It is cheaper to send a rocket into space than to drill a single oil well in the Arctic Sea.
One Proton rocket launch costs from $80 million to $100 million, while offshore oil wells in the Arctic come in at $100 million to $150 million apiece – and each oil field needs hundreds of them, says Valery Nesterov, an oil and gas analyst at Sberbank CIB, formerly Troika Dialog.
As for offshore Arctic drilling platforms, they rake up a bill of $5 billion to $6 billion, by Nesterov’s estimates. This is half the cost of the Large Hadron Collider.
If the costs are high, the potential gains from Arctic oil and gas may be even higher: running into trillions of dollars – and capable of sustaining the petroleum industry for decades to come.
But for now, projects in the Arctic remain unprofitable and require new technologies on par with anything the space industry has ever cranked out, Russian environmental and petroleum industry experts said.
Economic considerations have so far failed to stop the Russian government, which is pushing state-run oil and gas corporations to go North.
But this may just usher in another non-transparent “megaproject” like the Sochi Olympics or the APEC summit in Vladivostok – now notorious gravy trains for the abundant officials involved, said Vladimir Chuprov of Greenpeace Russia.
“This is a huge black hole – or rather, a ‘snow hole’ – that would allow for centuries’ worth of embezzlement,” said Chuprov, who supervises the watchdog’s energy program.
What Are We Racing For
The Arctic race has been picking up steam since the mid-2000s. “The polar nations” – including Russia but not the United States – have been busy filing claims for swathes of the Arctic shelf with the United Nations, which is set to rule on this in 2014.
What exactly they are gunning for, and how much they would have to pay to obtain it, remains subject to discussion.
Rough estimates for recoverable oil reserves in the Russian Arctic are about 25-30 billion tons. Compare that to 359 billion tons of the world’s currently proven oil reserves, including reserves of heavy oil, tar sands and hard-to-extract shale oil, said Nesterov of Sberbank CIB.
However, extracting these riches is no mean feat. WWF Russia head Igor Chestin, in an article in the business daily Vedomosti earlier in October, put the cost of oil drilling in the Arctic Laptev Sea at $700 per barrel.
The figure starts at $30 for projects such as Gazprom’s Prirazlomnaya oil rig in the northern Pechora Sea, compared to Russia’s current average of about $12 to $15 per barrel, said Mikhail Babenko, the Oil and Gas Officer of the WWF Global Arctic Programme.
Given the oil tax, which is $70 per barrel in Russia, and the current price of Brent crude at about $110 per barrel, oil drilling in the Arctic lacks the profit margin needed to induce companies to spend billions on costly Arctic projects, Babenko said.
Russian oil and gas majors are lobbying for tax breaks that would make their Arctic operations more profitable, but this work is still in progress, experts said.
Space Underwater
Drilling in the Arctic requires “technologies comparable to space tech,” Igor Yushkov, an analyst with the National Energy Security Fund think-tank, told a recent roundtable in Moscow.
Some risks simply cannot be handled with present-day technologies – such as a possible blowout and spill under ice – or like the threat posed by the 20-kilometer-wide chunk of ice that headed toward the Shell drilling rig when it tried, and failed, to launch operations in the Chukchi Sea in September, Babenko said.
However, technologies can be perfected in pilot projects that would bring the costs down, as with shale oil and gas, the extraction of which was deemed unprofitable for decades, until US companies in the 2000s proved otherwise.
“By 2050, the Arctic would be like the Persian Gulf or the Western Siberia now,” said Professor Anatoly Zolotukhin, a retired oil industry professional and a vice-rector at the Gubkin Russian State University of Oil and Gas in Moscow.
“You just need to develop the technologies. Twenty years ago, mobile phones also were nowhere near as handy or ubiquitous as they are now,” he said.
In a telling coincidence, the same example was cited by Greenpeace’s Babenko when he promoted energy efficiency and renewable energy over Arctic oil drilling as a long-term strategy.
“The main thing is to have a goal. Who expected, twenty years ago, that you’d be able to use a telephone to send pictures or something?” he said.
BP Energy Outlook, a study published in 2011, said that Arctic oil would not be a significant factor for the industry until 2030, a prediction applied by the Russian Natural Resources Ministry to Russia’s own large-scale drilling in the Arctic.
A high-profile international conference on the Arctic, set to take place in Russia’s Salekhard this week, was postponed “until further notice” without explanation. A Greenpeace source told RIA Novosti it happened because there was simply nothing to discuss as most countries were putting their Arctic programs on hold.
Go North
Every “polar nation” has their own incentive to go North, be it to sustain and reinforce growth of economy, maintain export potential, or assure energy security, said Greenpeace’s Babenko.
In Russia’s case, the Arctic rush is exclusively state-driven, Babenko said. State-owned Gazprom and Rosneft are the only two companies authorized to work on the Russian part of the Arctic continental shelf.
Total investment in Arctic oil exploration in Russia would amount to $500 billion through 2050, Russian Energy Minister Alexander Novak said earlier in October.
Most of this would be state investment in related infrastructure, including airports, sea ports, roads, emergency service and army bases, Greenpeace’s Chuprov said.
The government is worried that Russia’s petroleum revenues, which account for 40 percent of the state budget, will decrease unless new oil and gas fields are tapped, said Yushkov of the National Energy Security Fund.
The government expects to earn $1.7 trillion from Arctic hydrocarbons, but this estimate is highly speculative, Sberbank CIB’s Nesterov said.
