The acceleration of climate change and geopolitical tension surrounding hydrocarbons are churning the global energy landscape. Nowhere is the speed of these developments more evident than in the melting Arctic, which is heating twice as fast as the rest of the planet and opening up new opportunities for hydrocarbon development.
The powers staking a claim in the Arctic – China, Russia, and the United States – have moved forcefully this year to seize these opportunities. In June, Chinese and Russian companies established a joint venture to manage a fleet of ice-breaking tankers to move Arctic LNG, while the United States vows to restart leasing oil-exploration acreage this year. Evincing serious concern about climate change, Canada and Norway have taken a different tack, placing moratoriums on Arctic oil exploration. In Greenland, the epicenter of Arctic melting, China is angling to acquire oil concessions.
More than half of the Arctic’s hydrocarbons belong to Russia, which has started to develop them. This ship, in other words, has already sailed. But Canadian-Norwegian opposition to Arctic drilling is equally profound. It remains to be seen what happens in the United States and Greenland. The existence of both visions signals that the energy transition is further along then we realized.
The Arctic has long been billed as the final frontier for hydrocarbon exploration and production. High prices after the 1973-4 embargo made Arctic oil commercially viable, but this oil became superfluous when prices fell in the 1980s. The second wave broke in 2011-14, when prices were well north of $100 per barrel. The ensuing price collapse in 2014, however, erased these plans.
According to a 2008 U.S. Geological Survey report, the Arctic contains as much as 90 billion barrels of oil and 47 trillion cubic meters of gas. This means roughly 13% of the world’s undiscovered oil and 30% of its undiscovered gas. The breakdown of these assets by country is telling. Russia has 58% of total Arctic resources, the United States 18%, Greenland 12%, and others, including Norway and Canada, 12%.
Total Combined Arctic Resources by Country (bnboe)
Source: James Henderson and Julia Loe, “The Prospects and Challenges for Arctic Oil Development,” Oxford Institute for Energy Studies, 2014. Data from USGS (2008).
For Russia, the Arctic is more than about reloading its stores of oil and gas. The country hosts 50% of the total Arctic coastline, which constitutes the Northern Sea Route (NSR). Economic activity in the NSR accounts for a serious chunk of Russia’s GDP, with estimates ranging from 10%–30% and roughly 20% of its exports. In April, Russia announced that it would invest $11.4 billion in the NSR by 2024.
As the Arctic continues to melt, more acreage will open up for hydrocarbon development. Russia’s Yamal LNG project and LNG 2 are already bearing fruit, and more projects are on their way.
Russo-Sino hydrocarbon pact
U.S. sanctions against Russia have sought to deny it Western capital to develop its so-called blue fields, new fields either in the offshore Arctic or frozen areas of eastern Siberia. These sanctions have missed their mark largely because China has filled the investment vacuum. China’s gas-import dependency, meanwhile, continues to grow, making it desperate to secure new supplies.
China’s Natural Gas Import Dependency
Source: Steven O’Sullivan, “China: Growing import volumes of LNG highlight China’s rising energy import dependency,” Oxford Institute for Energy Studies, June 2019.
China’s drive for geopolitical power depends on conduits that bring energy and other inputs into China to manufacture goods for export. The NSR would be a boon to Chinese trade, offering a shorter route to Europe and North America. In 2018, China published a white paper outlining for the first time its national interests in the Arctic, a prelude to investment in the NSR in 2019.
The Russo-Sino hydrocarbon pact is unsurprising. China is already set to take on Russian pipeline gas later this year. By taking a stake in Arctic LNG, China becomes both an investor and facilitator of Russia’s Arctic assets and seeks to curb dependence on U.S. LNG.
Arctic hydrocarbons on the bubble
It appears that nothing will stop Russia and China’s pursuit for Arctic hydrocarbons. Yet environmental concerns are still blocking oil concessions in Canada, Norway, Greenland, and the United States.
This vision is understandable in Canada, which has plenty of onshore reserves and fewer Arctic ones. Norway is more puzzling, and should give climate activists hope. Already a significant Arctic producer, the opposition Labor Party in Norway has stifled further development for the time being. Nevertheless, there are inklings that Canada and Norway could reverse course.
China had also been gaining ground in Greenland, forging deals to produce and buy minerals including rare earths, uranium, and zinc. Oil and gas were next in line. Yet U.S. pressure seems to be pushing back on these efforts. Earlier this month, Chinese firms backed out of bidding to construct two airport projects, which are financed by Denmark. Denmark has sided with the United States on trying to block Nord Stream II and appears aligned against the Russo-Sino pact.
The United States is the most difficult to read. Shell tried to enter Alaska during 2011-14, but environmental pressure forced it to abandon its play in 2015. With Trump, the oil companies sense opportunity. BP started lobbying the Trump Administration in 2017 to reopen the Arctic. In May 2019, BP and Exxon-Mobil committed $20 million to develop LNG in Alaska.
Fleeting or enduring?
Arctic hydrocarbons were long thought a distant and final horizon due to the expense and environmental risk. The precipitous drop in offshore drilling costs in recent years, however, has rendered the former nugatory. Only climate activism can prevent it outside of the NSR. Which vision for Arctic hydrocarbons will prove fleeting and which one enduring?
Russia and China’s vision is certainly opportunistic, brought on by U.S. dominance in hydrocarbons. China has the most to lose, as investments in the Arctic and in oil and gas more broadly will exacerbate its own problems by extending the hydrocarbon era. They are also a signal that China does not truly believe in its own strategies to develop renewable energies and other clean-energy technologies. Russia, meanwhile, is betting that the Chinese economy will continue to hum.
The Arctic reckoning is here earlier than expected. Pushing into the Arctic shows a level of industry desperation and should further invigorate the climate movement. Yet the climate movement cannot rest assured that even its current achievements in blocking Arctic hydrocarbons in Western countries will continue. The climate is going to get far worse before it can hope to get better.