21 August 2006
A related piece to today's
analysis can be found at:
"Economic Brief: Alaska Pipeline Shutdown and the Rise of Oil Prices"
http://www.pinr.com/report.php?ac=view_report&report_id=538
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"As Arctic oil and gas become readily available, however, it is likely that
territorial claims and tension between states will increase."
The Arctic and Future Energy Resources
Drafted By: Michael Piskur
http://www.pinr.com
The recent decision by energy company BP to temporarily halve its output
from Alaska's Prudhoe Bay field has brought to attention the risks and rewards
of Arctic oil production. The sudden reduction by 200,000 barrels per day
reflects the difficulty of extracting Arctic oil and gas. U.S. markets have
withstood the cut without major repercussions, but with crude oil prices moving
toward US$80 per barrel, gasoline averaging over $3 per gallon and no sign that
costs will decrease, the United States continues to look for ways to diversify
its energy sources. Meanwhile, Canada, Russia and the United States have sparred
over territorial claims in the Arctic region, and record energy prices are
creating renewed interest in projects that had not been considered
cost-effective.
The Arctic region holds vast energy resources, possibly
greater than 25 percent of global reserves, most of which is offshore beneath
thick ice and deep water. The oil and gas contained in this area had been
unreachable or far too costly and dangerous to extract. Rising global
temperatures, however, are causing formerly impenetrable ice sheets to melt and
access to Arctic energy resources is increasing.
Despite some national
claims to ownership, the North Pole was traditionally considered international
territory. Increased access to Arctic oil and gas has brought several
territorial disputes. These include disagreements between Russia and Norway over
the Barents Sea; Canada and the United States on several matters; Russia and the
United States over the Bering Sea; and Canada and Denmark over Hans Island.
Additionally, Denmark has gone so far as to claim the entire North Pole under
the pretense that it is a natural continuation of Greenland. Thus far, these
countries have looked to independent third parties for
solutions.
Canada and the United States Clash Over the
Arctic
The Northwest Passage connects the Atlantic and Pacific Oceans
by way of waters around the Arctic Archipelago. During the next 20-30 years,
continually melting Arctic ice will increase access to what will become a vital
shipping lane. Climate studies have shown that temperatures are rising faster at
the earth's poles than the rest of the planet, which will increase annual
navigation via the Northwest Passage from approximately 30 days to 120 days by
century's end. As such, the Northwest Passage could reduce the trip from London
to Tokyo by some 5,000 kilometers (3,000 miles) compared to traveling through
the Suez Canal, or by nearly 8,000 kilometers (5,000 miles) when going through
the Panama Canal.
While the United States and the European Union
designate the Northwest Passage as international waters, Canada claims it as an
internal strait. Last year, Canadian Prime Minister Stephen Harper reprimanded
the U.S. ambassador for criticizing his government's intent to establish
Canada's ownership of the region. Likewise, after several instances in which
U.S. commercial and military vessels passed through the disputed area without
informing Canada, the Canadian military stated it will no longer refer to it as
the Northwest Passage, but rather as Canadian Internal Waters. Another point of
contention is over the Beaufort Sea, which contains significant energy
resources. While it currently remains frozen year round, increasing temperatures
are expected to open the Beaufort Sea to oil and gas exploration in the future.
Alaska and A.N.W.R.
BP's shutdown of 26 kilometers (16
miles) of pipeline has returned attention to the issue of oil drilling in the
Arctic National Wildlife Refuge (A.N.W.R.), a matter that has been debated since
the 1979 oil crisis. Proponents of drilling in A.N.W.R. look to the area as a
means to reduce U.S. dependence on foreign oil, citing U.S. Geological Survey
estimates of 10.4 billion barrels of oil in the region. However, other U.S.
agencies and private firms have performed surveys of A.N.W.R. that found only
4.3 to 7.7 billion barrels of recoverable oil. Opponents focus on environmental
concerns and question the impact oil from A.N.W.R. will have on reducing import
needs, as the United States consumes in excess of seven billion barrels of oil
annually.
The U.S. Geological Survey also estimates that 200,000
trillion cubic feet of methane hydrate gas exists under Alaskan territory
outside of A.N.W.R. While only a fraction of this amount is extractable, to
recover even one percent would double proven U.S. gas reserves. As such, the
U.S. Interior Department announced on August 16 plans to open the National
Petroleum Reserve-Alaska (N.P.R.A.) to drilling. Positioned west of Prudhoe Bay,
N.P.R.A. is a 22 million acre area that was earmarked for oil and gas
exploration in 1923. Bidding for leases in the area will begin in late
2006.
Russia and Norway Look to Settle their
Differences
The 32nd G8 summit in St. Petersburg saw Russia seemingly
indicate that the United States would be left out of efforts to develop the
Shtokman gas field, which represents the potential of Arctic energy reserves.
The Shtokman field lies under Russia's portion of the Barents Sea and holds
3.2-3.7 trillion cubic meters of gas. It was discovered in 1988, but harsh
conditions and extreme sea depth hindered development until now. A shortlist of
five firms to develop the Shtokman field with Russian state-owned Gazprom
includes American companies Chevron Corp. and ConocoPhillips, Norway's Statoil
and Norsk Hydro ASA, and France's Total S.A.
While the official
announcement will come no earlier than the end of 2006, Russian President
Vladimir Putin seemed to favor the Norwegian firms when he stated, "They don't
go around with their noses in the air. They work objectively, very
professionally." This barb aimed at the United States came after the Kremlin
announced in April that the opportunity to participate in the project was
directly connected to Russia's bid for W.T.O. membership, which the White House
blocked. Russia, however, intends to sell 40-50 billion cubic feet of gas from
Shtokman to the United States annually by 2010. To that end, Gazprom recently
created Gazprom Marketing and Trading U.S.A., which will allow the world's
largest oil company to supply gas directly to U.S. consumers. Politics aside,
Statoil and Norsk Hydro also have the advantage of experience in developing gas
and oil fields in Arctic conditions, particularly in the Barents Sea. As such,
Putin has made overtures to settle the boundary dispute so as to increase
cooperation between Oslo and Moscow.
With 45 billion barrels of offshore
oil, Sakhalin Island is another key to Russia's future wealth. In conjunction
with Gazprom, Russia has contracted Royal Dutch Shell, BP and ExxonMobil to
manage the Sakhalin II project that requires building a complete production
facility in an area with extreme conditions and little or no preexisting energy
infrastructure. Costs for this program, considered "a vanguard project for all
of Russia" and maybe the most ambitious energy recovery plan to date, have
already exceeded $20 billion.
Conclusion
While extensive
access to energy supplies and transportation routes in the Arctic will not come
about for decades, the legal and political battle will only escalate in the near
future. The countries involved seem content to settle their disputes through the
United Nations and other international bodies. As Arctic oil and gas become
readily available, however, it is likely that territorial claims and tension
between states will increase.
The move toward increasingly expensive and
dangerous projects highlights the changing approach that states and oil
companies are taking to secure energy resources. Projects such as Sakhalin II
and New Zealand's Great South Basin, once seen as exceptional, will surely
become the norm.
Short-term issues like development of the Shtokman field
will be resolved in coming months. Even if Moscow selects Norwegian firms that
are uniquely suited for the project, expect the United States, as the world's
largest energy consumer, to create opportunities for U.S. firms in the Russian
project.
Meanwhile, the politically loaded matter of drilling in
A.N.W.R. will be passed on to the next U.S. administration, as has been the case
for nearly three decades.
Report Drafted By:
Michael
Piskur
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