The challenges of drilling for oil in the Arctic can be summed up in two words: timing and risk. It now seems that these two factors are driving companies elsewhere.
The latest company to turn away from the far north is Royal Dutch Shell, announcing earlier this month that the "lack of a clear path forward" prevented the company from committing further resources to oil drilling offshore of Alaska in 2014. This follows other large oil companies including Total that have either delayed or abandoned Arctic drilling as well.
The time delay from lease to commercial production is anywhere from 10-25 years making it almost impossible to anticipate and address emerging risks. With short off-shore drilling seasons of about 100 days, huge infrastructure investments needed to explore, produce and transport discovered reserves to market, and a constantly changing physical, economic and regulatory environment, any decision to drill -- if allowed -- is a roll of the dice.
While the U.S. Geological Survey has estimated that more than 90 billion barrels of undiscovered oil and natural gas liquids may exist in the North American Arctic, reliable risk analysis for extracting it is almost impossible. Here's why.
According to a new BP Energy Outlook report issued Jan. 15, oil demand is experiencing the slowest growth of all major fuels -- just 0.8 percent each year. Meanwhile, plentiful new oil reserves are opening up worldwide as hydraulic fracturing expands and new conventional reserves in more temperate climates are discovered. Fully 51 of 54 African nations are currently drilling or planning to drill for oil, and most will depend on oil revenues to fund growing national budgets. Oil price competition is increasing beyond the power of OPEC to control supply. Oil prices are moderating, and for the first time in years most major price risk is to the downside. Arctic oil may struggle to be cost competitive in this new pricing environment.
Meanwhile timelines for when global oil demand will peak and decline are shortening. Estimates range from a peak of 108.5 million barrels a day (mbd) by 2035 under current policies (International Energy Agency) to as low as 92 mbd by 2020 (Citi Research). Natural gas, biofuels, fuel cells and electric vehicles threaten to break the oil monopoly on transportation fuels while stringent fuel economy standards are stretching mileage per gallon ever higher. The oil age will not end for lack of oil as the Stone Age did not end for lack of stones. It will also end sooner than anyone thought possible even 10 years ago.
Meanwhile, political and regulatory risk is rising even faster than fundamental demand risk for the oil industry. Boundary disputes, strong currents, severe storms and floating ice create legal and operational challenges. Leasing agencies, especially after the Deepwater Horizon disaster, want answers to questions on safety and marine impacts that oil companies currently have neither the analytical ability to answer nor the technology to address. Lease terms are generally too short and block sizes too small for oil companies to drill both safely and with confidence of success. Public support infrastructure -- communications, emergency response capacity, navigational systems etc. -- are weak. Regulatory oversight is increasing.
In addition, the U.S. assumes the Chair position of the Arctic Council, primarily a scientific support collaborative, in 2015. It seems quite possible that the Council will push hard to increase its regulatory powers over the entire region. These already include regulations on oil spill preparedness and response, and may soon includerestrictions on short-lived climate pollutants such as black carbon. Under such regulatory conditions the risk of losing leases for failure to meet lease terms and regulatory requirements may increase.
Driving both economic and regulatory risk is the fundamental problem of environmental risk. In addition to local impacts, the entire Arctic region faces the real prospect of a methane emergency. The Arctic is already warming at least twice as fast as average global temperatures. Methane -- essentially natural gas -- has more than 20 times the global warming potential (GWP) as carbon dioxide as a short term forcer of global warming and is being spontaneously released from tundra (onshore) and seafloor methane hydrates and leakage (offshore) at an alarming rate.
According to a recent report from the International Arctic Research Center in Fairbanks, Alaska, and published in Nature Geoscience in November 2013, methane emissions along the Eastern Siberia Arctic Shelf are now at least 17 million short tons per year, double previous leakage estimates and on par with total onshore methane releases from permafrost thawing. As Arctic sea-ice melts, water absorbs more sunlight, warming it and further driving methane releases. Arctic warming also increases onshore wildfires that deposit particulate matter on sea ice, further accelerating ice melt. Oil drilling and support activities in the Arctic risk further fueling this process.
While none of these risks, on their own, preclude a decision to drill in Arctic waters, their cumulative threat means that the world community should take a step back and think very carefully before pursuing any new drilling initiatives in the Arctic.