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Symposium 2012

Proposal - A new international dialogue about the ‘math’ of offshore oil extraction in the Arctic

The Challenge

As temperatures rise with a changing climate, Arctic sea ice melts. As a consequence, the once ice-covered Arctic Ocean becomes increasingly accessible, with implications for various economic sectors. ...

As temperatures rise with a changing climate, Arctic sea ice melts. As a consequence, the once ice-covered Arctic Ocean becomes increasingly accessible, with implications for various economic sectors. In particular, the oil and gas resources below the seafloor have whetted the appetite of the littoral states—Canada, Denmark, Norway, Russia and the United States—as well as outsiders, such as China and the European Union, which are developing or rethinking their Arctic strategies.

There should be a new international dialogue about the ‘math’ of offshore oil extraction in the Arctic.

There is a prevailing policy orthodoxy that suggests that drilling for oil offshore in the Arctic is inevitable, and that its regulation and management are the exclusive business of the Arctic states in which it will take place.  Yet the assumptions underlying the investment case for Arctic drilling are at best worrying and at worst dangerous.  They are founded on oil demand scenarios that imply unmanageable levels of climate change; and on an approach to cost and risk at the project level that does not appear to add up.  These issues are of global, not just regional significance, touching on the common and legitimate interest of people all over the world, in securing a safe climate future and protecting the unique Arctic environment. We need to re-boot our assumptions about Arctic oil extraction, beginning by initiating an international dialogue around these issues.

The scenarios underlying oil companies’ current investment decisions.

The future demand scenarios underlying international oil companies’ decisions to invest in the development of high carbon and/or technically challenging new oil resources imply unacceptably high levels of carbon emissions and climate change.  For example, Shell’s estimate that by 2050 around 65% of our energy will still come from fossil fuels, is equivalent under IEA scenarios of a 4 degree global average temperature rise. This level of temperature rise is one under which, according to scientists at the British Meteorological Office ‘Hundreds of millions of people [will be] at additional risk of hunger… significantly less water [will be] available to 1 billion people… [and] forced migration will be inevitable.’[i] Betting on the financial viability of Artic oil using these scenarios is betting on a future of dangerous climate change.

The risk/cost equation.

The immediate costs and risks of drilling in the Arctic are, meanwhile, already sufficiently high for many in the investment community to question its wisdom. For example, Nick Butler, the former head of BP's expro division, recently wrote in the Financial Times that the setbacks Shell has suffered in the Arctic should cause it to pull out. "To abandon the Arctic project would not be an admission of technical failure, nor an act of submission to the environmentalists. It would be a statement of commercial common sense"[ii].

This is because making the ‘math’ of Arctic drilling add up is tough call.  Shell and others have gone to great lengths to argue that that they can and will avoid a spill in the Arctic.  This is because, as many industry analysts have pointed out, the consequences of such a spill would be devastating for the company and for the whole enterprise of Arctic drilling. In stating his company’s intention to keep out of the Arctic oil race, Christophe de Margerie, chief executive of oil giant Total commented that "Oil on Greenland would be a disaster," he said. "A leak would do too much damage to the image of the company." The German bank WestLB announced it would not provide financing to any offshore oil or gas drilling in the region because the "risks and costs are simply too high."

Yet far from being unlikely, under current conditions many analysts believe that a spill at some point is inevitable. The U.S. Minerals Management Service estimated a one in-five chance of a major spill occurring over the lifetime of activity in just one block of leases in the Arctic Ocean near Alaska[iii]. Writing in Forbes magazine, commentator Matthew Hulbert said: "There will be another 'Macondo moment' at some stage from unconventional plays. It's just a matter of where, when, and who."[iv]

The irony is that with costs already high, many of the measures needed to mitigate against the risk of a spill could make the financial equation even less attractive for companies than it is now. This is presumably why Shell and others working in the Arctic have lobbied against regulatory interventions designed to reduce spill risk or increase preparedness.  Shell recently requested permission to drill outside their existing window (ie, when there was a higher risk of ice being present), despite a limited drilling window being one of the most basic precautions in place to protect against spill risk[v]. Previous to that, companies lobbied vigorously against provisions in Canadian law that would have required them to have the capacity to drill relief wells in the same season as any potential blow out[vi].

The political risks ‘triple lock’ of high cost, high carbon infrastructure plays.

It appears that for many, the risks of a spill are too high to justify the investment, yet the costs of projects are too high to enable companies to accept new regulatory controls of their activities that could even marginally reduce those risks.  When added to a dependence on demand scenarios that imply dangerous levels of climate change, you might be forgiven for thinking that environmental campaigners need to do little except sit back and wait for the financial and economic case for Arctic investments to unravel.

Yet the logic of lock-in tells another story. As Bill McKibben[vii] has written in his recent (and seminal) essay on the terrifying math of climate change, once companies have invested in high cost, high carbon infrastructure, their future profits are predicated on an irrevocably damaged climate.  Once companies have placed a bet on Arctic drilling, it also appears that they will work to keep down regulatory costs, despite the associated risk to the Arctic environment. And since Governments are beholden to those same companies for tax revenues and political support, and many of us are dependent on them for our pension revenues, we become bound by a powerful triple lock - financial, economic and political - to a high carbon, high risk future.

The risks being taken by companies in the Arctic then become all our risks; the math, all of our problem. It is time for a pause, to consider who should be involved in making these choices, what they mean, and how we can ensure they do not threaten our future common good.


[i] References listed here: http://greenpeaceblogs.org/2012/10/04/shell-bets-everything-on-a-four-degree-future/, more detail on IEA scenarios here http://www.iea.org/media/etp/Tracking_Clean_Energy_Progress.pdf

[ii] http://blogs.ft.com/nick-butler/2012/09/19/shells-risky-play-in-the-arctic/?Authorised=false

[iii] Revised Oil-Spill Risk Analysis: Beaufort Sea Outer Continental Shelf Lease Sale 170

http://www.boemre.gov/itd/pubs/1997/97-0039.pdf p.25

[iv] http://www.forbes.com/fdc/welcome_mjx.shtml

[v] http://articles.latimes.com/2012/aug/26/nation/la-na-nn-shell-arctic-chukchi-20120826

[vi] http://www.adn.com/2010/04/30/1258088/will-oil-industry-continue-to.html

[vii] http://www.rollingstone.com/politics/news/global-warmings-terrifying-new-math-20120719

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