and gas reserves. The total undiscovered/untapped conventional oil and gas resources of the Arctic amount to 90 billion barrels of oil, 1,669 trillion cubic feet of natural gas, and 44 billion barrels of natural gas liquids. About 84% of these resources are offshore^[3]. More specifically, the Russian Arctic is considered to be the richest in gas reserves, while estimates show that oil reserves are concentrated in the offshore Norwegian and American Arctic^[4]. These figures have been attracting large  capital flows from all over the world. According to the International Energy Agency, investment in the oil and gas sector in the region is expected to total $20,000 billion between 2012 and 2038^[5].

Why we need Arctic oil

Arctic resources are even more attractive in a world where hydrocarbons are destined to become a scarce source of energy. Existing fields have been producing oil for decades and new ones will soon need to be exploited to maintain the current level of production. Until recently, Russia has not had an urgent need to conduct new exploration. Russian reserves have an average lifespan of 20 years according to international standards, while reserves of major companies only last 13 years^[6].

Still, it is interesting to note that 90% of Russian oil production is done at oil fields that were discovered in the time of the Soviet Union. Only 10% of Russian oil is extracted from fields discovered in the last 20 years^[7]. This is because the majority of these newly discovered fields are located in remote regions and require huge investment to develop.

Russia’s Energy Strategy until 2030 aims for oil production levels to reach 530 million tons^[8]. Up until 2025, enhancing oil recovery methods will be enough to reach this target. However, by 2030, it will be impossible to maintain production levels without new fields^[9]. Therefore, undiscovered/untapped onshore and offshore resources will play a fundamental role in Russia’s energy strategy.

The challenge for the Russian oil and gas industry is to undergo exploration efforts, find new reserves, and replace the existing ones. This may require expanding exploration to regions like the Black Sea, East Siberia, the Sea of Okhotsk, the Barents Sea, and the Kara Sea. It is estimated that the success rate of exploration drilling for Russia ranges between 50% and 90%. This should encourage investment, but the expansion of exploration to remote and unknown regions may change the picture. The success rate is likely to fall down to 20%-30%^[10].

Are we really ready for Arctic oil?

As attractive as it is, Arctic oil presents at least two problematic aspects. The first problem has to do with the economic feasibility of oil drilling projects. The untapped potential of the Arctic shelf requires a huge amount of resources in order to be exploited. This is mainly due to harsh weather conditions. The price of Arctic oil is therefore influenced by severe weather, darkness, and ice. Also, even overcoming these problems, it remains to be seen whether the extraction will cover the costs. Gazprom forecasts that even with the field fully operational in 2020, the extraction will account for less than 1% of Russia’s total oil production^[11]. It is true that Russia has few options but to start developing new fields such as Prirazlomnoye, but, at the same time, the oil extracted will be sold at a discounted price due to its low quality. To be short, there are risks that Arctic oil will not be profitable even in the long term There is also a potential burden on state subsidies in the case of a drop in oil prices.

The other problem has to do with environmental sustainability and safety of the infrastructure to avoid the risk of oil spills. Responding to the debate surrounding the shipping of the first Arctic oil, President Putin stated at the St. Petersburg Economic Forum^[12] that the technologies in use in the field are the very best to protect the Arctic. Truls Gulowsen from Greenpeace Norway told the Barents Observer that Putin’s statement is not supported by evidence^[13]. Greenpeace argues that the Gazprom platform is operating without an official oil spill response plan. The plan was approved in July 2007 for a five-year period. The Russian Ministry of Emergency admitted to Greenpeace that the new spill plan has not been submitted yet^[14].

Alongside with Greenpeace, the inhabitants of the Nenets autonomous Okrug have expressed concerns regarding the danger of an oil spill. The Russian Indigenous Peoples signed a statement opposing offshore oil drilling near their traditional territory.

Latest news

In the meantime, other events are heating up the Arctic debate. At the moment, Greenpeace activists are occupying Statoil’s oil rig in the Norwegian Arctic. The protest on the platform is aimed at stopping the oil drilling plan backed by the Norwegian government and preserving the fragile ecosystem of Bear Island.

During last week’s top meeting on energy, the Russian gas major Novatek and the Chinese CNPC signed an agreement on the Yamal LNG project, one of the biggest Arctic gas projects. CNPC committed to buy 3 million tons per year of Yamal LNG. The agreement is a watershed for energy geopolitics and for the Arctic too. With the agreement, China and Russia strengthened their economic ties vis-à-vis the reluctant Europe and China firmly confirmed its presence in the Arctic.