Arctic Offshore Hydrocarbon

Resource Development

Past, Present and Vision of the Future

Maria Morgunova

Division of Sustainability and Industrial Dynamics

Department of Industrial Economics and Management KTH Royal Institute of Technology

SE -100 44 Stockholm, Sweden

TRITA-IEO-R 2015:02

ISSN 1100-7982 ISRN KTH/IEO/R-15:02-SE

ISBN 978-91-7595-502-5

This Licentiate thesis, with the approval of KTH in Stockholm, will be presented to public

examination for the Licentiate Degree in Industrial Engineering and Management, on Thursday, 23rd of April 2015, at 13:00 in Seminarierum Ludendo Discimus 243, KTH, Lindstedtsvägen 30,

Stockholm.

Printed in Sweden, Universitetsservice US-AB

Abstract

Energy issues have always been on the global economics and geopolitics

agenda, even though energy sources have been changing over time.

In recent years, the awareness of Arctic offshore oil and natural gas

development has escalated, yielding economic opportunities and incurring risks.

The offshore Arctic is one of ‘edges’ of the global petroleum industry. The

importance of these oil and natural gas resources extends beyond regional and

national boarders and local economies, as these activities have become a key

geopolitical, economic, and social concern. In an attempt to shed light on this

growing issue, this thesis outlines the Arctic is a link in the global energy system

and shows how it plays a special role.

The aim of this research is to provide deeper insight into offshore

hydrocarbon development activities in the Arctic. Historical approach is applied

as a main conceptual framework to provide a critical link of past to the present in

order to explore the origin and intensity of these activities in the Arctic.

This licentiate thesis presents the results of an ongoing doctoral research

project. The study provides several insights into Arctic offshore oil and natural

gas resources development in the global context via an analysis of the relevant

investments and technology from a country-by-country and historical perspective

in the maximum period time frame between 1920 and 2025. The two papers

included in this thesis explore the impact of investment and technology. This

research project illustrates the importance of several factors influencing the

Arctic offshore oil and natural gas production and highlights the most promising

areas for cooperation at the industrial and global level.

The implications of the study results can be useful for identifying and

emphasizing the factors that influence offshore Arctic hydrocarbon resource

development and investment trends, as well as making assumptions regarding

future development. Topics for further research are discussed and refined

relating to the ongoing study and the conceptual framework presented.

Keywords: Arctic, oil and natural gas, resource development, investment trends,

offshore technology, production volume, projection, historical framework

Acknowledgements

During my time as a doctoral student I have had the fortune to meet a

number of great people, who have been important in making the work on this

thesis possible and enjoyable. They contributed to creation of this thesis,

encouraged me, helped me plan the writing and discussed difficult decisions with

me.

First and foremost, I want to express my deep gratitude to my supervisor

Prof. Vladimir Kutcherov and my co-supervisor Prof. Elena Telegina for their

invaluable support, advice and knowledge. Thank you for giving me the

opportunity to develop my thoughts.

I would like gratefully acknowledge Prof. Staffan Laestadius, who

patently read my texts many times, and for the valuable feedback, reflections,

support, and advice.

I want to thank my mentors Lyudmila Studenikina, Prof. Anatoliy

Zolotukhin and Prof. Vitaliy Bushuev for encouraging deep discussions and their

willingness to help me in this process. Thank you for inspiration!

Many thanks are also due to my present and previous colleagues at Indek

and in Gubkin University, for the good times and fruitful discussions; as well as

the administrative personnel at Indek for their helpfulness and efficiency.

Finally, I would like to thank my family and friends for their love and

support, for believing in me and my activities, and helping me to overcome the

difficulties.

This thesis is only the beginning of the journey. Thank you all for

continuously challenging my way of thinking in my way forward.

Stockholm, sunny 18th

of March, 2015

Maria Morgunova

List of appended papers

This thesis is based on work presented in the following articles.

Paper I

Morgunova, M., Telegina, E., Kutcherov, V. Offshore Arctic Hydrocarbon

Resource Development: Past and Present.

Paper II

Morgunova, M. Role of technology in expanding accessible oil and natural gas

resources in the offshore Arctic.

Table of contents

Introduction ........................................................................................................ 11

Why does the Arctic matter? .............................................................................. 13

Oil and natural gas in a changing Arctic ............................................................. 18

The history of Arctic oil and gas exploration ................................................... 19

The USGS breaks the Arctic ice ...................................................................... 21

The challenges of offshore Arctic exploration ................................................. 24

Delimiting the Arctic scope ................................................................................ 29

Purpose and research questions .......................................................................... 33

Methodology ....................................................................................................... 35

Historical framework ....................................................................................... 35

The historical approach to Arctic issues .......................................................... 37

Methodological approach ................................................................................. 39

Data collection methods ................................................................................... 41

A case of Arctic offshore hydrocarbon resources: identifying factors ............. 44

Empirical data collection and sources .............................................................. 45

Research limitations............................................................................................ 48

Terminology and units ........................................................................................ 50

Study results ....................................................................................................... 54

Discussion ........................................................................................................... 57

Conclusion .......................................................................................................... 59

References .......................................................................................................... 60

Appendix ............................................................................................................ 72

Table of figures

Fig. 1: Oil and natural gas resources and production in the Arctic and

worldwide………………….………………………………………...………….22

Fig. 2: Oil and natural gas basins in the Arctic region…………………………23

Fig. 3: Oil production costs for various resource categories………………...…25

Fig. 4: Global energy-related CO2 emissions……………………………...…...26

Fig. 5: Arctic map……………………………………………………………....32

Fig. 6: Research design…………………………………………………………34

Fig. 7: The research ‘onion’………………………………………………....….40

Fig. 8: Resource classification scheme…………………………………………51

11

Introduction

Energy issues have always been on the global economics and geopolitics

agenda, even though energy sources have been changing over time. People’s

inevitable need to cook and to heat their houses can drive the energy industry. In

the reality of globalization and increasing world population - which in 2013 had

reached 7.2 billion (UN, 2013) and is projected to reach 8.3 billion (BP, 2013a) -

more people are becoming energy consumers.

Economic activity is a principal driver of energy demand, which has

increased dramatically worldwide since 2000. According to BP Energy Outlook

(BP, 2014a), 2002-2012 recorded the largest-ever growth in energy consumption

(in volume terms). Most projections foresee an energy demand growth of up to

37% from today’s demand by 2040 (WEO, 2014). Although new concepts of

sustainable living, energy efficiency and renewable energy technologies have

become more real in the last two decades, the issue of energy sufficiency is

pending. Due to energy efficiency, energy consumption can be decreased in

Europe and the United States of America (the USA) but not in the developing

world (SWP, 2014). Most projections predict that fossil fuels will dominate the

global energy balance for the next two decades (WEO, 2013, 2014; BP 2014a,

2014b; Shell, 2008); neither technological change nor market conditions are

likely to shift global fossil fuel consumption in the coming century.

