The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University.
Vast reserves found in the Arctic have inspired many oil and gas investors with fresh ideas to capitalize on these resources through commercial initiatives. As the number of navigable channels has opened up, such as the Northern Sea Route and the Northern Passage, opportunities have emerged to make the reserves more accessible. The Arctic has increasingly become a focus of attention for major oil companies with prospects of previously inaccessible oil and gas sources becoming available with retreating ice sheets.
After the U.S. purchased Alaska from Russia back in 1867, the U.S. has become an Arctic nation. Due to melting ice caps, the U.S. launched a strategy to meet the challenges arising from the changing Arctic environment while availing of newly emerged opportunities. Although commercial oil and gas activity has been seen in the Arctic as far back as 1920’s, a breakthrough landmark occurred in Alaska in the 1960’s.
The U.S.’ interests in the Arctic dates back to 1962 when the Pan American Petroleum Company discovered the first of its offshore oil fields in Alaska. Experienced in the Gulf of Mexico, the company used a steel platform as high as 30 feet with the hope of withstanding the harsh climatic conditions of Alaska. Once proven successful, the company installed another 16 platforms in the region. The key momentum for exploration and drilling activities, however, happened after the 1980’s when multi-national companies became involved in exploration.
An study conducted by the U.S. Geological Survey in 2008 assessed the potential hydrocarbon reserves in the Arctic. An estimated volume of 90 billion barrels of oil, equivalent to 13 percent of the world’s unconventional reserves, and approximately 30 percent of conventional gas reserves lie in the Arctic. The survey also estimated that 75 percent of conventional resources are to be found offshore while the remaining volumes are onshore.
Through the National Strategy for the Arctic Region announced in May 2013 and signed by former U.S. President Obama, the U.S. built its Arctic strategy on strengthening cooperation, advancing its security interests and lastly, employing scientific research to protect and benefit the environment as well as its resources.
In his recent speech at the Wilson Center in 2017, the U.S. Secretary of State Rex Tillerson hailed the vitality of the Arctic to the U.S.’ national security and claimed that “the U.S. has fallen behind other countries” in terms of its presence in the region. In his address, he sent signals that the U.S. would increase its presence in the region to catch up with other littoral states.
When the Arctic resource potential is considered, Russia by far remains the dominant player both in oil and gas. Despite Russia’s supremacy in natural gas reserves in the region, in comparison to oil potential, both Russia and the U.S. each hold approximately 35 billion barrels of oil.
The. U.S. Energy Information Administration projects that by 2040, the U.S.’ overall oil production will drop by as much as one million barrels per day as light tight oil production dwindles in the country. In this regard, vast oil resources in the Arctic offers U.S. producers the potential to avert this expected decline in the long term. However, many challenges lie ahead when it comes to operating in the Arctic.
The overall costs for oil and gas exploration and production in the Arctic is estimated to cost at least 50 to 100 percent more than the projects in Texas. Considering the poor soil conditions, the high cost and specifically designed equipment needed, the lack of transportation as well as higher costs of employment in a such climatic hostile environment, it becomes more difficult to turn a profitable investment. Since the transportation of natural gas in comparison to oil has traditionally been much higher, and its market price has been lower, the prospect for natural gas production does not seem very promising for U.S. producers despite the vast reserves the region holds.
The Arctic’s business cycle also requires a longer time frame. A typical project cycle starts with leasing, then continues with exploration, appraisal, and development and finally ends with production. While this cycle would normally take 10 to 12 years to complete in the Gulf of Mexico, in the case of the Artic, this time period would possibly extend to between 10 and 30 years for completion.
Among all other hurdles, the costs of accidents also require the utmost scrutiny especially in the case of oil spills. Many notorious accidents, which occurred during oil extraction, storage and transportation, remains firmly on the minds of many. Although many years have passed after the 1989 Exxon Valdez disaster, in which an oil tanker hit a reef in Alaska, many environmental reports and the region’s inhabitants believe that the region’s fishing and wildlife still carry the scars of this accident. For this reason, and considering the Arctic’s shallow water level and its frozen environment, which has caused a gradual evaporation of oil over many years, many companies have to think twice about furthering their investment in the region.
For the time being, despite the warming up of temperatures in the region, the drilling season in the Arctic is only three months long. Along with a thick ice cover during the winter months, the 24 hours of constant darkness further increases the challenges and risks. All of these obstacles inevitably increase the overall costs for offshore operations.
The rhetoric suggests that there has not been a better time for Arctic exploration but the current reality on the ground speaks for itself. With the retreat of ice sheets, many economic opportunities have emerged in the region. Nonetheless, many impediments stemming from the region’s harsh conditions need to be overcome with careful planning and innovative solutions, and only those up for the challenge will benefit from the Arctic’s hidden treasures.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.