Operational Risk Factors in the Arctic

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

The Arctic is a complex risk environment. Many of the operational risks to Arctic economic development – particularly oil and gas developments and shipping – amplify one another: remoteness, cold and, in winter, darkness. At the same time, the resilience of the Arctic’s ecosystems in terms of withstanding risk events is weak, and political sensitivity to a disaster is high. Worst-case scenarios may be worse in the Arctic because the ability to manage evolving situations is limited by environmental conditions and the lack of appropriate infrastructure.

Though risks can, and should, be mitigated through prudent corporate risk management, public interest and prevailing regulatory frameworks, they cannot be eliminated entirely. The potential commercial opportunities – to discover and extract substantial quantities of oil and gas or to reduce shipping costs – may encourage some companies to take on greater business, operational and political risks. However, it is for governments to decide what is an acceptable level of environmental risk, and to establish their preferred policy outcomes. Perceived risks and political tolerance to risk may change, as happened in the United States after the Macondo blowout, and these may be at odds with companies’ assessment of risks.

We have already identified a number of key uncertainties around the future economic and political trajectory of the Arctic, including the scale of hydrocarbon resources, the future location and predictability of sea ice, and the wider consequences of climate change. These uncertainties are the greatest risks to potential investors in Arctic economic development. The extended lead-times in Arctic projects, which often relate to a matrix of other risks and infrastructure gaps, can change the overall economic situation by the time any investment becomes productive. While this is a familiar business risk that may be balanced by economic opportunity, it underlines the need for improved knowledge, risk assessment and risk management in the Arctic context.

Even under conditions of climate change, the Arctic remains a frontier operating environment. Many operational risks will continue to be an issue for parts of the Arctic year even under a warming climate. Other factors may be worsened or complicated by climate change.

Geographic Remoteness

Many parts of the Arctic are geographically isolated, bringing operational challenges, entailing substantial costs and amplifying the potential consequences of risk events.

The infrastructure and capability to manage accidents may be distant or unavailable. In November 2010, the Pew Environmental Trust released a report questioning the capability of current infrastructure and technology to deal with a spill in some Arctic areas, arguing that until there is better research on marine ecosystems and the effects of an oil spill on them, these areas should remain off limits to development¹ .

Positively, the pan-Arctic Search and Rescue (SAR) Agreement signed in May 2011 committed Arctic states to provide resources to SAR within defined geographic zones – in areas beyond their own jurisdiction – where they can. But the ability to adequately cover these areas, particularly if there is increased activity, is still uncertain. Information about SAR services and their availability differs from country to country.

A study of the operating conditions of Norway’s SAR helicopter missions in the Arctic showed that the nearest base for the Norwegian Barents is in Banak Military Airfield, Lakselv at 70°N, in Finnmark (xxxvi). Since the sinking of the Kolskaya oil rig in December 2011, Russia’s preparedness for emergencies has been questioned. Particular concern exists over the offshore Prirazlomnoye platform, some 1,000 kilometres from the nearest sizeable port at

Murmansk, which is designed to store up to 840,000 barrels of oil (xxxvii). Environmental groups and others in the United States and Canada have long expressed concerns about search and rescue and clean-up capacity in Arctic areas² .

In some cases this will involve substantial additional costs if private companies are to operate safely and responsibly in the Arctic: Gazprom has stated its willingness to pay almost $550m for a sea-based helicopter platform at the Barents Sea³ .

Electronic communications challenges

Magnetic and solar phenomena, interference and geostationary satellite geometry all mean that high frequency radio and GPS are degraded above 70°-72° North, a major issue for communications, navigation, and search and rescue. Limitations and expense of high rate satellite communications may be partially resolved over the next few years with the launch of a number of Arctic specific satellite communications systems by the European and Canadian space agencies (xxxviii). The Iridium constellation of communications satellites provides communication services that operate in the Arctic environment, albeit with limited bandwidth.