Simultaneously, one of the most challenging trends in the oil and natural

gas industry is the depletion of major traditional oil and gas reserves. Peak oil, or

the time at which there is a conventional oil and gas shortage and a steep

decrease in conventional production will be unavoidable (Bentley, 2002;

Deffeyes, 2001), is a very negative view. Although it is necessary to pay

attention to the challenging trends of traditional oil and gas reserve depletion,

peak oil has ongoing relevance (Chapman, 2014); a less radical view is that peak

oil means the end of the era of cheap oil (Hirsch, 2005; Owen et al., 2010;

Robelius, 2007).

Powerful changes are occurring in the global energy system, in which

energy is both “the answer to and the cause of” urgent issues (WEO, 2014:1).

Sanctions against Russia and instability in traditional oil-producing regions are

major short-term concerns faced by energy markets. Changing architectonics of

global energy balance and production bring additional instability to the markets.

12

It is not easy to change the global energy trend (WEO, 2014:1). The depth

of energy needs and emergent issues of energy supply security are the subjects of

global energy concerns. The energy industry is searching for alternatives.

Currently, world petroleum production is dependent on the Middle East and

Northern Africa, other politically unstable suppliers and peak oil fears. The

global community has already begun to prepare a transition to unconventional

sources of oil and other alternatives (Greene et al., 2006). For example, the

heavy-oil fields of Venezuela, the Athabascan oil sands in Canada and shale gas

in the USA have already found their places in the global energy balance. The

temporary solution lies in the world’s huge unconventional hydrocarbon resource

potential: oil shales, coal bed methane, gas hydrates, shale gas, deep-water and

ultra deep-water resources, etc., all of which are opened up by new technologies

and market needs (Bardi, 2009; Chapman, 2014; Greene et al., 2006; Rogner,

1997). These unconventional resources are less attractive compared to

conventional light crude oil because of their higher price and need for new

technologies (Adelman, 2003; Greene et al., 2006). However, they are highly

promising (IEA, 2008) and sometimes already considered by energy reviews as

conventionals (Sorrell et al., 2010).

In an effort to guarantee energy independence and the reliability of energy

supplies (for instance Bielecki, 2002; Correljé and van der Linde, 2006; Stern,

2002, Winzer, 2012 and others), both developed and developing countries

continue to move forward in the search for new resources. Today, the above

mentioned challenges - along with new exploration approaches and

comprehensive technologies - have moved the energy frontier to distant, hard

accessible and politically stable (Heininen, 2005) regions such as the Arctic

(Zolotukhin et al., 2012).

The offshore Arctic is one of ‘edges’ of the global petroleum industry.

Corporate and government interest in oil and natural gas activities in the Arctic

region has recently occurred with renewed force and has become a key

geopolitical, economic and social concern (ex. Palmer, 2009; Stokke, 2011;

Blunden, 2012; and others). However, the origin and intensity of these activities

in the Arctic have not been fully revealed. The Arctic is a link in the global

energy system and plays a special role. It is an important region from the

perspective of sovereignty, mineral resources extraction and transportation, and

raises issues related to indigenous interests, involvement of other Arctic

countries, and potential sources of economic advantage.

13

Why does the Arctic matter?

The Arctic covers as much as 11% of the world’s surface area. It is the

region of spacious Northern territories and unbounded Arctic waters. This is only

one reason that the Arctic receives so much attention. Many studies argue the

importance, power and causal relationships of the factors that drive interest in the

Arctic. The Arctic is “an emerging space of and for geopolitics” (Dittmer et al.,

2011:202) and a region of the globalized world with a variety of intersecting

economic and political interests.

Today, there is a wide-ranging debate on the Arctic. To address a variety

of global challenges, more research is focused on regional socio-economic and

geopolitical development, environmental issues, geopolitical claims, potential

energy resource extraction and increasing competition for resources. The

following literature review on Arctic issues serves a double purpose: it provides

both a research background and a way to identify the forces that drive interest in

the Arctic.

The reviewed literature addresses the social sciences (particularly

economics) and energy issues. It consists of recently published books, reviews

and academic papers. The targeted literature represents studies of aspects of

geopolitics, economics and resource management; it also estimates and forecasts

the Arctic’s future both qualitatively and quantitatively. The periodical literature

that studies the Arctic and its potential resource utilization (e.g., hydrocarbons,

other mineral resources, water, biological resources, transport routes, etc.) has

significantly increased during the last decade, providing ample opportunities for

exploration. The keywords for the literature search were the following: Arctic,

shelf, offshore, development prospects, natural gas, oil, petroleum, hydrocarbon

resources, natural resources, extraction, production, fields, Arctic future,

development factor, factors influence, drivers, driving forces, history, historical

study, and historical perspective.

Numerous recently published books research Arctic geopolitics, resource

and sovereignty issues from a wider perspective. Charles Emmerson’s “Future

History of the Arctic” (2011) explains the history of the Arctic in a globalized

world, describes its contemporary state and aims to understand its future.

Michael Byers’s (2009) book, “Who owns the Arctic? Understanding

sovereignty disputes in the North”, is tightly focused on sovereignty issues. A

more precise investigation of the Arctic’s place in international relations in a

14

historical, political, and legal context is conducted by David Fairhall (2011). The

focus on resources is presented as the ‘Arctic gold rush’ by Roger Howard

(2009). There is a broad discussion on hydrocarbon resources that might be

offshore. The key issue of these studies is the Arctic as a region, which has

become prominent in global politics and economy due to its re-evaluated

importance. These studies are mostly qualitative. They are based on historical

data and review the current legal framework, geopolitical and economic situation

as described in both primary and secondary sources. Young (2011) characterizes

these books on the Arctic as “explaining the ‘new’ Arctic in terms easily

digestible for the wider public” with large-scale socioeconomic and geopolitical

processes. To Young (2011), this literature provides the raw materials to

construct answers to global questions: in most cases, geopolitics is taken as a

starting point.

Reviewing the academic literature, the second-largest block of topical

literature is dedicated to Arctic governance and changing management in the

Arctic region (Holland, 2002). During the past twenty years, Arctic nations have

formed “an initial framework for cooperation” (Huebert & Yeager, 2007:5) to

address common challenges in the region, beginning with some environmental

and nature-protection treaties. This is the example of the Arctic Council - the

best-known institute of Arctic governance arrangement (Smits et al., 2014) -

which was formed to address environmental issues and to promote both

sustainable development and cooperation among governments, institutions and

indigenous people. However, those same factors comprise the politics in the

Arctic controversy (Emmerson and Lahn, 2012), including the high political

tensions resulting from the opposing interests of the interested parties at different

levels. Territorial claims by the five Arctic countries (Dodds, 2010) and other

demarcations (Borgerson, 2008; Huebert, 2003) represent only a small portion of

Arctic disputes. Ongoing Arctic territorial claims, climate changes and the

accessibility of sea routes have resulted in considerable geopolitical speculation

(Dodds, 2010:72). In the fields of diplomacy and international relations, some

authors argue, the Arctic is a special region that consists of remote lands of

several Northern states (Young, 2005) that are governed from faraway political

centers. This makes Arctic governing and the Arctic region itself a special case.

