Arctic Oil and Gas: Hype or Reality?

by Andreas Osthagen

In 2000, the U.S. Geological Survey estimated that 25% of the remaining recoverable undiscovered oil and gas resources in the world were located in the Arctic region. Subsequently, the region became branded as a “new energy province” overnight. While more recent studies have been conducted, this early estimate attracted a number of applications for permanent observer status on the Arctic Council from an array of non-Arctic states, including China, Singapore and Italy, interested in gaining access to the debates concerning this new global hotspot. International commercial heavyweights, such as Shell Oil, Total, and ExxonMobil, are also realizing the lure of these natural resources. In particular, the North American Arctic–encompassing Alaska, northern Canada, and Greenland—has seen a rapid influx of such actors.

A closer examination of the actualities involved in oil and gas development in the “High North,” however, reveals a different picture. A combination of factors can help explain why the concept of Arctic oil and gas needs to be further investigated and nuanced before any accurate or reliable predictions can be made on the future of the region itself. Here’s why.

First, Arctic petroleum development is inherently dependent on commercial profitability. Sustained high oil and gas price levels, in combination with the cost of extraction, are the main determinants in the decision to invest in Arctic extraction. The current high price levels for oil, which has remained at an annual average of almost $100 per barrel since 2008, consequently prompts an interest in Arctic resources. The International Energy Agency (IEA), and the world markets, however, expect the price to fall in the long term. The IEA also argues that the cost of Arctic oil production will be very high, ranging anywhere between forty to one hundred dollars per barrel. Should these predictions come true, the profitability of Arctic oil extraction will be dramatically reduced.

Similarly, the natural gas spot price for the North American market has also seen a remarkable shift over the last decade. Natural gas prices rose sharply towards 2009, prompting interest in recoverable Arctic natural gas. In 2010, however, following a sudden boom in domestic shale gas production, the United States embarked on a path to self-sufficiency with price levels dropping accordingly for the whole of North America. As with Arctic oil, natural gas from the High North does not seem to be as profitable as originally predicted.

A second stumbling block to Arctic petroleum development is environmental concerns. In the North American Arctic, as elsewhere, the public is concerned about the environmental risks that come with oil and gas extraction. The 1989 oil spill from the tanker Exxon Valdez in Alaska, and more recently, the Deepwater Horizon accident in the Gulf of Mexico in 2010, serve as reminders to the public of the potential consequences drilling in ecologically sensitive areas carries. Highlighting this, Greenpeace has been extremely active in promoting its “Save the Arctic” campaign. Litigation and activism by indigenous communities and local NGOs have similarly halted much of the Chukchi Sea development in Alaska.

Internationally, Arctic resource exploration has attracted attention as a symbol of corporate greed and climate change. As more and more attention is paid to the Arctic, striking the right balance between the conflicting interests in the region becomes of paramount importance to national politicians intent on reelection. As such, discussions concerning Arctic oil and gas activities often seem to inspire conflict and public outcry, such that the power of civic engagement, in terms of halting the processes, should not be underestimated.

A third hindrance comes from the friction caused when regional interests collide with those of the Federal government. The people and local governments of Alaska, for example, are increasingly interested in mineral and oil extraction to boost local employment levels and tax bases. Washington, D.C., however, is wary of the politically unpopular issue Arctic mining or drilling generates amongst environmental organizations. The deadlock between these two competing interests constitute yet another hindrance for the rapid petroleum development in the Arctic.

Although the Arctic undoubtedly contains a vast amount of natural resources, its status as a “new energy province” should not go unquestioned. As highlighted, there are significant economic and political factors that need to be considered before Arctic oil and gas development becomes a reality. Canada takes over the chair of the Arctic Council in May of this year, followed by the United States in 2015. Awareness of these issues is therefore essential, as the debate on drilling for oil and gas in the North American Arctic will only intensify in the future.

About the Author

Andreas Østhagen works for the North Norway European Office in Brussels while contributing to The Arctic Institute, a D.C. based think tank. He holds a MSc in International Relations from London School of Economics and has previously worked on Arctic issues at the Center for Strategic & International Studies (CSIS) and the Norwegian Institute for Defense Studies in Oslo.

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