Oil and gas drilling in the Arctic, is it worth it?

Materials World magazine
5 Jan 2016

Late in 2015, Shell announced it was ceasing to drill in offshore Alaska. Rhiannon Garth Jones considers the future of exploration in the Arctic region.

For nearly 40 years, the Arctic has been considered the next frontier of petroleum exploration. Since it was first put forward as an option, it has proved controversial, with protestors highlighting the ecological fragility of the area and its rare wildlife. Despite some high-profile cases, it remained a key area for development, with the five Arctic nations working to maximize their Exclusive Economic Zones (EEZs) in the area and, therefore, their access to the oil and gas, which the USGS estimated in 2008 to be around 13% of the world’s undiscovered oil and around 30% of its undiscovered gas.

In November, Materials World reported that Shell had finally succeeded in drilling its first well in the Chukchi Sea, off the Alaskan coast, and immediately declared that it would ‘cease further exploration activity in offshore Alaska for the foreseeable future’, citing a disappointing discovery, high costs and a ‘challenging and unpredictable federal environment’. By that time, most other major firms had already pulled out of their existing commitments in the area, including Chevron, ExxonMobil and Statoil. Shell’s withdrawal seemed to indicate that the challenges of drilling in such an environment – the remoteness, pressure from the environmental lobby, the government regulations around wildlife and, crucially, the technical difficulties of drilling in such extreme conditions – were no longer worth it with oil prices remaining resolutely low. 

Just before the successful drilling of the Burger-J well, Shell’s top executive for the Arctic, Ann Pickard, said ‘Everybody’s watching to see if we’re going to fail or succeed out there. If we fail for whatever reason […] I think the USA is another 25 years away from developing Arctic resources.’

A frosty climate?

The future of drilling off the Alaskan coast certainly seems bleak, however big the estimated prize. Already, since Shell’s announcement, President Obama has cancelled the auctions of two future leases in the area and turned down requests for extensions. The US Energy Information Administration’s 2015 Annual Energy Outlook projected that the USA would eliminate energy imports between 2020–2030, acknowledging ‘continued growth in oil and natural gas production, growth in the use of renewables, and the application of demand-side efficiencies’ as reasons to be positive. Unless the oil price rises significantly (Shell has previously suggested it would have to reach at least US$70 per barrel, and it recently fell below US$35), there seems to be little incentive. 

Moreover, in the COP21 agreement in December 2015, the nations of the world committed to curbing their carbon emissions to such a degree that a renewed attempt to extract petroleum from the Arctic region would surely be even more controversial than it has ever been. 

However, not everyone has lost hope. In September, just before Shell’s announcement, Hilcorp Alaska LLC, a subsidiary of Hilcorp Energy Co, based in Houston, asked the US Bureau of Ocean Energy Management to assess its Liberty Project. Hilcorp is proposing the construction of a 23-acre gravel island to serve as a platform for five or more extraction wells that could tap oil six miles from shore in the Beaufort Sea. 

Hilcorp purchased 50% of the Liberty Project in 2014 from BP Exploration Alaska, which drilled at the site in 1997 and discovered an estimated 120 million barrels of recoverable oil. Four other projects currently use offshore gravel islands in state waters, including Endicott, the first continuously producing offshore oil field in the Arctic. Hilcorp has stated that it would build the island using trucks carrying gravel by ice road to a hole cut in sea ice, which would then deposit 76,000 cubic metres of gravel into six metres of water. The work surface would be 38,000 square metres and would be surrounded by a wall to provide a barrier to ice, waves and wildlife.

Norway’s the way

Hilcorp is not alone in keeping faith that the far north will yield profits. The Norwegian Government announced in December 2015 that 26 oil companies had applied for drilling licenses in the country's latest concession round, which included an unexplored Arctic area at the border with Russia – the first licensing round since 1994 to cover a new geographical area. Drilling could start in 2017, and the applications for licenses include BP, Royal Dutch Shell, and Statoil. Both the Norwegian and Russian governments, whose economies are heavily dependent on energy production, support exploration in the area. ‘New acreage is a cornerstone for long-term activity,’ said Norway's Minister of Petroleum and Energy, Tord Lien, after the announcement of the latest licenses. ‘It's a good sign for future petroleum activity in the high north that a broad selection of companies are competing for new acreage in the Barents Sea.’

Russia’s President Putin has repeatedly stated his support for Arctic drilling, particularly the Prirazlomnaya project, which is currently the only oil-producing Russian site in the Arctic. Although Russian activity is supported by the state and faces less regulation than in Norway and the USA, international sanctions have prevented Russian firms from obtaining the latest offshore drilling technology and could diminish their access to financing. Additionally, while any oil spill is difficult to clean, the problem is especially acute in such icy conditions. Outside the short summer season, it could be impossible and might have a catastrophic impact on Norwegian and Russian fisheries, as well as the wider consequences for the ecologically delicate area. 

Clearly, the Arctic frontier has not yet been conquered, and significant challenges remain to those companies who are still willing to try. However, Shell’s withdrawal from the Chukchi Sea does not signal the end of drilling attempts in the far north – this remains an area worth keeping an eye on, particularly if oil prices begin to rise.