A new report out of London takes a sweeping look at the Arctic and reckons it could attract investment topping $100 billion over the next decade.
Most of the investment will be in the oil and gas and mining sectors, says the study, which also looks at shipping, fisheries and tourism.
“The epicenter of that investment is likely to be in the Barents Sea area, north of Norway and Russia, and in northern Alaska,” it says. “Smaller investments, but with major local and international consequences, could occur in Greenland, Canada and elsewhere in the Arctic.”
The study comes from Lloyd’s, the global insurance concern, and Chatham House, also known as the Royal Institute of International Affairs.
The report is titled “Arctic Opening: Opportunity and Risk in the High North.”
Lloyd’s is an outfit that certainly knows something about risk. It describes itself not as a company, but “a market where our members join together as syndicates to insure risks.” Lloyd’s says it’s often the first to insure new, unusual or complex risks.
Arctic risks are in many ways particularly daunting, but companies are likely to brave those risks if, for example, oil prices stay high, the study says.
‘Increasingly significant’
The Lloyd’s report notes that prior to the 20th century, “the overall role and scale of the Arctic in the global economy was minimal.” It wasn’t until the second half of the century that the Arctic became a significant factor in oil production with the startup of Alaska’s Prudhoe Bay field in 1977.
Today, the Arctic — comprising the Arctic areas of Canada, Denmark (Greenland), Finland, Iceland, Norway, Russia, Sweden and the United States — has about one-twentieth of 1 percent of the world’s total population, the report says.
“The Arctic region is undergoing unprecedented and disruptive change. Its climate is changing more rapidly than anywhere else on earth,” the report says. “The combined effects of global resource depletion, climate change and technological progress mean that the natural resource base of the Arctic — fisheries, minerals and oil and gas — is now increasingly significant and commercially viable.”
In terms of Arctic access, however, the warming climate has “double-edged consequences.” Sea-borne access is improving as ice cover dissipates. But on land, infrastructure such as roads and pipelines built on permafrost will become more expensive to maintain, the report says.
Oil and gas landscape
The report offers a brief country-by-country summary of oil and gas investments in Canada, Greenland, Norway, Russia and the United States, and discusses political, market, tax and environmental risk considerations.
“In general, the Russian Arctic is considered to be more gas-prone and the offshore Norwegian and American Arctics (including Greenland) more oil-prone,” the report notes.
High oil prices, coupled with uncertainly about access to resources elsewhere, make Arctic projects more attractive to investors.
“Falling commodity prices would probably put many Arctic projects on hold,” the report says.
“For the most commercially marginal Arctic oil and gas developments, the tax regime applied may be a decisive factor in determining their viability,” it adds.
In Russia, the largest potential offshore project is the Shtokman gas development in the Barents Sea. Investment could reach $50 billion.
“However, the Shtokman project has been repeatedly delayed owing to concerns about drifting icebergs, negotiations over the tax regime with the Russian government, and concerns about export markets,” the report says.
Investment in Norway’s Arctic fields is more predictable, given that country’s “arguably more stable regulatory and operating environment.”
In Alaska, the report’s authors make note of Shell’s long-frustrated plans to drill in the Beaufort and Chukchi seas, and see “an increasingly supportive approach taken by the Obama administration to Arctic development.”
Politics and risk
“Within most Arctic countries, oil and gas development is politically controversial on environmental grounds and can have a significant influence on the political dynamics between central and local governments,” the Lloyd’s report says.
In the United States, support for opening more Arctic areas to oil and gas exploration is strong in Alaska, but limited elsewhere.
“In Canada, Arctic energy and mining projects play into complex federal politics and the domestic politics of indigenous peoples across the north,” the report says. “In Greenland, exploration for offshore hydrocarbons is widely accepted as a pathway to greater economic prosperity and a guarantee of self-government. In Russia, maintaining oil production and increasing production of natural gas is a strategic imperative. In Norway, government and public support for development is contingent on strong environmental regulation.”
As for environmental risk, the remote Arctic presents a special case, the report says.
“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.”
The authors conclude that major spending on science and research is urgently needed to close “knowledge gaps” on the Arctic’s environmental change and geological potential.
They further conclude: “Full-scale exercises based on worst-case scenarios of environmental disaster should be run by companies with government involvement and oversight to provide a transparent account of the state of knowledge and capabilities, to foster expertise and to assuage legitimate public concerns.”
Find the 60-page report online at http://bit.ly/HDSRxo.
—Wesley Loy