Banking on energy efficiency instead of Arctic hydrocarbons could help Russia save up to $700 billion on heating bills, costing just the $320 billion needed for a nationwide upgrade of the country’s housing, according to a WWF study published in May.
But alternative energy lacks powerful lobbyists in the government, unlike the petroleum industry, said Yelena Kobets of the Russian branch of the Bellona environmental group, headquartered in Oslo.
Money Down the Snow Hole
Proponents of Arctic expansion say it would give a boost to both Russia’s flagging hi-tech sector and the country’s depopulated and underdeveloped northern regions.
But analysts contacted by RIA Novosti agreed that the Arctic race may be a huge drain on state coffers through hard-to-evaluate and non-transparent projects.
The Kremlin is already operating several “megaprojects,” including the 2014 Sochi Olympics and the 2018 World Cup. The APEC summit in Vladivostok in September raked a bill of almost 700 billion rubles ($22 billion).
Many construction projects for the Vladivostok summit were poorly thought-out, not finished on time, or of subpar quality. No major criminal cases followed, but media speculation over potential embezzlement was rife, a story echoed by a RIA Novosti source at the summit organization committee.
Russia ranked 143th out of 183 countries in Transparency International’s corruption perception index 2011, out last December.
“Sadly, in Russia’s case, this is a very expensive toy with huge potential for embezzlement,” Babenko said of the Arctic oil exploration.
With the right technologies and mindset, Arctic oil drilling could be as safe as Norwegian shelf projects that do not disturb salmon spawning in the same area, said Zolotukhin of the Gubkin Russian State University of Oil and Gas.
“But you need to overcome the administrative resource for that,” he said. “Until then, there will always be someone fishing in troubled waters.”
A Global Sanctuary
But this much-trumpeted “Arctic rush” may not transpire, for as the oil majors are sizing up northern oil and gas fields, green groups are accelerating their global drive to protect Arctic from development.
A Greenpeace petition to declare the globe’s northernmost zone a “global sanctuary” had gathered 2.1 million signatures as of late October.
“The Arctic ice we all depend on is disappearing. Fast,” claims the petition’s website, Savethearctic.org, proceeding to elaborate that the northern ice cap – which shrunk to a historical low this summer – is a major climate factor.
Meanwhile, “a new Arctic oil rush is starting. Shell, BP, Exxon, Gazprom, Rosneft and others want to risk a devastating Arctic oil spill for only three years’ worth of oil,” the petition goes on.
Bipedal polar bears – actually Greenpeace activists dressed up in faux-Ursidae skins – protested outside Gazprom and Shell offices across Europe in recent months.
In August, an international team of six climbers led by Greenpeace head Kumi Naidoo scaled a vertical wall at Gazprom’s Prirazlomnaya rig in the Pechora Sea and hung there for hours, only making themselves scarce when workers began to pelt them with chunks of metal.
Royal Dutch Shell, which started oil drilling in the Chukchi Sea in September – the project came to a halt within a day over equipment malfunction and an incoming iceberg – even threatened to sue Greenpeace for reputational damages.
Other environmental groups joined the fray, including WWF Russia, whose head Chestin claimed in his Vedomosti article from earlier this month that oil drilling in the Arctic was dangerous and economically unfeasible.
From Melt to Spill
The logic behind the Arctic campaign is, in fact, flawed: the polar cap has been melting for at least 30 years – long before Prirazlomnaya, Chukchi Sea’s Burger prospect by Shell, the Shtokman gas field in the Barents Sea or the Snohvit gas field in the Norwegian Sea came into view.
“There is a certain gap” between the two lines of environmentalist reasoning, Greenpeace’s Chuprov conceded.
Oil industry experts were more straightforward. “Green groups and logic are incompatible,” sneered Vladimir Pavlenko of the Oil and Gas Research Institute at the Russian Academy of Sciences.
The main danger from drilling on the Arctic shelf is potential spills, not direct climate impact, said Kobets of Bellona environmental group.
But the danger remains. WWF’s study of Prirazlomnaya – which is yet to begin operating – showed that a potential spill or leak from the platform could affect an area the size of Greece. No modern clean-up technology is adapted for use in the Pechora Sea – with its ice hummocks burrowing into the seabed, freezing winds, polar nights, temperatures under minus 60 degrees Celsius. The nearest emergency service bases are hundreds of kilometers away.
“It would be much worse than the Gulf of Mexico,” Kobets said about a potential spill. Up to 4.9 million barrels of oil pumped out during infamous Deepwater Horizon spill in 2010, with 6,000 sea vessels involved in the clean-up – a fleet that is nowhere to be found in the Russian Arctic.
The Arctic melt makes drilling for petroleum in the North seem easier, which is why environmental groups went for a preemptive strike, trying to stop “irresponsible” oil and gas exploration before it got off the ground in the environmentally fragile region, said Greenpeace’s Babenko.
The region is already peppered with waste left by now-defunct military bases from the Cold War. Fields of empty oil drums stretching as far as the eye can see have prompted a shocked President Vladimir Putin to declare a “general Arctic clean-up” in August.
The pilot clean-up project on the Franz Josef Land costs 8.5 billion rubles ($275 million) and is set to run until at least 2020.
But the project’s leader, Anatoly Shevchuk, admitted the money had been promised, but not earmarked, in the budget – unlike the 500 billion rubles ($16 billion) that Gazprom and Rosneft plan to invest in their shelf operations by 2015.