Others argue that there are no political structures to provide stable regional

development (Borgerson, 2008). Some differences in regulatory regimes,

standards and overall governance may be found among the Arctic states, thus

causing international relations in the region to take on a more confrontational

character. Military and sovereignty issues in the Arctic unfold in a more radical

15

way, including the possibility of military conflicts (Dittmer et al., 2011; Huebert,

2003; Jensen and Rottem, 2010); opposing opinions (Baev, 2007) target

cooperation and stability. However, the Arctic is a truly important strategic (and

military) region, especially for Russia and the USA (Heininen, 2005). Generally,

the Arctic is a stable region with normalized political relationships among the

Arctic states (Emmerson and Lahn, 2012:32).

The Arctic is at the centre of numerous climate studies and reports. This

is because of the region’s natural vulnerability, and especially in the face of

climate change (Arctic Climate Impact Assessment, 2004; IPCC, 2007; and

others), due to dramatic recent changes and the speed with which those changes

have occurred (Comiso et al., 2008). Sea ice is melting due to increasing

temperatures (for instance, see Kattsov et al., 2011; Ridley et al., 2007), and

many other events (Hinzman et al., 2005) create challenges for nature (Derocher

et al., 2004), business and society. Climate change affects economic sectors and

mining industries, along with both infrastructure and transportation (Prowse et

al., 2009). Simultaneously, some authors argue that climate change is the

primary cause of the ‘Arctic rush’ (Borgerson, 2008; Ebinger and Zambetakis,

2009; Peters et al., 2011) and the most suitable area to cooperate in the region

(Numminen, 2010). From a global perspective, climate change in the Arctic is

becoming a global environmental security issue (Dalby, 2002), which has

implications for all of the Arctic’s activities.

Indigenous peoples’ rights (Nicol, 2010), recognition of their rights and

protecting the security of their traditional lifestyles (Tennberg, 2010) are

included among the Arctic’s important issues. Indigenous recognition and

diplomacy are not new, but recently have been noticed (Beier, 2010). Indigenous

people have become important political actors, raising their voices to

communication about Arctic political and economic activities.

There are numerous economic opportunities in the Arctic region. Natural

resource management is of a complex Arctic issue; sometimes, it is considered a

separate factor in the international affairs context (Borgerson, 2008; Powell,

2008; and many others). The Arctic Seas are opening up for shipping because of

melting ice. This creates legal issues (Jensen, 2008) and implicates social and

economic interests for indigenous people, Arctic governments and non-Arctic

states (like China). Shipping also provides new opportunities to explore the

Arctic resources (Blunden, 2012; Brubaker, 2001). Use of the Northern Sea

Route (NSR) and The Northwest Passage (NWP) increases possibilities both for

national (Russian and Canadian, respectively) economic development and for

16

international transit (Granberg, 1998; Parker and Madjd-Sadjadi, 2010).

Additional ice melting can improve local economies (Somanathan et al., 2009) if

geopolitics (such as sovereignty claims and military issues) related to shipping

routes remain stable and favor international transit.

Consequently, numerous factors make the Arctic a challenging and

interesting issue to explore: geopolitics, governance, climate change, indigenous

issues and economic opportunities. “Lawyers, energy economists and military

strategists trained to envisage the northern regions in very different ways”

(Powell, 2010:76) stressing their own interests. Most disciplines that address the

Arctic have a clear perspective, but it is difficult to choose between “treating the

Arctic as a suitable subject for an integrated [policy]” study or “a discipline-by-

discipline functional basis” (Kildow, 1983:232). Arctic issues enter a whirligig

in which the Arctic is presented as ‘bonanza’, a region with new strategic

transport routes and immense biological resources (Dittmer et al., 2011; Powell,

2008) in which resource exploration requires further development of the region’s

infrastructure (Heininen, 2005), and the prospects of Arctic offshore oil and gas

exploration advance governmental development (Humrich, 2013:80; Huebert

and Yeager, 2007:4). Again, the indigenous community participates in economic

and industrial changes to secure their rights (Nuttall, 2006; Stern, 2006). Overall,

the urgency of the delimitation issues, economic factors and technological

possibilities motivates the international and business communities to elaborate

further governance in the Arctic region, namely, offshore.

The study area is highly promising because “not all activities will be what

they seem to be” (Avango et al., 2010:10). This study provides a space to explore

these activities, particularly given the Arctic’s changing geopolitical and

economic setting. Following the aspiration of Arctic pioneers, the study aims to

discover the Arctic of economic opportunities and to obtain deeper insight into

offshore hydrocarbon development activities. Lack of quantitative data on oil

and natural gas fields’ exploration and development costs, oil and natural gas

production costs and production volumes set according to commercial value

limits most studies to qualitative estimations and forecasts, whereas empirical

and historical data provides a variety of ways to untangle these issues. In this, the

central issue is the gap in structured, longitudinal and consequential research into

Arctic offshore hydrocarbon resources development. Aiming to provide deeper

insight into Arctic offshore hydrocarbon development activities, several

questions arise. The first question relates to a simple delimitation, because the

Arctic is huge. What exactly is the Arctic and the offshore Arctic? The second

17

issue that must be clarified is the following: What is the Arctic offshore oil and

gas experience? There are many oil and gas projects worldwide that can be

called ‘Arctic’ or that at least are similar to ‘Arctic conditions’. Finally, we

examine the primary question that targets our goals: What is the scope of Arctic

offshore oil and natural gas development?

18

Oil and natural gas in a changing Arctic

Arctic regions are either northern regions or the five Arctic countries with

sea outlets - Canada, Greenland (Denmark), Norway, Russia and the USA - and

the three Arctic countries without sea outlets - Finland, Iceland and Sweden.

Fewer than 4 million people permanently live in the Arctic (UNEP, 2008). At the

circumpolar level, the Arctic region with 0.2% of the world’s population

generated 0.5% of global gross domestic product in 2005 (Mäenpää, 2008).

Today Arctic is a region in which economies are built on natural resources.

These resources are used both for internal consumption and for exports.

Following is some information about the population and GDP distribution of the

Arctic economies. According to Duhaime and Caron (2008), the first group of

Arctic regions is fully oriented towards large-scale extraction of non-renewable

resources as fossil fuels and minerals (i.e., oil and natural gas on the North Slope

of Alaska in the USA, the Khanty-Mansi Autonomous Area in Russia, nickel in

Norilsk and the Kola Peninsula in Russia, diamonds in the Northwest Territories

of Canada and gold in Chukotka in Russia). The second group uses natural

renewable resources such as fish and wood. The Russian Arctic economy is the

largest. It generates more than 10% of Russia’s GDP (approximately 70% of the

Arctic’s total GDP) and more than 20% of its exports (oil, natural gas, minerals,

fish). Canada and Denmark (Greenland and the Faeroe Islands) take second and

third place after Russia by Arctic territory size, but both their populations and

their economic activities are much lower. In other Arctic countries - Finland,

Iceland, Norway and Sweden - population and industries are relatively large

compared to national levels. In Canada and the USA, the Arctic population is

approximately 1% of the country. Economic growth in the Arctic regions is

double that of non-Arctic regions. Growth rates are very high in regions that

recently have started to produce oil and natural gas (e.g., Russia’s Evenk

Autonomous Area). At the same time, the spread between regions’ economic

development and industrial distribution is relatively substantial. Four Arctic

regions generate more than 60% of the Arctic’s total GDP (the Khanty-Mansi

and Yamal-Nenets Autonomous Areas in Russia’s Republic of Sakha and Alaska

in the USA). In addition to the Arctic’s substantial economic opportunities, the

socio-ecological impact of extractive industries is significant and hydrocarbon

resources play a substantial role.

