China could be the future of Arctic oil

The Arctic may contain 10-15 percent of the world’s undiscovered oil reserves, with most of that oil located in the seabed of the Arctic Ocean. And China, thanks to its financial rather than military strength, could take the lion’s share.

The US Geological Survey estimates there are 90 billion barrels of conventional oil north of the Arctic Circle, enough to fuel the entire world for three years at current consumption rates.

Most of the Arctic’s oil is located within the uncontested jurisdictions of Norway, Russia, Canada, Denmark (Greenland), and the United States. This is because offshore oil is usually found in the sedimentary strata of continental shelves, and the law of the sea grants each coastal country absolute jurisdiction over the resources located there.

However, extracting Arctic oil is both challenging and expensive. Offshore drilling in this remote region requires advanced technologies and vast amounts of funding to overcome the costs and risks imposed by great distances, harsh weather conditions, limited infrastructure, and other challenges such as sea-ice.

Despite these obstacles, Arctic countries are keen to develop their offshore reserves. This is especially true of Russia, the world’s largest producer of oil. Russia’s current production comes predominantly from on-shore wells in Western Siberia, where production levels are declining.

Win-win situation?

Russia has been striking partnerships with multinational oil companies to access their experience, technology and capital. In April, Russian state-owned Gazprom entered into a partnership agreement with Royal Dutch Shell. The deal was considered so important that Russian President Vladimir Putin attended the signing ceremony himself. In June, Russia’s state-owned Rosneft concluded a similar agreement with ExxonMobil that foresees investments of up to $500bn if expectations concerning offshore reserves hold up.

But China, not Russia, could become the biggest player in Arctic oil – even though it cannot exploit that oil on its own.

China, like most countries, adheres to the law of the sea. It benefits from international rules regarding fish and other resources in the East and South China Seas, and freedom of navigation everywhere. As a result, China does not contest the rights of the Arctic Ocean coastal countries to oil reserves on the continental shelves.

However, China also knows that it can access Arctic oil through the accepted avenues of foreign investment and trade. In 2010, China provided Russia’s state-owned companies Rosneft and Transneft with $25bn to build an oil pipeline from Siberia to China. Already, the pipeline carries 300,000 barrels per day. This year, China paid Rosneft an additional $60bn to develop offshore oil fields in the Arctic. As with the first $25bn, the money was an advance against future production.

The next step would be for China to help the Russian government improve necessary services and infrastructure along the Arctic coast. Russia already uses icebreakers such as the Fifty Years of Victory – the world’s newest and largest nuclear icebreaker – to lead commercial vessels through the sea-ice. It is also establishing new search-and-rescue centres and refurbishing existing ports.

Similar opportunities exist in North America, where concerns about China gaining control over strategically important oil reserves have led the Canadian and US governments to impose restrictions on investments from Chinese state-owned companies.

Lack of infrastructure an opening for China

Canada lacks roads and pipelines to its Arctic coast and has just one deep-water Arctic port, located in Hudson Bay far south of the Arctic Circle. The US has no Arctic ports, just two functioning icebreakers, and faces massive costs to repair damage being caused to existing roads, pipelines and buildings by melting permafrost. If Beijing were to offer concrete and lasting benefits, such as funding for ports and other multi-use infrastructure, Chinese investments in Arctic offshore oil would be looked upon more favourably.

Technological limitations and high costs are not the only challenges facing companies and governments as they develop the Arctic offshore. Oil degrades and dissipates very slowly in cold water, while great distances, extreme weather, sea-ice, seasonal darkness and an absence of coastal infrastructure pose enormous challenges for any attempt at cleaning up a spill.

Already, it is estimated that Russia loses more than one percent of its oil production through leaks and spills. In 2011, concerns about Russia’s ability to carry out safe offshore oil production escalated after a drilling platform capsized and sank while being towed in the Sea of Okhotsk in the Russian Far East. The rig was owned by Gazprom, which just a few months earlier announced it was sending another floating platform to engage in exploratory drilling in the Pechora Sea north of Siberia. Similar incidents have occurred in the North American Arctic. In 2012, Shell lost control of a drilling rig while it was being towed along the Alaskan coast.

Environmentalists flex muscle

This poor track record has prompted environmental groups to campaign against Arctic oil. A focus on media advocacy, including the use of iconic symbols such as the polar bear, has given these groups substantial political leverage. Their influence affects the willingness of governments to allow Arctic offshore drilling and provide workable regulatory regimes, essential services and infrastructure.

Environmentalists have a particular problem with Arctic oil, since access to it has only become possible because of climate change, which has been caused – at least in part – by the use of oil from other regions. They worry that extracting Arctic oil will prolong our dependency on fossil fuels, further exacerbating climate change.

Up to now, the governments of the two largest Arctic countries – Russia and Canada – have shown no serious concern about climate change. But changes in public opinion, or changes in governments, could lead to new restrictions on oil, and Arctic oil in particular.

If China wants Arctic oil, it needs to encourage Arctic governments and the already involved companies to address at least some of these environmental concerns. Funding for oil spill clean-up equipment and personnel would help. So too, would diplomatic support for region-wide safety standards, such as a requirement that companies have equipment in place to drill a “relief well” promptly should a blowout occur.

Arctic oil will always be expensive oil. China could be the future – but only if it is willing to pay.

This is the first article in a three part series on the Arctic.

Michael Byers holds the Canada Research Chair in Global Politics and International Law at the University of British Columbia. He is the author of International Law and the Arctic, published this month by Cambridge University Press.