Climate change-related factors

Access to some parts of the Arctic is expected to improve, particularly in coastal areas, and principally as a result of changing maritime conditions. In other parts of the Arctic, however, accessibility may decline, as melting permafrost (soil at or below the freezing point of water) damages fixed infrastructure and as shorter winter road seasons reduce accessibility by land. Melting permafrost may present additional challenges for onshore oil and gas drilling by raising the risk of drill-rig instability.

Weather

Weather can change quickly in the Arctic, weather stations are relatively sparse, and weather forecasts are generally more uncertain owing to satellite constraints. In some places, the range of temperatures from winter to summer, and even the range of temperatures within a single day, means that designs have to be adapted and special materials used for Arctic construction, such as steel that is less brittle. The length of winter Arctic nights remains a challenge for operations. Low temperatures, in the Arctic as elsewhere, can cause machinery to seize up and, in high winds, make wind-chill extremely dangerous for workers. Companies must also adhere to more stringent health and safety procedures such as limitations on outside work in low temperatures. All of these have implications for operating procedures, and costs⁴ .

The Trans-Alaska Pipeline system, in almost continuous operation since 1977, was temporarily shut down in January 2012 as a result of weather conditions reported as “not uncommon⁵ ”. The closure caused an estimated daily loss of $18.1m to the Alaskan government in taxes and royalties from the sale of oil⁶ .

Icing and icebergs

Icing is a serious hazard for Arctic shipping, causing machinery to seize up and making vessels more top heavy. It is also a major problem for coastal infrastructure, particularly in places exposed to sea-spray and storms. Statoil’s Melkøya LNG plant, just outside Hammerfest in Norway, the only such plant above the Arctic Circle, has reported a number of technical difficulties, some of which relate to location, temperature and icing⁷ . At the time, Norwegian media speculated that the problem cost Statoil $34–$51m a week in lost revenue⁸ .

Conditions vary around the Arctic and most of these challenges are neither new nor particular to the areas above 60º North that are the primary focus of this report. As already noted, sea ice conditions around Sakhalin and the Sea of Okhotsk – in Russia’s Far East and far south of the Arctic Circle – are far worse than those off the north coast of Norway. Iceberg management systems are in use off the coast of sub-Arctic Newfoundland, Canada, identifying icebergs far from vulnerable installations, deflecting icebergs with tugs if possible and allowing sufficient time for installations to move off if deflection is not⁹ .

Many of these challenges can be managed – though at additional cost – through the application of existing technologies, through specific design and build specifications, or with adapted processes and additional infrastructure. However, the combination of factors means that the Arctic will remain a frontier operating environment, with or without climate change. The mitigation of these operational risks implies not only corporate investment but also government participation and support, in order to maintain and ensure adequate levels of surveillance and management.

Footnotes:

(xxvi) This base has one helicopter with medical staff on board, which has been able to deal with most serious injuries. Besides this, there are some Norwegian Coast Guard ships with SAR-equipped helicopters on board. For more information about the statistics and effectiveness of Norwegian SAR missions in the Artic see Haagensen, R.; Sjøborg, K.A.; Rossing, A.; Ingilæ, H.; Markengbakken, L. and Steen, P (2004) ‘Long Range Rescue Helicopter Missions in the Arctic’, Prehospital and Disaster Medicine, Vol. 19, No. 2.

(xxvii) Nataliya Vasilyeva, ‘Kolskaya Oil Rig Sinking Sparks Doubt Over Arctic Plan’, Huffington Post, 23 December 2011., 23 December 2011.

(xxviii) Dufour, Bastien (2009) ‘Polar Communications & Weather (PWC) Mission Overview’, Canadian Space Agency, presentation available at www.envirosecurity.org/arctic/Presentations/EAC_Dufour.pdf

Charles Emmerson, Glada Lahn, 2012, Operational Risk Factors in the Arctic, Lloyd’s.©