19

The history of Arctic oil and gas exploration

The Arctic region was not always economically oriented toward resource

extraction. Historically, the scope of human activity in the Arctic has

significantly changed. Previously, people challenged the Arctic’s harsh climate

conditions and remoteness; they strived for uncertainty and were willing to be

the pioneers in the land of eternal cold and ice. In the beginning of the 20th

century, the North Pole “was one of the very last places on earth which had not

been mapped, explored or claimed by a ‘modern’ state” (Emmerson, 2011:99).

Military and sovereignty factors attracted most of the attention both before and

after the Second World War. Only 50 years later, a new, extremely powerful and

important factor arose. That factor was energy economic needs in conjunction

with geopolitical factors, which together have transformed the Arctic into a

“major goal of exploration” (Emmerson, 2011:15).

Commercial oil and gas activities have been taking place in the Arctic for

more than 90 years, starting in the 1920s in Norman Wells in Canada’s

Northwest Territories, northern Russia and Alaska. During World War Two,

extensive oil and gas exploration was launched in northern Alaska, northern

Russia and Canada’s Mackenzie Delta (AMAP, 2007). In the 1950s, new trends

in Arctic exploration arose and further development and understanding of the

great importance of the northern territories caused a transformation in public

opinion about the economic value and meaning of the region.

During the 1960s and 1970s, events in the Middle East provided powerful

and persuasive reasons for Arctic development. Political instability in the major

oil exporting countries made development of oil fields in the Arctic both

commercial and advisable. When oil prices significantly increased in the 1970-

1980s, Arctic oil and natural gas became an attractive investment for both

governments and companies.

In the USA, oil and gas industry in the Arctic began to develop in 1958

with industry-sponsored exploration drilling. During 1968 and 1969, 13

discoveries were made, including large oil and gas reserves on Alaska's North

Slope. The Trans-Alaska Pipeline System was completed in 1977, allowing

production to begin at Prudhoe Bay and nearby fields. The 1960s were

productive for oil and gas discoveries in Russia in the Yamalo-Nenets

Autonomous Okrug and the Nenets Autonomous Okrug, where production began

in 1972 and the 1980s, respectively. In Canada, cooperation between government

and industry resulted in the creation of the Panarctic Oils Company. Sometime

20

later, in the 1970s, Canadian government investments led to offshore exploration

drilling and huge discoveries in the Mackenzie Delta and the Beaufort Sea. Since

that time, nearly 90 wells have been drilled in the Beaufort Sea, 34 wells have

been drilled in Nunavut’s High Arctic Islands and 3 have been drilled in the

Eastern Arctic offshore (AMAP, 2007). Greenland also entered the Arctic

hydrocarbons exploration ‘club’ with test drillings in 1976 and 1977 (and later in

1990), which occasionally failed to prove economic feasibility of resources

development.

Though the exploration and development of Arctic hydrocarbon resources

is both challenging and expensive, and much of the region lacked the necessary

infrastructure to transport oil and gas to the major markets, billions of dollars’

worth of both oil and gas has been produced in the Arctic regions of Canada,

Norway, Russia and the USA since the 1970s (AMAP, 2007).

By the 1980s and 1990s, oil and gas activities extended further along the

Arctic frontiers. In Canada, the small field Bent Horn was developed in the

islands of the High Arctic thanks to a new technological approach. The Norman

Wells field made a comeback in the early 1980s when a pipeline was built south

to Alberta, though a bit later oil and gas exploration and production activities in

Canadian Arctic almost stopped, because of a lack of infrastructure, changing

market conditions and governmental policies. Norway started operations in the

Barents Sea in 1981 and the Norwegian oil company Statoil discovered a huge

Snøhvit gas field. Offshore exploration in Russia have also opened up large

resources potential, as in the Shtokman and Prirazlomnoe fields, but the breakup

of the Soviet Union led to a steep decrease in production in the 1990s.

Conversely, a new period of exploration of northern Alaska arose. Exploration

extended to offshore frontiers, new offshore discoveries were made, near shore

fields were developed and production began.

Interest in exploring the Mackenzie Delta and Beaufort Sea has increased

in recent years with the announcement of the construction of the Mackenzie

River Valley pipeline. New licenses were issued in these regions in 2007 and

2008. The North Slope may also enter an intensive exploration phase if a natural

gas transportation pipeline is built in the near future. Greenland’s offshore

development strategy changed in 2010, when oil company Cairn Energy

discovered hydrocarbons for the first time and the first offshore oil and gas

exploration licenses were granted (Ernst&Young, 2013).

21

Comparatively high oil prices, political instability in major oil and gas

exporting countries, government incentives and new technological approaches

opened the Arctic frontier to future oil and gas production in the 2010s. Today,

an exploration process is unfolding in Alaska (US), offshore Greenland, the

Norwegian Sea and the Barents (both Russia and Norway) Sea. The first oil from

the Beaufort Sea could be delivered as early as 2020 and from the Chukchi Sea

after 2022. Norway plans further expansion of the Barents Sea as its main

petroleum province in future years (Ernst&Young, 2013). Russia’s goal is to

intensify the development of Arctic petroleum resources offshore as its primary

strategic issue related to its stability and prosperity, which is why two state-

owned companies - Gazprom and Rosneft - are advancing seismic research and

exploration of oil and natural gas fields in Arctic waters.

As can be seen from this brief historical overview, the factors that

stimulate Arctic oil and natural gas development are not very different from

those encouraging today’s interest in exploring the Arctic region. They include

the geopolitics of energy resources, the economic interests of both industry and

government, strategic and governance issues, and the availability of technologies

and infrastructure. These factors shape decisions about exploring hydrocarbon

resources in the Arctic.

The USGS breaks the Arctic ice

There are undoubtedly issues other than external ones for the economic

interest in exploring Arctic resources. For example, there is a possibility of

highly promising oil and natural gas resources according to the United States

Geological Survey estimates (USGS, 2008a, 2008b). At the same time,

probability assessments of Arctic hydrocarbon resources made by United States

Geological Survey (USGS, 2000, 2008a, 2008b), Wood Mackenzie (2006) and

others are controversial. A USGS (2000) study has shown future prospects for

Arctic oil and natural gas exploration and has influenced the new interest in

Arctic offshore oil and natural gas exploration. Another authoritative source -

Wood Mackenzie (2006) - provided a very skeptical overview and made an

estimate of undiscovered resources much lower than that of the USGS (2000),

with significant amount of those resources deemed very remote and expensive.

However, the ‘bonanza’ had already occurred. Further USGS studies from 2008

and later provided scientific justification to explore.

