Retreating from the US Arctic

December 18, 2015

The US is losing its opportunity to lay claim to Arctic exploration, falling behind countries such as Norway and Russia. Now with Shell and Statoil exiting Alaska’s offshore, many in the industry and in politics are wondering how to salvage Alaskan offshore exploration, but will the US be ready? Jerry Lee reports.

The Fennica icebreaker, owned by Finland’s Arctia Offshore, had been under contract for Shell’s now cancelled Arctic program offshore Alaska in the Chukchi Sea. When enroute there, it notably had to be sent back to Portland, Oregon, for repairs when a leak was reported in the ship’s hull.

The Arctic, though its environmental conditions are harsh, still remains a much sought after spot for oil and gas exploration. And this is because much of the remaining undiscovered hydrocarbons lie in the Arctic: 13% oil, 30% natural gas, and 20% natural gas liquids, according to a 2009 USGA CARA report.

The US has about 11% of the Arctic shelf and most of its resources is developable today with conventional technology, said Jed Hamilton, ExxonMobil’s senior Arctic consultant. However despite this position and economic incentive to develop the region, the US lags behind seven other Arctic nations.

Hamilton was one of four speakers to present at the Baker Institute’s conference on “The Arctic: A New Energy Frontier” held at Houston’s Rice University on 12 November 2015.

The conference came after the disappointing news that both supermajor Shell and Norwegian giant Statoil would leave its offshore Alaskan leases after the US Department of the Interior rejected extensions. For Statoil, it chose to exit 16 operated leases and stakes in 50 leases operated by ConocoPhillips, and close its office in Anchorage, saying at the time, it found the leases no longer competitive.

For a state reliant on the health of its oil economy, the departure of two heavily invested international companies did not go unnoticed.

“I am very concerned that, for the second time in as many months, a major company has decided to walk away from Alaska because of the uncertainty surrounding our federal government’s support for Arctic development,” said Lisa Murkowski, a US senator for the state of Alaska. “Low oil prices may have contributed to Statoil’s decision, but the real project killer was (the Obama) administration’s refusal to grant lease extensions; its imposition of a complicated, drawn-out, and ever-changing regulatory process; and its cancellation of future lease sales that have stifled energy production in Alaska.”

Lagging behind

The US is currently lagging behind other nations, not just in exploration and development, but also in terms of equipment. Fran Ulmer, special advisor to the US Secretary of State on Arctic science and policy, outlined challenges.

Currently, Russia is exploiting its Arctic resources resulting in oil leaking into Arctic waters equivalent to over 14 Exxon Valdez disasters each year due to substandard Russian infrastructure, according to Ulmer.

This type of event is one of the major environmental concerns that the public has used to argue against Arctic development. Addressing these concerns Shell had spent US$5 billion to date on oil spill research, and had signed an agreement to share this data with the National Oceanic and Atmospheric Administration (NOAA). In comparison the US federal government has spent $0.16 billion in the last 11 years, Ulmer presented. Now with Shell, the biggest investor in oil spill research, ceasing its Arctic plans indefinitely, there is no incentive to continue their research. As a result, the federal government will have to find other means to ensure our preparedness for when the US Arctic is exploited.

Obstacles to US Arctic development are also due to logistical issues. The infrastructure simply is not there to service the Arctic. As highlighted by Ulmer at the Baker Institute conference, the large US Coast Guard base in Kodiak, Alaska, is far removed from Barrow, Alaska, and would be challenged to get assets there to respond to an incident; fabrication yards are located long distances from projects; the supply chain is complex to cope with the long distances and lack of infrastructure; and the environment is inhospitable to the labor force, and results a narrow window to install assets. Ulmer also emphasized the lack of one particular essential Arctic asset, ice breakers.

“Finland is a country of five million people and they have three or four times the number of icebreakers than the US has; Russia has about two dozen; we literally have two,” Ulmer said. “If the [US] is to be a serious player in the Arctic, the need to invest in infrastructure is pretty obvious.”

Fran Ulmer, special advisor to the US Secretary of State on Arctic science and policy, giving the keynote address at "The Arctic: A New Energy Frontier" at Rice University's Baker Institute.

Federal backpedaling was further seen in October when the US Department of the Interior announced the cancellation of two Arctic offshore leases under the current five-year plan which ends in 2017.

“This is a stunning, short-sighted move that betrays the Interior Department’s commitments to Alaska, and the best interested of our nation’s long-term energy security,”  Murkowski said at the time of the cancellation.

In the meantime, Norway has opened up the new Arctic province in the Barents Sea for its 23rd licensing round, the first time in 20 years. Despite the low oil prices, the Norwegian Ministry of Petroleum and Energy received bids from 26 companies, including Shell and Statoil.

This region has the least severe operating conditions of any Arctic basin, and has virtually no sea ice.

"Exploration costs in the Norwegian Barents are significantly less than everywhere else in the Arctic offshore. A consortium of over 30 companies has already shared acquisition costs for new 3D seismic. Future Norwegian Barents exploration wells might cost around $20 million – when taking the [78%] tax rebate into account. This is more than 20 times less than the drilling costs in the both Russian and Alaskan offshore Arctic during 2014-2015," said Andrew Lathan, vice president of exploration research at Wood Mackenzie, in an analysis of Norway’s 23rd licensing round.

Norway has also recently expanded its cooperation with South Korea to develop new shipping routes through the Arctic, taking advantage of decreasing volumes of ice which previously choked off the route. South Korea has similarly cooperated with Russia towards the same goal. These moves are in line with the memorandum of understanding (MOU) signed in 2012 with Norway and Russia, said the South Korean Ministry.

“The US, for a long time, did not focus on the Arctic the way in which other nations have. Norway, Canada, Russia, they think of themselves as Arctic nations, it’s part of their national identity, and that’s not really true in the US,” Ulmer said. “They are Arctic nations in a way the US really hasn’t been.”

“[However], climate change, the disappearance of sea ice, and the interests in oil and gas development, and global economics has really changed the focus, and has also changed the focus of our federal government,” Ulmer said.

In 2013, the US adopted an Arctic strategy. This was followed in 2014 by an implementation plan, and in 2015, an executive order (13689) to create a steering committee to make the implementation plan work.

“As an American and an Alaska, I’m very happy about that, but there is still a huge lag in terms of federal investment in a way in which is necessary to make these strategies and implementation plans real,” Ulmer said.

Though the current administration may be hesitant to pursue exploitation of the US Arctic offshore resources, it is still involved in the Arctic discussion and keeping relevant by taking part in the Arctic Council.

“The Arctic Council is an intergovernmental forum among the Arctic eight that was created back in the 1990s, basically as a place where the nations of the Arctic could share information together, do research together, find areas of common interests, and work together in a positive way,” Ulmer said.

Since April 2015, chairmanship of the Arctic Council passed from Canada to the US, represented by US Secretary of State John Kerry. On its agenda are three themes: Arctic Ocean safety, security, and stewardship, improving economic and living conditions, and addressing the impacts of climate change.

Read more

Statoil pulls plug on Alaska

Interior cancels Arctic lease sales

The case for US Arctic exploration

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