Arctic Oil-Gas Resources and Activity

(from Lloyd’s Report 2012: Arctic Opening – Opportunity and Risk in the High North)

Three key factors are sharpening interest in the Arctic’s hydrocarbon resources:

• Feasibility: Technological improvements mean that many more resource projects are technically feasible and commercially viable while geological risks can be better managed.

• Commercial attractiveness: High commodity prices, coupled with uncertainty about access to resources elsewhere in the world, make a far wider range of potential Arctic projects attractive to investors.

• Access: Improving access to large parts of the Arctic reduces costs of operation and eases logistics. These factors are strongly inter-related and tend to be mutually reinforcing. They apply across the full spectrum of resource projects.

The Arctic has been known to contain oil and gas for over two centuries. A petroleum reserve for the US Navy was established in northern Alaska as early as 1923 (xv).

However, commercial development is more recent. Discovery of the Prudhoe Bay field sparked renewed interest in the North Slope of Alaska in the late 1960s. The first oil shock of 1973, government support for domestic exploration, and concerns of international oil companies (IOCs) about being shut out of reserves in other parts of the world led to a decade-long boom in the US and Canadian Arctic in the 1970s¹ . The Trans-Alaska Pipeline opened in 1977 and North Slope production peaked a decade later. The exploration boom extended to Greenland in 1976–1977 with the drilling of five offshore wells, which all turned out to be dry.

Historically, activity in the European Arctic has been much lower. Exploration in the early 1980s in both the Norwegian and Russian Arctic resulted in a number of oil and gas finds, including Snohvit, Shtokman and Prirazlomnoye. In the 1990s, however, interest waned as new sources of oil and gas opened up and the oil price fell towards $10 a barrel. Large-scale Arctic exploration and development halted – except in Alaska, where the Trans-Alaska pipeline made it commercially viable (xvi).

Several factors have substantially affected commercial and strategic calculations of Arctic development over the last decade. The improvement of exploration, drilling and offshore production technologies has increased the likelihood of finding oil and gas in any given location, and allowed larger areas to be developed with fewer oil and gas installations. Globally, access for IOCs to easy-to-produce reserves has been reduced. Finally, and crucially, the price of oil has increased.

In 2008, the United States Geological Survey estimated that the Arctic contained some 412.2 billion barrels of undiscovered oil and oil equivalent. Over two-thirds of this was estimated to be natural gas – approximately 46 trillion cubic metres, representing 30% of global undiscovered natural gas (approximately equivalent to Russia’s entire current proven reserves of natural gas² ). Some 90 billion barrels were estimated to be oil – 13% of the estimated global total of undiscovered oil, approximately three times the current total proven reserves of oil of the United States and more than three times the proven reserves of the world’s largest non-state oil company, ExxonMobil.

The balance of oil and gas across the Arctic will vary. In general, the Russian Arctic is considered to be more gas-prone and the offshore Norwegian and American Arctic (including Greenland) more oil-prone³ . Most Arctic hydrocarbon resources are likely to be on the near-shore continental shelves of the Arctic states.

All these estimates are highly uncertain. Drilling data is scarce relative to highly developed areas such as the North Sea or the Gulf of Mexico. A comparison of the Norwegian Petroleum Directorate estimates for undiscovered oil in the North, Norwegian and Barents Seas shows the range of uncertainty around prospective oil resources in the Arctic is significantly greater than elsewhere (Figure 8).

The mean estimate for the Barents Sea in 2011 was 6 billion barrels of oil equivalen⁴ t. Over the course of a single year, with the announcement of the Skrugard oil find in January 2011 and the Havis oil find in January 2012, Statoil reported Barents oil finds amounting to 400–600 million barrels of recoverable oil equivalents.

Figure 8: Range of estimates for undiscovered hydrocarbon resources in the North, Norwegian and Barents Seas  

Footnotes:

(xv) The National Petroleum Reserve Alaska (NPRA) was initially the National Petroleum

Reserve, established by order of President G. Harding in 1923.

(xvi) Seismic work continued in some areas – for example in offshore Greenland in the 1990s.

Charles Emmerson, Glada Lahn, 2012, Arctic Oil-Gas Resources and Activity, Lloyd’s.©