22

The U.S. Geological Survey Circum-Arctic Resource Appraisal (CARA)

(USGS, 2008a, 2008b) is based on probability-geological methodology and

appraises technically recoverable resources from large fields. The study

estimates, that the Arctic holds approximately 22% of the world’s undiscovered

conventional oil and natural gas1

(approximately 30% of the world’s

undiscovered natural gas resources, 13% of the world’s undiscovered oil

resources, and 20% of the world natural gas liquids (NGL), which are included

in natural gas resources, Fig. 1) (USGS, 2008c).

* By the end of 2013 (BP, 2014a)

** Sum of estimates of undiscovered hydrocarbon resources in oil- and natural-gas-bearing provinces

north of the Arctic Circle by 2008 (USGS, 2008b)

Fig. 1: Oil and natural gas resources and production in the Arctic and worldwide,

million tons of oil equivalent (mln toe)

Approximately 80% of these resources are predicted to be offshore, but in

relatively shallow water (less than 500 meters) (Gautier et al., 2009). These

resources are primarily located in the West Siberian Basin and the East Barents

Basin (47%) (Fig. 2) and a significant portion is predicted to consist of natural

gas and NGLs (94%) (Budzik, 2009). The 10 largest oil and natural gas

provinces account for 93% of the total undiscovered resources. Approximately

61 large oil and natural gas fields have been discovered within the Arctic Circle:

43 in Russia (35 in the West Siberian Basin), 6 in Alaska, 11 in Canada’s

1 Arctic Mean Estimated Undiscovered Technically Recoverable.

0

100000

200000

300000

400000

500000

total world proven

reserves*

Arctic total mean

undiscovered

resources**

mln

to

e

oil natural gas

23

Northwest Territories, and 1 in Norway. The Eurasian side of the Arctic is more

natural-gas-prone, whereas the North American side is more oil-prone.

Fig. 2: Oil and natural gas basins in the Arctic region (Budzik, 2009)

Arctic production volumes (not only offshore) have reached billions of

cubic meters of both oil and natural gas. The Arctic share of oil production is

approximately 10% of global production, and it share of natural gas production is

approximately 21% of global production (by 2008, including both on- and

offshore) (Glomsrød and Lindholt, 2008). Considerable resources remain to be

exploited. According to Budzik (2009), approximately 550 oil and gas fields

have been found in the Arctic basins. There are several world-class petroleum

provinces (northern Alaska, the East Barents Sea, and the South Kara/Yamal

basins) where the largest discovered fields are located (such as Urengoyskoe and

Shtokman fields, Prudhoe Bay).

24

Although oil and natural gas resource potential in the Arctic, especially

offshore, is very promising, the feasibility of their extraction is questionable and

sometimes very speculative. Thus, estimations of the Arctic undiscovered

hydrocarbon resources do not consider technological or economic risks (see

Gautier et al., 2009). Overall, the Arctic offshore oil and natural gas resource

potential is highly debatable because of the need for advanced technologies and

massive long-lead capital investments. Their extraction is challenged by

instability in terms of weather conditions, the sensitive environment, and so on.

The challenges of offshore Arctic exploration

Extremely promising resource-appraisal forecasts on the peak in oil prices

resulted not only in huge interest and new leaps in oil and gas exploration

activities in the offshore Arctic but also in the need for huge investments,

innovative technologies and ecological monitoring. However, this strong interest

has some surprising elements both on a global and a regional level.

The World Energy Outlook (WEO, 2008) paid a great deal of attention to

unconventional hydrocarbon resources, including in the Arctic. In 2008, at the

beginning of the ‘Arctic rush’, the cost of Arctic oil resources was expected to be

very high (between $40 and $100 per barrel, when oil prices were approximately

$80-90 before the economic crisis of 2008-2009) (IEA, 2008; BP, 2015) (Fig. 3).

The same observation applies to Arctic natural gas resources. Arctic offshore

hydrocarbons extraction costs are expected to be even higher. If the economic

feasibility of Arctic hydrocarbon resources is not obvious, the question is what

drives development activities.

The expectations for Arctic offshore oil production were very modest -

less than 200 thousand barrels per day (10 mln toe per year) by 2035 (IEA, 2008).

Simultaneously, as mentioned above, there are numerous companies pursuing

exploration projects, including as Shell in the Chukchi and Beaufort Seas,

Russian companies Rosneft and Gazprom in the Barents and Kara Seas, Cairn in

offshore Greenland and international energy companies such as ExxonMobil and

Eni. Some development could move more quickly. If offshore development

plans are realized, total Arctic offshore production may increase considerably

(WEO, 2013:472). However, the oil production costs for various resource

categories set forth in Fig. 3 do not include technological progress. New

25

technologies could probably lower these costs, although they are high and the

environmental risks substantial.

Fig. 3: Oil production costs for various resource categories, USD/bbl (IEA,

2013a; EIA, 2015), adapted by the author

Technologically, some difficult questions have arisen. Insufficient

geological and geophysical knowledge about the Arctic offshore areas

(especially in the Russian Arctic); harsh climate environmental conditions; a lack

of operation, storage and supply facilities; and health, industrial safety and

environment issues all have influenced development plans.

Changing climate issues and possible environmental impacts strongly

influence offshore hydrocarbon resources development (Fig. 4).

26

Fig. 4: Global energy-related CO2 emissions (Shell, 2014:71)2

This is true not only because of melting ice or permafrost, infrastructure

hazards (Prowse et al., 2009), etc., but also because of changing policies on CO2

and other emissions. International climate negotiations are moving into a critical

phase and important decisions should be made during 2015 (IEA, 2014:86-87).

The United Nations Framework Convention on Climate Change (UNFCCC) has

pursued a low-carbon track that counteracts Arctic offshore development plans.

Policy and environmental communities have requested more coordinated

decisions that target CO2 emissions reduction. This places stress on resource

economics (Shell, 2014:70-71), which means both higher costs and better

technologies.

Ecological issues are pending due to challenging environmental and

operational complexity, both of which can cause pollution and leakages. There is

very limited knowledge about the industrial and ecological safety of Arctic

offshore hydrocarbon resources (for instance, Marichev, 2013), although it is

broadly questioned in academic sources and the mass media. The oil and natural

gas industry has made significant advances in detecting, containing and cleaning

up spills in Arctic environments (JIP, 2013). However, oil-spill response

2 CO2 emissions reduction is considered under three scenarios: ‘Oceans’, ‘Oceans – clean and green’

and ‘Mountains’, applying different economic, social and governance parameters.

27

technologies (for example, in-situ burning3) are far from admissible, and it is

difficult to estimate the consequences of an accident in the Arctic seas.

According to the National Snow and Ice Data Center (NSIDC, 2014) and

the Alfred Wegener Institute for Polar and Marine Research (AWI, 2014), the

Arctic climate has experienced significant change, including sea ice retreat and

permafrost melt. One example of risk estimations is the estimation of public

infrastructure damages caused by climate change in Alberta (Canada) (Larsen et

al., 2008). Energy infrastructure and the transport system are the most vulnerable

to the effects of climate change (from now until 2030, the likely share of

additional costs will be as follows: roads 25%, water and sewer systems 30%,

airports 24%), which would have economic and social consequences in all

sectors of human activity. Due to substantial future climate challenges, some

argue the need to rethink the oil and natural gas industry business strategies in a

sustainable manner.

