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Arctic Economy Viewed as Challenging but Emerging

View of the world diplaying the extent of arctic ice in January 2012
The extent of arctic ice in January 2012 is far less than it was in January 1980 (shown below), creating an opportunity for oil and natural gas exploration as well as infrastructure development. Image by NASA Scientific Visualization Studio based on data from the Special Sensor Microwave Imager/Sounder of the Defense Meteorological Satellite Program

Analyst firm predicts shrinking ice and rich oil and natural gas reserves will combine to create a tempting, but challenging atmosphere for exploration.

November 27, 2012—Global warming is beginning to create a tantalizing situation in the Arctic region, where shrinking summer ice cover, coupled with rich deposits of oil and natural gas have led the United States, Russia, Norway, Denmark, and Canada to start staking out the infrastructure of an Arctic economy, according to a new report by Verdantix, an independent analyst firm headquartered in London.

The report, “Ice Rush: Making the Arctic Economy Sustainable,” asserts that firms and nations investing in the Arctic should anticipate substantial risks in the harsh environment and should prioritize sustainability. 

“If there were a significant oil spill from a drilling operation, you are not going to have the same level of negative impact with communities as we saw with the Deepwater Horizon because it is a largely unpopulated area,” says David Metcalfe, the chief executive officer of Verdantix. “But, let’s say this oil spill occurs at the end of the autumn. You run into a period when there is no light for several months. To what extent has anybody ever managed to tackle a large-scale oil spill over a five-month period, at sea, with no sunlight?”

Arctic exploration creates an awkward situation for governments because of the perceived vicious cycle in which greenhouse gas emissions melt the ice, leading to oil and gas development, which then creates more greenhouse gas emissions, which then creates further opportunities for oil and gas exploration.

“I think there is a lot of sensitivity around that,” Metcalfe says. “But if you look at what governments are actually doing, they are effectively subsidizing the development of infrastructure so that will provide a platform for economic development. From our point of view, we’ve got a pure business lens on this. We are not making any kinds of ethical judgments.

 View of the world, diplaying far more of the older arctic ice which existed in January 1980 than exists now

Far more of the older arctic ice existed in January 1980 than
exists now; a new report recommends that developers consider the
harsh environment as well as environmental protection in their efforts.
Image by the NASA Scientific Visualization Studio based on data
from the Special Sensor Microwave Imager/Sounder of the Defense
Meteorological Satellite Program

“The Arctic is going to become a huge economy. To some extent, it already is,” Metcalfe says. “If you look at the number of offshore oil wells that the Norwegians have built or partially built with other oil and gas firms apart from Statoil [headquartered in Norway], it is already happening. The interesting thing is from an engineering point of view, the multiple waves and categories of infrastructure development that are going to be required.”

Earlier this year, Shell Oil, in The Hague, Netherlands, conducted exploratory drilling at two sites in the Arctic, where it has invested $4.5 billion. Delays in completing and testing a spill-response barge prevented the company from drilling into oil reserves. The company was further challenged when it had to move vessels to avoid ice floes, and then was delayed in leaving the region.

“If you saw the failures Shell had this year, clearly the risk they faced from an engineering point of view is still very significant,” Metcalfe says. “Firms like Shell are basically saying we are willing to incur significant upfront losses to develop the expertise to be able to operate in these extreme conditions. I think you have all of those issues around extreme cold and moving ice that I think still need to be tackled.”

The Russian government has also staked a strong claim for leadership in the Arctic, granting permission for a $30-billion liquefied natural gas port in Sabetta. The U.S. Geological Survey estimates Arctic oil reserves of 90 billion barrels and natural gas reserves of 1,670 trillion cubic ft.

“It’s fundamentally about a land grab for resources,” Metcalfe says. “I think in 20 years time the sheer amount of infrastructure investment that will go into the Arctic will be quite extraordinary.”

The Arctic economy will require substantial infrastructure in the form of roads, ports, and telecommunications installations. The harsh climate and shifting conditions in the region will present added challenges to the engineers on these projects, Metcalfe says.

“It’s an innovation challenge really for the engineering profession because to some extent, it’s developing engineering solutions for requirements that haven’t been there before,” Metcalfe says.

For instance, the region’s ice roads are melting and no longer reliable. That means the region will need roads constructed upon melting permafrost, and those roads will then be covered by ice and darkness for months in the winter.

Verdantix advises engineering firms to consider the Arctic as a single economic market, sharing complex climate engineering challenges and increasingly connected by emerging trade routes in the receding ice. Verdantix expects engineering firms with geotechnical expertise and environmental remediation proficiency are best positioned to reap high rewards in the coming decades.

“One almost has to take this 10- and then 20-year scenario view on what’s going to happen,” Metcalfe says. “And it’s going to be so transformed that if you just sit and think of it in a narrow way, you will miss a lot of opportunities and you’ll risk being caught out by rapid changes. This is the whole point: How much are you willing to risk up front to develop the expertise and knowledge and acquire the kind of prospecting rights where you could face either a 2-year or a 10-year period [during which] you are losing money?” Metcalfe says. “I don’t think that’s going to go away. It’s inherently unpredictable. I don’t believe anybody has the climate models that would enable them to predict how that timeline is going to move.”  



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