The case for US Arctic exploration

October 6, 2015

Arctic drilling has made headlines since the announcement of Shell’s 2015 summer drilling campaign. Paired with the low oil prices due to a surplus of supply, many people wonder why we even need to drill in the Arctic when there is so much oil right now?

In short, the answer is energy security. Our world revolves around energy, and US needs a consistent supply if we are to stay independent, according to a recent panel at the University of Houston’s 2015-2016 Energy Symposium Series- Arctic Drilling: Untapped Opportunity or Risky Business.

With today’s low oil prices comes a surplus of oil and gas, and at present, we have more energy now than our demands require. However, this is a shortsighted view. In the long term, the global population will grow, countries will continue to develop, and global energy demand will rise.
In the US, the surplus has come with the exploitation of unconventional reservoirs. However, these unconventional resources do not produce as long as conventional reservoirs.

“The difference between those types of wells (unconventional), and what I would call tradition conventional oil well is that a conventional well depletes at about 6%/yr and it goes on decline. These wells (unconventional) deplete much more quickly at about 20-30%/yr,” said Jed Hamilton, ExxonMobil’s senior Arctic consultant.

This means that though unconventional wells currently provide more than the population needs, this production is not permanent. Unconventional wells will, in fact, slow down much faster.

When demand picks back up, decreased oil supplies and lack of investment from operating companies could create a gap in supply.

“Ben van Beurden, Shell’s CEO, recently said that even if they make a major find in the Chukchi (Sea) they will not probably produce until 2030,” Hamilton told the audience. “It is anticipated that, for the US, the Arctic stream can come online as the unconventionals are declining and help maintain US Energy independence and security. That’s why I say that exploring for Arctic oil now is needed, so that you can bring it into production by the 2030 timeframe.”

The US is not the only country that is looking to exploit the Arctic as a resource, there are seven other nations who may lay claim. Of those seven, Russia holds the largest claim and is not only currently producing, but has recently brought a second well online at their Prirazlomnoye field in the Pechora Sea. In addition, the Russian government is bidding, again, to expand its Arctic claim 350nm off its coast, which would add about 1.2 million sq km to their territory.

“It would be naive to think that the Russians will not develop their sovereign resources because they are a true Arctic nation with over 40 ice breakers,” Hamilton said. “Likewise Norway, Greenland and Canada are all pursuing exploration for Arctic oil and gas. Hence, in many respects, the debate of whether there should be Arctic development in the US is moot. Given this reality, the US must consider its national security, its energy security and the technology implications of doing nothing while others proceed.”

Without action in the near future, the US will be playing catch up in a competition where the bets are national security and independence.

“I personally believe that America should lead the way,” said Lisa Murkowski, a senior US Senator for the state of Alaska, in a statement released late last month after Shell announced it would leave the US Arctic after disappointing results. “The Arctic is crucial to our entire nation’s future, and we can no longer rely solely on private companies to bring investments in science and infrastructure to the region. As the Arctic continues to open, we urgently need to accelerate our national security investments in icebreakers, ports, and other necessities.”

Further arguments have also centered on concerns for the native populations in the area. These natives still depend on the environment to survive.

However, it is interesting to find that local populations support exploration and have thus far benefitted from Arctic activities. Following the formation of counties by the native Iñupiat population, they started to tax the infrastructure brought in by oil and gas exploration and production activities. From this tax base, the income provided for plumbing, schools, hospitals, and elderly care facilities to name a few. Take away oil and gas exploration and production and you take away a large source of income that provides modern comforts that these populations wants to keep.

“We (native Arctic leaders) understood we had to find a way to align offshore exploration and development with the sustainability of our community while protecting our subsistence practices, culture and rights,” said Rex Rock, Arctic Iñupiat Offshore (AIO) president, at the 2015 Offshore Technology Conference in Houston. “Finally we concluded the only way to protect our subsistence, environment community, and local economies was to partner with the OCS (outer continental shelf) operators like Shell.

“We recognize that North Slope communities bore all the risk from potential offshore development, without receiving any tangible long-term benefits. With that in mind, in 2009 we decided to approach Shell to request the opportunity to invest.”

Living in a harsh environment, Arctic natives adapt to survive, and have chosen to adapt utilizing oil companies to complement their way of life.

But, after a very long and very complicated regulatory process, Shell eventually made its decision to pull out of the Arctic following disappointing results from the single well they were allowed to drill. Many in the industry shared Shell’s disappointment, except not with the drilling campaign, but the regulatory factors that limited Shell’s program.

“It is disappointing on a number of fronts that due to a variety of factors, including regulatory constraints and cost issues, Shell has decided to halt their offshore drilling campaign in Alaska,” said Randall Luthi, president of National Ocean Industries Association (NOIA). “First, the US will lack energy source diversification for the foreseeable future since low oil prices and high drilling costs in the Arctic will likely impact future exploration activity in the Alaskan OCS. Second, enormous economic opportunities for Native Alaskans have been delayed, if not lost, for the immediate future.

“Third, the US will continue to lag other nations in the exploration and understanding of Arctic offshore areas,” he continued.

Sen. Murkowski echoed Luthi’s statements about the end of Shell’s program: “I am extremely disappointed by this decision, just as I have been deeply frustrated by the years-long path that led to it. There is also more at stake here than the current status of one company’s exploration program. Development in the Arctic is going to happen – if not here, then in Russia and Canada, and by non-Arctic nations.”  

Image: University of Houston

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