In 2008, the US Geological Survey (USGS) announced that an estimated 13% of the world’s undiscovered oil and 30% of undiscovered gas lay to the north of the Arctic Circle. This was also the year Big Oil’s influence was at its zenith: the oil price peaked at a July 2008 high of $147 per barrel, while ExxonMobil, then the world’s most valuable company, reported profits of $45bn. Oil and gas in the Arctic was seen as ripe for extraction, “the largest unexplored prospective area for petroleum remaining on earth”, said USGS’s Donald L Gautier, while US magazine Vanity Fair predicted a new “Arctic Oil Rush”.
As is so often the case with energy markets, few predicted what happened next. Oil prices sank 80% over the following six months as the world grappled with the global financial crisis. They fluctuated between $80 and $120 from 2010 to 2014, before dropping to under $40 a barrel as US shale production, not Arctic oil, boomed. April 2020 saw the oil price crash to a low of $18 a barrel as global demand plummeted during the Covid-19 pandemic.
Go deeper with GlobalData
However, the ongoing energy crisis, and Russia’s invasion of Ukraine, have seen oil prices soar, which means mothballed projects risk being seen as viable once again. Already, there has been a resurgence of oil production in markets such as Brazil. Could we see a return to those heady days of 2008 when the Arctic was the next frontier?
A tale of two Arctics
Ecologists and anthropologists care deeply about the Arctic, which is the 20,000,000km2 tract of land and sea that lies north of the Arctic Circle. The region – which spans Canada, Denmark, Russia, Finland, Greenland, Iceland, Norway and the US – is home to more than 21,000 known species of animal, including iconic species like the polar bear, walrus, narwhal and snowy owl. Some four million people live in the region, 9% of whom are indigenous communities with distinct cultures and lifestyles.
Already, climate change has melted at least 75% of summer sea ice in the Arctic, which is warming four times faster than the global average. Habitat destruction has disrupted the migratory patterns of traditional food sources like caribou and salmon, while melting permafrost is forcing indigenous communities to move to survive. This melt also releases millions of tonnes of carbon dioxide and methane, further exacerbating climate change.
The melting ice is opening up shipping routes and fishing grounds, with the likes of China and Russia – who are working together on a “Polar Silk Road” – and the EU all competing for access. But “there will be no scramble for energy in the Arctic”, says Mathieu Boulègue, from the think tank Chatham House. This is because economically viable mineral and energy deposits largely exist within “exclusive economic zones”, he explains.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataRussia, currently dominating the news as a result of its invasion of Ukraine, is far and away the biggest player in the Arctic, with significant operations in the region. Data from Energy Monitor's parent company GlobalData shows that more than ten million barrels of oil equivalent per day (boe/d) are expected to be extracted in 2022 alone in the Russian Arctic. The country has invested around $300bn (Rbs31.3trn) to develop oil exploration and shipping infrastructure, adds GlobalData, while state-owned energy companies Gazprom and Rosneft are the sole licensees for exploration and production activities in the region.
Norway has also long looked northwards as North Sea deposits mature and it tries to prolong its status as a leading oil and gas producer. Generous tax breaks and technological improvement – which have seen the break-even price for oil production in the country’s northernmost Barents Sea drop to $35 per barrel – mean that around 500,000 boe/d of oil and gas is set to be produced by Norway from offshore Arctic fields in 2022, shows data from GlobalData.
In the US, Arctic oil and gas production lies off the north coast of Alaska, where the Prudhoe Bay oil field has produced around 18 billion barrels of oil since its discovery in the 1960s. However, conditions here are more challenging than in Norway, without the more temperate climate created by the Gulf Stream. The break-even price for oil production here is around $75 per barrel, according to GlobalData. US President Joe Biden has also indicated he will not sanction new oil production in Alaska's Arctic National Wildlife Refuge (ANWR), one of the last fully functional ecosystems in North America. His administration suspended all new drilling leases there in June 2021.
Denmark, and its constituent territory Greenland, are both founding members of the Beyond Oil and Gas Alliance, launched at COP26, and have committed to keeping the vast quantities of oil and gas on the world’s largest island in the ground. Canada, meanwhile, has no real interest in Arctic oil, says Nils Bartsch from the non-profit Urgewald, due to its enormous oil sands reserves, which are much more accessible than remote Arctic regions. A huge number of oil and gas projects have been cancelled in the country’s Northwest Territories over the years, shows data from GlobalData – and these are unlikely to be resurrected as a result of the Canadian government’s moratorium on Arctic drilling.
The spread of oil and gas production across the Arctic means we have, in effect, “two Arctics”, says Rob Huebert from the University of Calgary. “Both the US and Canada have taken steps to end [Arctic] oil and gas production, even if the legacy of the 20th-century Alaskan oil industry remains,” he says. “The legacy of Barack Obama and Justin Trudeau’s pro-environment policy means that Arctic assets in these countries are in effect stranded.”
However, says Huebert, the story in the “Ural Arctic” – where Norway and Russia lie – is different. “Russia has an entire corridor of Northern development, which started producing offshore around a decade ago, and from which they have never looked back,” he says. Norway, meanwhile, is pursuing the same “sophisticated, high-tech oil production” it carries out in the North Sea, he adds.
