Risk to Arctic Energy Exploration

Risk to Arctic Energy Exploration

Trump Administration Opens Drilling in Arctic Wildlife Refuge

In 1903, U.S. President Theodore Roosevelt founded the National Wildlife Refuge System, a scheme to designate certain protected areas for the conservation of fish, wildlife, and plants. The Sierra Club once called Alaska the “Last Great Wilderness.” Alaska, due to the efforts of the Sierra Club, and other conservationists has maintained this characteristic. Specifically, a section of the Alaskan North Slope encompassing around 78,000 km², has been protected under the NWR System, known as the Arctic National Wildlife Refuge (ANWR). Administered by the Department of the Interior, the protected species in the area include polar bears, and the porcupine caribou.

Energy dominance has been an important key to the Trump Administration’s economic agenda. A controversial Republican-passed tax bill from 2017 opened up the region for oil and gas leasing. Recently, the Trump Administration has been finalising its plans to establish a leasing system for energy companies to gain the right to extract resources from the region. While Alaskan  Governor Mike Dunleavy (R.) has lauded the move by the Administration as an important step in revitalizing the state’s oil and gas sector, a key sector that has suffered and been in decline for recent years. While Republican lawmakers have cheered the move, environmentalists and tribal leaders have criticized the move it as a threat to the wildlife, in particular the porcupine caribou population, which tribes in the region depend on for sustenance. Critics of the energy exploration scheme in the ANWR, have warned that these efforts in the region could endanger the porcupine caribou mating grounds. 

Russian Hydro-Carbon Development

With the output of traditional oil fields in Western Siberia on the decline, Russia has sought out alternatives to top off its resource base, such as the Arctic’s wealth of hydrocarbons. According to the Arctic Institute, in 2017 alone, around 18% of Russian oil originated in the Arctic, and this number is expected to rise. However, like shale production in the U.S., the viability of Arctic oil for Russia is heavily dependent on a +$50 per barrel global price. As of writing on September 9th, 2020, WTI is sitting at around $37 and Brent is around $40. As long as oil remains cheap, the Russian Arctic’s pristine region will remain largely untapped.

According to the Bank of Finland, hydrocarbon revenues account for roughly 50% of the federal budgets total revenues. The State Duma has already begun taking steps to stimulate development in the Arctic, based on the Norwegian model of shelf development. As the Arctic Institute has asserted, “the law presumes that private companies will develop hydrocarbon resources in consortium with Rosshelf through production sharing agreements (PSA), whereby the Russian state-owned entity will have 25.1% in a project and the remaining 79.4% will go to private investors.” In addition to the PSA, the government approved fiscal amendments back in February, providing no severance tax on LNG and gas processing projects in Russia for up to 17 years and 12 years respectively. These measures are intended to stimulate investment into Russian Arctic hydrocarbons, in a time when the Energy market has braced for a major global economic downturn and shockingly low energy prices.

Global Markets Driving the Lack of Viability for Arctic Exploration

It cannot be overstated, that 2020 has been a detrimental year for the energy industry. Crude experienced nearly a 300% drop, back in April. Following a price war led by Moscow, in an effort to undermine shale production in the US, which requires around a $50 per barrel price point to be financially viable. Similarly, Russian’s Energy exploration in the Arctic also requires a high price-point, so in a short term effort to undermine US shale production, Russia has cut off its nose in order to spite its face. Greeted with similar price point issues in the Arctic, Russia’s short-term efforts to target US shale, it has cut off its nose in order to spite its face.

As Sehr Nawaz has reported on GRI, “negative pricing has been a common trend in the commodity markets. US natural gas markets fall susceptible due to the dearth of pipeline space.” Gas has experienced a precipitous decline in recent years, with production at an all-time high and prices towards all-time lows.

To throw another wrench into the uncertainty, talks of halting the Nord Stream 2 project over the poisoning of a Russian opposition figure, Alexei Navalny, have begun in Berlin. Reportedly, Heiko Maas Germany’s Foreign Minister has been quoted as saying, “I hope the Russians won’t force us to change our position regarding the Nord Stream 2.” Now, many believe that Germany is merely paying lip service, as Chancellor Merkel has heretofore attempted to “decouple” the two issues, but the threat has led to further uncertainty of the stability of Russia’s continued exports to the EU. Nord Stream 2 was an attempt by the Russian government to bypass Ukraine for its gas exports to vital European markets.

Arctic Exploration remains an exciting prospect for many in the energy sector. According to estimates, the Arctic could be one of the greatest untapped reserves of energy resources in the world. However exciting the proposition of tapping these resources may seem, it is an extremely expensive proposition.  Environmentalists can breathe a little easier knowing that whilst governments are attempting to make the Arctic an attractive proposition for investors, the current state of energy markets may keep those attractions on ice.

About Author

Michael Lyons

Originally from Arizona, Michael currently resides in Germany and focuses on European and Middle Eastern International Affairs issues. He received an M.A.I.S. degree from the Diplomatic Academy of Vienna, and a B.A. in Political Science with an emphasis on Foreign Affairs from the University of Arizona's School of Government and Public Policy. He has also studied at the Moscow State Institute of International Affairs (MGIMO) and worked with the Kennan Institute at the Woodrow Wilson International Center for Scholars in Washington, D.C as well as other U.S. and European Think-tanks.