Another serious ecological concern is Arctic methane (Dyupina and van

Amstel, 2013; Kvenvolden et al., 1993), which is now more easily released,

possibly from destabilized gas hydrates. The primary reason for this could be

climate change and ice cap melting (Reagan and Moridis, 2007; Shakhova et al.,

2010). The risk remains uncertain, but accurate scientific investigation is needed,

especially of offshore oil and natural gas activities, which can affect and be

seriously affected by methane flux (Dyupina and van Amstel, 2013).

Academics see the future challenges of oil and natural gas production in

the Arctic in a different way, and have expressed additional concerns. The study

by Economides and Wood (2009) analyzes future gas prospects but barely

discusses the potential of Arctic offshore petroleum resources. More short-term

narrow forecasts of Arctic oil and natural gas exploration (such as that by

Johnston, 2010) are based on the quantity and location of oil and gas reserve

projections made by the United States Geological Survey (USGS, 2000, 2008a).

Proactive region-focused studies are made by Soderbergh et al. (2010), who

examine Russian natural gas production based on reserves in existing giant fields

and their potential export capacity to Europe, and by Glukhareva (2011), who

studies oil and natural gas resources production and transportation prospects

from the western Russian Arctic. Soderbergh et al. (2010) argue that the Yamal

Peninsula is the most promising oil and natural gas bearing region. Although

3 When controlling the burning of spilled oil with fire booms, 50-98% of spilled oil can be burned

(JIP, 2013).

28

most of Russia’s undiscovered natural gas resources are in the Arctic region,

primarily offshore, its discovered resources are not commercial in the near term.

Moreover, it is predicted that those resources are not likely to have an impact on

production before 2030, but post-2030 results are also under consideration. For

Arctic offshore fields, the bottlenecks are primarily financial resources and long

project lead times. One outcome study suggests three scenarios for future

European Union (EU) gas supply from Russia, which is rather optimistic.

Lindholt and Glomsrød’s (2011, 2012) long-term studies of the robustness of the

Arctic supply and resources accessibility suggest a model that describes future

oil and natural gas demand and supply. The model’s main variables represent

prices, costs and reserves, with a focus on profitability. Those authors illustrate

future Arctic oil and natural gas supply and demand under three scenarios - the

reference scenario (based on IEA data), the high oil price scenario and the low

resource scenario. According to the relevance scenario, future shares of global

production are predicted at a level that is 8-10% lower than today because of the

rise in unconventional hydrocarbons production. Harsem et al. (2011) suggest an

analysis of economic, geopolitical and climate factors that influence future oil

and natural gas prospects in the Arctic in a very broad manner. All of the articles

describe counteracting trends in the energy industry and oil and gas resources

production forecasts, which are dependent on a set of variables. Hasle et al.

(2009) study the decision-making process in exploration activities in the Arctic

under the pressure of environmental risks.

To summarize, in the Arctic’s challenging external and internal

environment with high geopolitical turbulence, oil and natural gas projects are

longitudinal and demand both investments and technology. These activities and

future trends should be assessed and measured to enable an understanding of the

question for the Arctic’s hydrocarbon resources.

29

Delimiting the Arctic scope

Arctic oil and gas activities imply the broad variability of geographical

and physical parameters: deposits located offshore, onshore or partly onshore,

explored from on- or offshore installations, located in Northern or Arctic seas,

seasonal ice-covered seas or ice-free water. Moreover, Arctic borders may vary

depending on governance, average temperature, vegetation, permafrost, etc.

(Bjørnbom, 2014). The Arctic offshore area should be specified and described

for the purposes of research and data collection because the specific area studied

has a direct influence on data collection and interpretation.

According to some publications in professional oil and gas magazines,

e.g., Eie and Rognaas (2014), the Arctic begins at 67° Northern latitude.

However, those authors underline a primary area of confusion: the offshore oil

and natural gas industry tends to ascribe some projects to the Arctic that are

located far from the Arctic Circle. Energy companies classify projects due to

harsh (Arctic-alike) weather conditions with a broad variability of geographical

and physical parameters. Baffin Bay Sea is covered by ice more than 6 months

per year. However, climate conditions in the abovementioned areas can be much

less harsh than they are inside the Arctic Circle.

Arctic weather conditions are defined as including extreme cold (less than

-40°C), severe storms, underwater and subwater ice, frequent and long-lasting

fog, permafrost, shallow seawater areas, strong sea currents, gusty winds (up to

36 m/sec), severe ice conditions, sea bottom plowing, darkness and considerable

sea level changes (up to 5 m) (NSIDC, 2014; Bellona, 2007). The classical,

widely used definition of the Arctic region is based on a parameter of an average

temperature of the warmest month below 10°C (Köppen–Geiger climate

classification, Köppen, 1936). Due to changing climate conditions, this border

may vary from year to year. It does, however, include the vast Arctic Ocean, and

onshore parts of the Arctic region have an average temperature line during the

warmest month of below 10°C.

In addition to the climate-related definition of the Arctic, there is a

technical definition. Though technology level varies significantly, the common

technological trend in Arctic offshore exploration is subsea, automatized,

remote-controlled and unmanned drilling and production units (RG, 2014). There

are few examples of such technologies worldwide, and probably only single

example in the Arctic offshore - the Snøhvit natural gas project in the Barents

30

Sea. Some of the Arctic’s oil and natural gas deposits are located partially

offshore and are developed both from onshore and offshore facilities. Those

located only partially offshore can also relate to the Arctic offshore experience as

an ‘entry point’ to the Arctic offshore.

Statoil has offered a more practical definition that highlights three Arctic

zones; the company argues that the “Arctic is not only the Arctic” (Reuters,

2014). These three regions are the workable Arctic, the ‘stretch’ and the extreme.

The Norwegian Barents Sea and Canadian East Coast are examples of the

‘commercial Arctic’. However, exploration is occurring beyond the ‘workable’

Arctic. Attempts are being made to pioneer along the frontiers, such as the

Chukchi Sea, Russia’s Western and Eastern Arctic seas, and Greenland’s

offshore, which are close to ‘the stretch’ and the extreme Arctic.

According to AMAP (1998), a merely geographical definition contains

variations in temperature and permafrost. The Arctic region is described through

a variety of physical, geographical and ecological parameters: geography,

climate, vegetation, meteorology, geology and marine environment (Table 1).

However, only a few factors - geography, climate and vegetation - are used in the

AMAP definition. The first factor is climate boundaries (north of the 10°C July

isotherm) (Linell and Tedrow, 1981; Stonehouse, 1989; Woo and Gregor, 1992;

cited in AMAP, 1998) and the presence of permafrost (Barry and Ives 1974;

cited in AMAP, 1998). The second factor is treeline, which is a vegetation-

related Arctic boundary (north of this line, trees do not grow). The third factor is

geographical (Arctic Circle). There are also three types of Arctic areas that are

classified by AMAP (1998) depending on a combination of the above-referenced

factors: High Arctic, Low Arctic and Sub-Arctic (region south of the Arctic,

Linell and Tedrow, 1981, cited in AMAP, 1998), all of which are also implied in

Statoil’s practical definition.