Drilling for the future
Data from GlobalData suggests the take of “two Arctics” is set to continue. Canada has no new oil and gas fields in the pipeline, while five that are under development in the US look unlikely to survive with the current White House administration. There are, however, the same polarised views on Arctic oil as exist in so many other parts of US society in 2022. “Alaskan state officials support oil and gas activity, and are pretty frustrated with the pace of exploration and project developments on federal lands in the state,” explains Ben Cahill from the Center for Strategic and International Studies (CSIS).
President Biden paused all new leasing on federal lands when he first came into office – but this was overturned by a Louisiana judge in June. Fights along these lines continue to play out in the courts, although the moratorium on drilling in the ANWR endures.
However, both Russia and Norway have major expansion plans. Russia’s 2020 Arctic strategy plans the launch by 2035 of five new major oil projects on the continental shelf, while Arctic liquified natural gas (LNG) production should increase from 8.6 million tonnes in 2018 to 91 million tonnes by 2035, to be shipped out via the newly ice-free Northern Sea Route. Data from GlobalData suggests there are 28 Arctic oil and gas fields in the pipeline in Russia, in addition to the 114 that already exist. Whether oil prices rise or fall will likely not affect the prospects of new projects going forward because “Russian budgets are always indexed on low projected energy prices”, says Chatham House’s Boulègue.
“Arctic oil and gas is a massive economic resource for Russia, it is a big source of export revenue, and the government sees it as strategically important” says the CSIS’s Cahill.
These plans, however, were made before Russia’s invasion of Ukraine. The resulting economic fallout – which has seen the majority of European oil majors exit the country – threatens Russia’s access to technology and financing. However, China could well pick up some of the slack left by Europe. The massive 16.5 million tonnes-a-year Yamal LNG export terminal, which opened on Russia’s north coast in 2013, was built using money from the Export-Import Bank of China and the China Development Bank. Russian President Vladimir Putin also signed a series of massive new cooperation deals in the oil and gas sector with his Chinese counterpart, Xi Jinping, just ahead of February’s 2022 Winter Olympics.
Norway, meanwhile, handed out 53 new drilling licences in January 2022, five of which are located in the Arctic region. The country has been accused of “blindly drilling for oil” with no heed paid to future climate and financial risk. The Johan Castberg oilfield is one major greenfield development under construction in the Arctic off the country’s northern coast. Due to be operated by state oil company Equinor from 2023, the plan is for it to produce a total of 550 million barrels of oil until 2049, shows data from GlobalData.
Another controversial Arctic project under development by Equinor is the Wisting field, which would come online in 2028 and produce 430 million barrels of oil until 2053, says GlobalData. Lying 300km north of Norway’s northern coast, it would be the northernmost oil development in the world and pose significant transportation challenges. It is also not far from the uninhabited and ecologically sensitive Bear Island, points out Aled Fisher, from Friends of the Earth Norway.
[Keep up with Energy Monitor: Subscribe to our weekly newsletter]
For its part, Equinor denies these projects really represent “Arctic extraction”, due to the fact the seas where the drilling takes place would be ice free. “Activities in the Arctic regions do not play a role in Equinor’s current strategy," says the company’s Eskil Eriksen. "Some years ago we exited from Arctic licences in, for example, Alaska, Greenland and the Beaufort Sea. Equinor has activities in the Barents Sea, but we will not be carrying out future exploration in frontier areas.”
Risks going forward
It is easy to assume that with renewables proliferating and talk of net zero everywhere, the era of frontier oil and gas exploration is behind us, but the examples of Russia and Norway prove these assumptions wrong. A 2021 report from the NGO Reclaim Finance shows just how embedded companies remain in the region, with the authors highlighting that projects from the likes of Gazprom PJSC, ConocoPhillips and TotalEnergies SE mean production of oil and gas in the region is set to climb 20% over the next five years. The report also found that from 2016 to 2020, commercial banks including JPMorgan Chase ($18.6bn), Barclays ($13.2bn), Citigroup ($12.2bn) and BNP Paribas ($11.8bn) channelled more than $314bn into the leading companies developing upstream oil and gas in the Arctic.
There will be significant financial risk attached to any new Arctic fossil fuel projects going forward, if countries decarbonise as quickly as their net-zero pledges suggest. Think tank Carbon Tracker has warned companies could "waste some $530bn of capex this decade by investing for the long term based on short-term price signals". It reiterated that warning to Energy Monitor in the aftermath of Russia’s invasion, as the oil price surged above $100 a barrel.
The European Commission also announced a new Arctic Strategy in October 2021, which included a commitment to “ensure that oil, coal and gas stay in the ground, including in Arctic regions”. The strategy highlights the International Energy Agency's pronouncement in its Net Zero 2050 Roadmap that “no new oil and natural gas fields are needed”. The authors assert they will “work with partners towards a multilateral legal obligation not to allow any further hydrocarbon reserve development in the Arctic”.
“This new EU strategy puts Norway in a bit of a tight spot with their operations in the Barents Sea, because the EU is such a major partner,” says Chatham House’s Boulègue. However, economic sanctions permitting, Russia will likely continue on the same course regardless, as the country’s leaders have few other options.
“As far as the energy lobbies in the Kremlin are concerned, the green transition does not exist,” says Boulègue. “The Russian state is now so reliant on fossil fuels that oil and gas exploitation is required to feed the beast of vested interests, corruption and state machinations. To change tack now would bring into question the very survival of the current regime.”
