The battle for Arctic riches heats up

In recent posts I have identified the growing issues of declining energy reserves and those countries and firms seeking to protect their self-interests. Clearly, the oil industry is facing uncertain times, not just in terms of the declining reserves, but also in light of rapidly changing technologies and expectations in terms of the environment.

The state of oil production is beginning to cause alarm. Oil production peaked during 2006 with global oil production from mature oil fields now declining at a rate of between 6-7% per year. Oil is becoming more difficult, expensive and energy intensive to extract.  The Peak Oil Crisis website has real time clocks of global oil consumption and graphics illustrating the impending crisis as well as articles, graphics and links to industry articles. Countries reliant on oil imports are desperately seeking new oil and gas sources with global oil companies jockeying for position to extract any new reserves found. Power politics are coming to the fore and environmental organisations are increasingly concerned about the ramifications of the rush for oil on the global environment as multinational oil giants seek out previously untapped reserves in the remotest of regions.

The Artic is one of the regions that likely to become an economic and realpolitik battleground, almost certainly pushing ethical, environmental and moral considerations aside. It has been stated by industry experts that another 5 million barrels of new oil per day must come on line per year to meet global demand. A 2008 United States Geological Survey estimated that areas north of the Arctic Circle have 90 billion barrels of undiscovered, technically recoverable oil (and 44 billion barrels of natural gas liquids). This represents 13% of the undiscovered oil in the world.

In addition to the size of the untapped resources, additional environmental factors are driving moves to develop the Arctic region. In the past, the Northwest Passage connecting the Atlantic and Pacific Oceans through the Canadian Arctic Archipelago, has been virtually impassable, because it was covered by thick, year-round sea ice. However, satellite and other monitoring confirm a progressive, year-by-year decline in the thickness and extent of Arctic sea ice. In September 2006, satellite images showed that the Arctic Ocean was clear enough to sail directly to the North Pole from northern Europe, which raised the exploration stakes and initiated a bout of political skirmishes in support of territorial claims.

Under the 1982 UN Convention on the Law of the Sea, coastal countries have the right to control access to the belt of shoreline along their coasts.  Every country controls the resources under its coastal waters up to 200 nautical miles from its shore. Under the treaty, a country’s territory can be expanded further if it can prove the ridges and rock formations underneath the water are connected to its continental shelf. Countries have 10 years from when they signed the treaty to submit their scientific data to a UN commission in support of any territorial claims.  In 2007, for example, Russia’s set out to extend its territory almost up to the Pole itself and claim the vast mineral and energy resources lying beneath the Arctic ice. It launched a naval manoeuvre designed to plant an actual Russian flag, in a titanium capsule, at the base of the North Pole, 4,200 metres below sea level.

The enormity of the exploration task in the remotest regions has led to oil companies to seek out strategic alliances to provide the political clout and commercial resources required to make exploration a reality. One company attempting to reposition itself in the energy market is BP, reeling from its 2010 ‘annus horibilis’, in which its reputation was severely scarred following the Deepwater Horizon disaster. Russian companies are quickly emerging at the forefront of the global energy industry and this encouraged BP to approach Russia’s largest oil company, Rosneft (75%owned by the Russian Government)  to propose a joint venture and share swap,  with the two companies jointly exploring for oil in the Arctic. However, the proposed deal collapsed this week after the two parties could not reach a deal with BP’s existing partners in Russia, the oligarchs of Alfa Access Renova (AAR).

Environmentalists find the global alliance and plans to expand drilling in the Arctic hugely controversial given the oil industry’s recent safety and environmental records. In response to BP’s and Rosneft’s plans, Greenpeace released the following statement:

The Arctic is the world’s most fragile environment for oil exploration, while its ice sheet is melting rapidly due to climate change. Any company that drills for oil there forfeits any claim to environmental responsibility.

A further battle between environmentalists and the oil industry over drilling in the Arctic was triggered at the start of this month when Shell unveiled “risky” plans for the Beaufort Sea while the 53,000 tonne Leiv Eiriksson oil rig, belonging to the Scottish oil company Cairn Energy, set sail for Greenland, where it intends to explore for oil and gas in Baffin Sea this summer. Shell, Europe’s largest oil group, has submitted plans to the US government for permission to drill 10 exploration wells in the Beaufort and Chukchi seas off the north coast of Alaska in 2012 and 2013.

In a stand-off in the Davis Strait, west of Greenland, the Danish navy has been shadowing the Greenpeace ship Esperanza as it tracks the Leiv Eiriksson. Yesterday off the freezing seas off Greenland, activists from the Greenpeace ship Esperanza took taking direct action against oil drilling in the Arctic. Greenpeace activists scaled the underside of the rig and secured an Arctic survival pod hanging 30 meters above freezing seas with enough food and water to stay put for ten days. You can see the unfolding story on the Greenpeace website.

IB  Class Assignment

Ask your students to evaluate Greenpeace’s position that:

The Arctic is the world’s most fragile environment for oil exploration, while its ice sheet is melting rapidly due to climate change. Any company that drills for oil there forfeits any claim to environmental responsibility.

Is exploration of the Arctic justifiable in light of the decline in Global oil reserves?

IB style written questions

1.  Distinguish between a strategic alliance and a joint venture.

2.  Explain the importance of research and development in the oil industry.

3.  Analyse the impact that external opportunities may have on the business objectives and strategy of oil companies, such as BP.

4.  Discuss why the attitudes of oil firm’s towards social responsibility will change over time.