Table 1: Parameters of Arctic boundary definition (AMAP, 1998:9-24)

Parameters Definition

Geographical Area north of the Arctic Circle (66°32'N)

Climate (temperature) Area north of the 10°C July isotherm (mean July temperature of 10°C);

the presence of permafrost

Vegetation Terrestrial Arctic (the northern limit beyond which trees do not grow)

Ecological High Arctic, Low Arctic and Sub-Arctic (based on a combination of

climate and vegetation parameters)

Marine

Oceanographic characteristics (along the convergence of cool, less-

saline surface waters from the Arctic Ocean and warmer, saltier waters from oceans to the south)

31

The political and administrative definitions of the Arctic region may

deviate from the natural and geographical definitions. Emmerson and Lahn

(2012:9) argue that the Arctic is not likely to become a “truly single regulatory

space”: international organizations and Arctic countries define it differently

based on “environmental conditions, geological prospectivity, physical

accessibility, population levels, economic development and political salience”.

For example, the International Maritime Organization (2010:6) defines the

Arctic solely as the Arctic Ocean, although Arctic countries identify as Arctic

those areas north of 60°. However, if to look to the 60° parallel, some onshore

and offshore areas and some other countries enter the research scope: Iceland and

its waters, some territorial waters of the UK, half of Russia, etc. If we choose the

‘lower’ 60° latitude, the Arctic becomes too broad.

Finally, USGS reports (USGS, 2008a), scientific publications (Gautier et

al., 2009) and the US Energy Information Administration (Budzik, 2009), all of

which have the purpose of evaluating Arctic oil and natural gas resource

potential, clearly define the area of research as all areas north of the Arctic Circle

(66.56° (66°34′) north latitude).

To conclude, there is not one Arctic, but many (Emmerson and Lahn,

2012), which are defined to meet particular needs. For example, for oil and

natural gas development the key distinction is onshore versus offshore. AMAP

(1998) modifies the Arctic boundary to include “elements of the Arctic Circle,

political boundaries, vegetation boundaries, permafrost limits, and major

oceanographic features” and to address “source-related research issues …

within and outside the Arctic” (AMAP, 1998:10).

In this research, the focus is Arctic offshore oil and natural gas resources,

and the interest is to exclude a loose interpretation of the Arctic offshore area.

Aiming for an applicable, simplistic definition for the purposes of research in the

offshore Arctic area, and taking into account the most authoritative Arctic oil and

natural gas resources research appraisal by USGS (Gautier et al., 2009), this

study was limited only by geographical parameters. This is also because the vast

majority of Arctic oil and natural gas resources are located within the Arctic

Circle (Budzik, 2009), which means that the Arctic offshore oil and natural gas

projects studied are located in the Arctic offshore areas of five Arctic countries

(i.e., the country-by-country approach) - Canada, Greenland, Norway, Russia

and the USA - which lie north of the Arctic Circle (66° 33′ 44″). The country-by-

country approach is justified by the method of data collection and its unification

(see corresponding chapters). The main Arctic offshore areas include the Barents,

32

Pechora and Kara Seas; Ob and Taz Bays; Beaufort Sea; waters of the Canadian

Arctic archipelago; Prudhoe Bay; the Chukchi and Norwegian Seas; and

Greenland’s waters (i.e., Baffin Bay, the waters south and east of Greenland, and

the Greenland Sea). Fig. 5 is a map of the study that contains both defined

geographical borders and the locations of oil and natural gas projects.

Fig. 5: Arctic map, adapted by the author

33

Purpose and research questions

Industrial activities in the Arctic changed significantly over the study

period. More specifically, the energy and extraction industries became very

important to Arctic economies. At the same time, there are numerous factors

(both external and internal) driving not only regional development but also

offshore oil and natural gas exploration. The aim of this research is to provide

deeper insight into offshore hydrocarbon development activities in the Arctic.

The specific research aims are as follows:

to identify factors that influence Arctic offshore hydrocarbon production

(driving forces) and to examine their influence;

to understand the scope and significance of Arctic offshore hydrocarbon

development; and

to provide a better understanding of current trends in Arctic offshore

hydrocarbon development.

This research aims help to provide a better understanding of current

trends in Arctic offshore oil and natural gas development and of how to maintain

Arctic offshore oil and natural gas production in a manner that is safe and

sustainable.

To target the research goal, several research questions were developed.

They are as follows:

RQ1: Why does Arctic offshore hydrocarbon production matter?

RQ2: What factors influence Arctic offshore hydrocarbon production and how?

RQ3: How much oil and natural gas production occurs offshore in the Arctic?

RQ4 (Ph.D.): How do these influencing factors interact and what can be done to

move Arctic offshore oil and gas production toward sustainability?

These questions (RQ1-RQ3) are sequentially formulated from this study’s

aims and from the research process. RQ4 is a cohesive question that integrates

the results of the other studies (for future research).

34

Arctic offshore oil and natural gas exploration and production are

multicomponent processes. To narrow the research scope and focus on the

identified research aims, the overall project has been divided into several

interrelated and consecutive parts. These parts comprise studies that examine the

factors driving Arctic offshore hydrocarbon resources development (i.e., one

study per paper). The research design is schematically presented in Fig. 6.

Fig. 6: Research design

However, it is possible that during the study, additional factors that

influence Arctic offshore hydrocarbon production will be identified. In that event,

more studies will be planned.

35

Methodology

Society’s interest has moved beyond simple economic studies and

commercial exploitation of resources. Resource management has become a more

complex issue that now focuses not only on human aspects and environmental

issues but also on an integrated, sustainable analysis; it has lost its focus on

resources development. This thesis argues that to bring global energy and the

global economy to a new level, it is necessary to study the past. Historical

research provides a critical link between past and present (Given, 2008:395).

Aiming to provide deeper insight into Arctic offshore oil and natural gas

development as a very challenging and debatable industrial activity, the

historical approach has been chosen as a dominant theoretical framework for the

thesis and two papers. The single case study has been chosen as a research

strategy. The historical method of data collection was conducted through desk

research on primary and secondary sources.

Historical framework

Classically, the historical method studies the occurrence, formation and

development of objects in chronological order. It consists of techniques and

guidelines for the use of primary sources and other historical evidence to provide

an account of the past, with deep philosophical roots in epistemology.

The historical method appeared in the late 1800s (Gottshalk, 1969; Golder,

2000), stimulated by the desire to develop a self-sustaining method to analyze

data (Langlois and Seignobos, 1898; Marwick, 1970; Golder, 2000). Its primary

goals were to develop accurate descriptions, to understand events in their full

context (Elton, 1967), and to identify laws or generalizations (McCullagh, 1984).

Golder (2000:158-159) presents an approach to the historical method in five

stages: (1) select a topic and collect evidence; (2) critically evaluate the sources

of the evidence; (3) critically evaluate the evidence; (4) analyze and interpret the

evidence; and (5) present the evidence and conclusions. The key procedures

involve collecting, verifying, interpreting and presenting evidence from the past.

