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Arctic Development Stalls with Tumbling Oil Prices

The oil boom that began less than a decade ago is now on shaky ground, with U.S. crude oil prices crashing to below $27 per barrel this week. The collapse in prices will lead oil companies to put expensive drilling projects in areas such as the Arctic on hold.

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Last summer Goliat, a massive orange and white floating oil platform, was towed from Hammerfest, Norway, to its field location in the Barents Sea. At 71.3ºN, the platform, which is owned by the Italian oil company Eni Norge and Norway’s Statoil, will be the northernmost producing offshore rig once it comes online.

After years of delays and cost overruns, Goliat finally got the go-ahead this week from Norway’s Petroleum Safety Authority to begin pumping oil.

But with the high cost of production in Arctic areas – and oil prices hovering around the $30 dollar mark – many projects have been put on hold and those that have started may not break even, including Goliat, according to some reports. It all means that billions of barrels of crude oil will likely stay buried beneath Arctic oceans for the time being.

“The lower prices are, the less attractive these projects are,” said Michael LeVine, Pacific Senior Counsel for Oceana, an international ocean conservation and advocacy group.

The Arctic holds about 90 billion barrels of undiscovered conventional oil resources, according to an assessment by the U.S. Geological Survey, as much as 13 percent of the world’s undiscovered oil. Despite the size of these resources, it is difficult and expensive to drill wells in the Arctic.

Companies must have specially designed drilling equipment able to withstand subzero temperatures and they have to keep a larger inventory of equipment and spare parts close at hand in case something breaks or goes wrong in such challenging conditions, according to a 2012 report by the U.S. Energy Information Administration. In addition, they must ship oil out of the Arctic when the concentration of sea ice is low and take care to avoid dense, hard multiyear ice.

The average cost of extracting crude oil from the Arctic is $75 per barrel, almost triple the cost of extracting oil from onshore fields in the Middle East, according to a Deloitte report.

“Companies may need prices to be around $100 per barrel to make that so-called ‘break-even’ point in Arctic projects,” said Katherine Hardin, a senior director at IHS Energy, a global oil and gas consultancy. “The price of Brent oil has recently been closer to $30 – that’s a big gap.”

What’s led to the persistent decline in oil prices? In its monthly Oil Market Report for January, the Organization of Petroleum Exporting Countries said the main contributor was “persistent oversupply” coupled with the slowing growth of the Chinese economy. OPEC said that the world demand for oil in 2015 averaged about 93 million barrels a day, with supply exceeding demand by 1.94 million barrels a day.

Interest Wanes in the U.S. Arctic

In 2008, the U.S. sold exploration leases in the Chukchi and Beaufort seas for $2.6 billion. It wasn’t the first time companies had drilled off the coast of Alaska. In the 1980s and early 1990s, about 30 wells were drilled in the Beaufort Sea and another five in the Chukchi Sea. But when the price of oil crashed, the companies left and let their leases expire.

“We appear to be on the downward side of the second boom-bust cycle of the U.S. Arctic,” said LeVine. “We are likely seeing this era of oil exploration in the U.S. Arctic coming to an end.”

In September, Shell abandoned its drilling operations off the Alaska coast. The company, which had invested $7 billion in the region, said it had made oil and gas discoveries, but not enough to continue its search.

Statoil, Norway’s largest energy company, soon followed. It announced in November that it would abandon 16 active leases and an additional 50 leases that it co-owned with ConocoPhillips in the Chukchi Sea. The leases were “no longer considered competitive within Statoil’s global portfolio,” the company said in a press release.

There are no active oil exploration projects going on in Arctic waters offshore of the U.S., Canada or Greenland. The delay gives governments, scientists and northern communities time to think about future Arctic development, said Scott Highleyman, who directs the International Arctic Program at the Pew Charitable Trusts. “It’s a chance for governments to identify and protect ecologically important areas, using a combination of western science and traditional knowledge and take those areas off the table from offshore oil and gas development,” he said.

But Norway and Russia have also backed off some of their Arctic offshore drilling programs.

Despite a slight increase in crude oil production in 2015, the Norwegian Petroleum Directorate, the country’s oil industry regulator, expects production to drop slightly in 2016 and continue to decline through 2019. Director General Bente Nyland told Bloomberg that the “industry is in a crisis.”

Last year, Norway expanded its oil drilling territory by offering new leases in the Barents Sea. Climate change has seen the sea ice edge retreat, giving the government the opportunity to open the northern waters to oil and gas exploration, over protests from environmental groups.

Russia, which earns about half its government revenue from oil and gas sales, has seen its economy stumble as oil prices fall. It had planned to drill 14 offshore wells in 2017, but downgraded those aspirations to two wells in September. This week, Russia said the fall in oil prices meant the budget would be $38 billion short of income.

“Russian companies have not been hit as hard as many expected by the low oil price. There are several ongoing Arctic projects, which are driving some of the tanker traffic along the Northern Sea Route,” said Hardin.

It’s realistic to expect Arctic sea ice to continue to retreat and oil prices to rise again, and when they do we can expect to see more interest in frontier projects in the Arctic, unless governments adopt policies that set aside ecologically important areas from drilling. In a study published in Nature a year ago, scientists determined that all Arctic oil and gas had to stay beneath the ocean in order to limit global warming to less than 2C (3.6F).

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