Hydrocarbon Resources along the Northeast Passage 

(by Arnfinn Jørgensen-Dahl)

Of all potential Arctic sea routes, the NEP is much the most promising Arctic shipping route but is also the one most vulnerable to changing global and national economic conditions. The expected economic recovery among countries which have traditionally accounted for the bulk of global demand for consumer and finished goods is likely to be uneven. The recovery that seemed underway in Europe faltered in the fourth quarter of 2009 when the euro zone economy grew by a paltry 0.1% after having improved by 0.4% in the third quarter. By comparison the US economy grew at an annualized rate of 5.7% in the fourth quarter which is equivalent of about 1.4% over the previous quarter¹ . A slow and uneven pace of recovery is likely among the advanced economies in which case the demand for the resources of the Arctic, including oil and gas, from traditional customers may take time to recover to earlier levels.

This gap between supply and demand is not likely to be offset in the near future by an increase in demand from countries like China, India, Brazil and the ASEAN ones in particular. What seems to be a widely accepted view is that the economic downturn of 2008-2009 will not be easily overcome, and that global economic growth in the time ahead will take place at more moderate levels than in the past 10-20 years. Maritime trade, like other important sectors, will take time to reach activity levels of the past. If after 2010 economic growth returns to long term historical average growth levels, the overall effect of the economic downturn on transport activity is assessed to delay growth in this sector by about five years² .

Given this state of affairs, the question is how the economic recovery will affect the Arctic and the activities on which the Arctic depend, and what might be the spill-over effects on Arctic shipping. Oil and gas are central factors in this context. Whereas the pace of economic growth dropped somewhat in countries like China and India, their rate of growth in 2009 was nonetheless expected to continue at a very brisk pace, that is, 8.9% and 5% respectively. China is forecast to grow 10% in 2010.

Table 3.23:  Oil Export by Outlet

Source: US Energy Information Administration

As shown in Table 3.3 above, most of the advanced economies, however, were in a recession, as indeed the entire global economy is supposed to have been for the first time since the 1930s. Before a recovery is underway in these countries, the estimates suggest a period of anaemic or little growth during which the demand for oil and gas is likely to be subdued. Global oil demand fell in 2009 for a second year in a row, the first time since 1983 it has performed like this since 1983. The consumption of natural gas in 2009 is estimated to have declined by 1.5% because of the economic downturn.  The economies that are expected to lead the world in economic growth belong to the non- OECD club. But the demand coming from the OECD countries will remain a very important driving force.

The North Atlantic area is still and will remain an essential component of the world economy, and the extent to which Russia will be able to invest, develop and economically extract its oil and gas resources in particular depend very much on how and when these countries are returning to a path of stronger economic growth. The sales of  gas from fields like Shtokman, targeted at the US market in particular, will in the future have to compete with increasing production of gas from unconventional sources in the US and Canada, shale gas in particular. In other words, the outlook over the next four to five years, despite increasing demand, is decidedly uncertain. Indeed, this was precisely the reason given for the postponement of the Shtokman investment decisions³ .

There are other uncertainties that may affect Arctic shipping. The estimate that 22% of the world’s undiscovered oil and gas resources are to be found in the Arctic only begs the question of where the other 78% might be. As we learned above, more than one half of the world’s proven gas reserves are in three countries – Russia, Iran, and Quatar. An educated guess is that much of the 78% undiscovered resources are to be found in the Caspian Sea area, the Middle East and in South America.

But there are other candidates. In a 2006 US Department of Interior study of undiscovered technically recoverable oil and gas resources on the US outer continental shelf, the Gulf of Mexico was assessed to be the most promising and was thought to contain some 44.92 billion barrels of oil and some 232.54 trillion cubic feet of undiscovered gas, or 54% of the total potential. It was followed by Alaska with 26.61 billion barrels of oil and 132.06 trillion cubic feet of gas, or 31% of the potential (presumably included in the Arctic 22% of the USGS), with smaller quantities likely to be found on the Atlantic and Pacific continental shelf areas⁴ .

But it is also possible that the a good deal might be found in sub-Arctic parts of Russia. Should this be so, a case may be made that exploiting sub-Arctic gas rather than offshore Arctic gas is less costly and more profitable. Much the same argument can be made if the exploitation of undiscovered offshore Arctic gas finds itself in competition with the exploitation of undiscovered gas in areas with a much more clement climate and easier access.  

The latest financial crisis is not the only factor influencing demand for oil and gas in particular. Climate change and global warming are likely to become increasingly important items on the international agenda. Earlier in this chapter the point was made that today’s advanced economies achieved their present state of economic development employing more or less the same mix of energy resources which included a heavy reliance on hydrocarbon resources. If  today’s developing economies are to achieve similar levels of economic development they will, sooner rather than later, have to rely on a different mix of energy sources involving  much less reliance on hydrocarbon resources. Countries like China and India will not be able to escape the rising expectations of their enormous populations for a better quality of life. The stage of economic development this implies will have to employ a mix of energies rather different from todays, and climatically and environmentally much less destructive.

What the most important ingredients of this mix will be is a very complicated question. It will in any case take time before a climatically better mixture is developed. One change, the beginning of which is already discernible, is a shift away from oil towards gas because of lesser CO2 emissions. Gas emits 50% less CO2 than coal and 30% less than oil. The speed and magnitude of the change from the one to the other is an unknown quantity but speaks in favour of increased emphasis on the search for and exploitation of new gas resources, including those that may be found in the Arctic. 

How and how much of increased volumes of gas will be transported in the future from the Arctic is nevertheless uncertain. Although China today imports relatively little gas as a share of her overall consumption, the general understanding is that she will import large quantities of Russian gas in the future. From where in Russia this gas will come is, however, an open question. The mode of transportation is in any case likely to be pipelines that are on the drawing board. Today most of the oil imported from Russia is transported by railway.

Currently maritime transport in the Euro-Arctic region is primarily a matter of shipping oil along the NSR from old and new operating fields in Western Siberia to transhipment terminals, mostly in the Barents Sea area of Russia, but also in northern Norway. The capacity of the tankers involved carrying oil from the production fields in the east to the terminals in the west is relatively modest. The transport from the established terminals in the Barents Sea region to foreign destinations is carried out by very large tankers (VLCC). If and when the planned offshore activities start in earnest, other types of ships will be required to supply and service these activities. 

Although far from being a novelty, the transit sailings of the Beluga ships from the Pacific to the Atlantic via the NSR took place under circumstances and at a time that attracted widespread attention. The apparent success of this transit and the new transit journeys planned for 2010 is likely to have a demonstration effect and perhaps to lead other shipping companies and shippers to do the same. Again important drivers in this context are the advanced economies and fastest growing economies of Asia – Japan, Korea and China – both in their capacities as importers and exporters.

Arnfinn Jørgensen-Dahl, 2010, Hydrocarbon Resources along the Northeast Passage, CHNL.©