Market News

 December 06, 2013
A Rush to Expand Oil Drilling in the Arctic

 In late December 2012, the U.S. Coast Guard was dispatched to rescue 18 crew members from the Kulluk, a Royal Dutch Shell drilling rig that had broken free from its tow. The responders battled an Arctic storm that generated near hurricane-strength winds and 50-foot waves, but despite their efforts, the rig ran aground off of a small Alaskan island on New Year's Eve. The oil rig's fuel tanks were not breached, according to a Department of the Interior review, but up to 272 gallons of diesel oil may have flowed into the water from shattered lifeboats. The Kulluk incident -- the culmination of the first exploratory drilling effort in the U.S. Arctic in almost two decades -- demonstrated the perils posed by this remote and harsh area of the world.

Human activity in the Arctic is growing fast, as rising global temperatures have led the frozen polar region to warm faster than expected and become increasingly ice free for longer periods of time. In the last few years, six of the eight Arctic littoral countries - the United States, Russia, Norway, Canada, Denmark and Iceland - have granted energy companies offshore oil and gas exploration licenses. According to the U.S. Energy Information Administration, the Arctic could hold about 22 percent of the world's undiscovered oil and natural gas resources. And in addition to the estimated boost to energy production, shipping companies are exploring the potential for polar navigation routes to save transit time. In September, a Chinese container ship made headlines by reaching Europe's Rotterdam port 15 days sooner than it would have through the common route of the Suez Canal, which connects the Mediterranean Sea and the Red Sea.

Experts warn that the lack of infrastructure and regulatory framework opens the door for conflict and potentially devastating accidents. In the U.S., observers are pressing the Obama administration to urgently develop a more specific national strategy and to take more control internationally. In two years, the U.S. will lead the Arctic Council, an intergovernmental forum of regional governments and peoples.

"The Arctic is evolving more rapidly than our policies can keep up with," says Heather Conley, senior fellow and director of the Europe Program at the Center for Strategic and International Studies. In May, President Obama released a national strategy, basically reaffirming the previous administration's 2009 presidential directive on the Arctic, says Conley. The strategy assigns federal agencies to seven areas of focus - national and homeland security, international governance, border resolution, scientific cooperation, maritime transportation, economic and energy promotion, and environmental protection. "What we need now is really a strategy that goes to the next level, details how we're going to achieve those objectives and [identifies] the funding resources necessary to achieve those directives. [It should also ensure] some accountability for how those agencies achieve those objectives," says Conley.

Last month, Secretary of Defense Chuck Hagel unveiled the Pentagon's own strategy, outlining agency-specific objectives based on the White House plan. Still, experts say, the DOD's strategy lacked specifics and budgetary resources, particularly in developing the Arctic's infrastructure. "The Defense Department has a lot of capacity [such as charting and marine communications]," says Mark Rosen, a maritime law expert and senior legal adviser at CNA Corporation, a research nonprofit. "There could be mechanisms put in place where DOD can do this but get reimbursed by some of the energy companies for some of the costs." Rosen recently co-authored a policy paper, identifying gaps in Arctic governance for the Arctic Security Initiative, a project at Stanford University's Hoover Institution. The report outlines specific recommendations to usher economic development in the region and highlights a need for legally binding agreements between Arctic countries that would establish an enforceable regulatory regime. "If a serious incident involving a ship or oil rig were to occur today, it is quite likely that there would be insufficient assets to respond to that emergency, clean up the mess, and compensate those who are injured," the report reads. Establishing material and training requirements, as well as strict liability and minimum insurance limits, would help regulate international vessel activity, according to the report.

But not everyone is convinced the rush to the region is warranted or desirable. Despite recent news events, polar routes are not exactly commercially viable, says Jean-Paul Rodrigue, professor at Hofstra University's Department of Global Studies and Geography. The harsh Arctic conditions and lack of infrastructure means the costs are high and the benefits marginal, he notes. Indeed, the Kulluk incident demonstrates this point. Royal Dutch Shell reportedly spent more than $5 billion on its Arctic drilling operation, brought in an armada of 20 vessels to support the two oil rigs, and coordinated more than one thousand flights. In the end, the company wasn't able to complete even one well after being delayed by Arctic conditions.

For environmental groups, the harsh environment and potential for accidents are reasons to avoid industrialization of the Arctic altogether. To Gustavo Ampugnani, Arctic team leader at Greenpeace, last year's Shell incident demonstrated that industry is not equipped to exploit the region safely. "Even with normal weather conditions for the Arctic, the company suffered a lot of mishaps and setbacks," says Ampugnani, referring to a documented list of problems Shell encountered even before the storm grounded the Kulluk during transit. There were approximately 143,000 gallons of diesel and 12,000 gallons of other petroleum products aboard the rig, according to the U.S. Coast Guard. "A significant accident or spill in the remote and inhospitable Alaskan Arctic could have catastrophic consequences on fragile ecosystems and the people who depend on the ocean for subsistence," warned a Department of the Interior review of Shell's program.

But last month, the company resubmitted an exploration plan for further drilling off Alaska's northern coast for federal review. For now, energy firms, rather than government officials, appear to be setting the pace for Arctic exploitation.