Golder also advocates the usefulness of the historical method in marketing (and

in other fields). He argues that the historical method is underevaluated, and

conducts a comprehensive review to justify its usefulness. The primary strengths

of the historical method by Golder (2000:167) are its applicability to longitudinal

36

analysis, its ability to extract findings from existing data and its ability to

adequately deal with complex phenomena. However, some researchers consider

the historical (archival) method unreliable (Bonoma, 1985). Its limitations

include the following: the difficulties of confirming theory in a complex

environment (Nevett, 1991); the method’s descriptive (rather than explanatory)

character; the method’s possible interpretive biases (Calder and Tybout, 1987;

Nevett, 1991); and the method’s time-consuming data collection strategy

(Chandy and Tellis, 2000). Some limitations may be compensated for by

collecting more factual data and more accurate records (Golder and Tellis, 1993),

and by using mixed research strategies in a single case study (Bayus et al., 1997).

To address the relatively negative view of the historical method presented above,

one “must retain the objectivity of the scientific method, following its structure

as closely as possible” (Savitt, 1980:54). That means the study should approach

“the structure of a well-defined experiment” (Marwick, 1970:105; cited in Savitt,

1980:54), its data collection and analysis techniques, both qualitative and

quantitative (Hollander et al., 2005).

Some authors, such as Savitt (1980), Nevett (1991) and Smith and Lux

(1993), argue for historical research in a different way: to study the past precisely,

to use the past to supplement one’s main research or to explain changes over

time. These approaches are somewhat different than the traditional version of the

historical method, which in an accurate combination can provide a path to a more

modern way of applying the historical framework. Moreover, most historians’

research objectives are similar to many marketing researchers’ objectives, which

makes today’s historical study more contemporary and focused on recent issues.

Historical research can take many forms depending on research aims, data

availability and data quality (Given, 2008:398). The most common forms include

oral history, autobiographical narrative, life history and case study. These

methods are usually are used in combination with other approaches to include

more innovative and contemporary methods of data collection. This research

consists of a focused case study; the historical framework helps us to explore the

phenomenon.

As examples of historical frameworks, Grübler et al. (1999) study

technological change using a combination of historical analysis and modeling to

improve the understanding of technological change with reference to historical

patterns. Historical context is part of a heat pump study by Hepbasli and Kalinci

(2009), historical trends are studied in American coal mining by Höök and

Aleklett (2009) and a broad historical review of wind energy technology is

37

conducted by Ackermann and Söder (2000). Longitudinal approaches and

variations on historical frameworks are welcomed in marketing and management

studies (Aaker and Day, 1986; Bayus et al., 1997; Golder and Tellis, 1993; Low

and Fullerton, 1994; Menon and Menon, 1997; Nevett, 1991; Zaltman, 1997) and

consumer behavior (Hudson and Ozanne, 1988; Smith and Lux, 1993). From a

managerial perspective, the historical approach is appropriate for studying

strategic issues (Aaker and Day, 1986; Golder, 2000; Prahalad, 1995). In

economic history, the historical approach is used not only to discover the past

but also “to contribute to economic theory by providing an analytical framework

that will enable us to understand economic change” (North, 1994:359).

The usefulness of the historical method in the context of this study is as

follows. The historical method is based on the identification and analysis of

contradictions in the development process through time, as along with

regularities of technological development. The method contributes to an in-depth

understanding of the issue and provides an opportunity to formulate more well-

grounded recommendations. This helps to account for the past and improve our

understanding of both the present and the future. Moreover, the historical method

does not stand in opposition to quantification methods, which are essential to

studies in which the main markers are production volumes and investments;

instead, the historical method is open to a combination of methods.

Important changes in how modern researchers treat data have also

influenced their treatment of the historical method. Historical research is

changing as more data and data types become available online. The important

issues of data collection and sources - such as reliability, validity and

trustworthiness - have prompted new improvements due to the broad availability

of primary and secondary sources online (Given, 2008).

The historical approach to Arctic issues

The historical perspective on the Arctic oil and natural gas issue has not

been very widely presented. Studies are mostly limited to reviews of mining

trends in the Arctic frontier regions (related to a variety of natural resources

extractive industries) and papers about the social effects of those activities (for

example, Haley et al., 2011). Archaeological research from the historical

perspective is more diverse (for example, natural resource exploitation in the

polar regions, particularly in Svalbard, by Avango et al., 2010). Oil and natural

38

gas activities are not often addressed, although there are some studies that

resemble historical studies focusing on natural resources extraction and/or

energy sources.

Natural resource exploitation on Spitsbergen is studied by Avango et al.

(2010) from a long-term historical perspective. Aiming to define the driving

forces of large-scale natural resources exploitation in the North, to examine at

international competition for natural resources and to identify the consequences

for Arctic geopolitics, those authors argue that “in order to understand the

current quest for natural resources in the Arctic and its political consequences,

research is called for into the history of similar developments in the high Arctic

in the past” (Avango et al., 2010:1).

The historical method is applicable to all of the fields of study that have a

need for some historical knowledge and that can vary in the depth of their

analysis with the use of both qualitative and quantitative factors (to discover

origins, theories, breakthroughs, etc.). Historical methods help secondary data

analyses to identify previous social and economic opinions, perceptions and how

those opinions and perceptions have evolved over time to form a base for

analyzing both ongoing trends and future challenges. This is shown in the recent

study by Fjaestad (2013), which uses the historical context to study wind power

through a successful case in Sweden. This study shows that by using “time-

specific historical conditions” (Fjaestad, 2013:124), it is possible to discuss

influential factors related to a developing energy sector. Moreover, it is

important to discover the possibility of using past experience for future projects.

Returning to the Arctic region itself, the historical study by Elzinga

(2009:313)

shows “an archaeology of knowledge” and the theoretical

foundations of polar research. A long-term historical perspective targets the

incentives for polar research over 125 years and identifies differences in driving

factors.

A narrower case of political and institutional regimes as shown through

the example of the Shtokman field4 is made by Mineev (2010) to study the role

of political forces in an organizational field. That study conducts a short

historical investigation of oil and natural gas politics and the Shtokman project to

provide a background for better understanding interrelated factors and to support

macro- and micro-level analyses.

4 A gas and condensate field in the Barents Sea (Russia), its development was frozen indefinitely in

2013.

39

One example of contemporary studies of Arctic energy issues is the paper

by Harsem et al. (2011), which has the same research scope as this thesis and

more specifically, explores factors influencing future oil and natural gas

development in the Arctic. However, those authors choose to study a broad and

nuanced perspective on the issue from both “climate-driven changes” (abstract,

Harsem et al., 2011) and the available literature. This results in a short-term

review of the most debatable issues around Arctic hydrocarbon resource

development, such as climate, politics and market conditions, and the

dependence of Arctic oil and natural gas resources development on a complex set

of variables as an outcome. Here it is worth underlining that oil and gas

industries in the Arctic cannot be properly studied without an understanding of

the historical experience.

A variety of cases in Arctic history, from first expeditions to new

technologies and climate change, have had different impacts. However, the

current interest in Arctic offshore oil and natural gas resources following more

than 90 years of oil and natural gas exploration and development in the Arctic

region (AMAP, 2007; Ernst&Young, 2013) has attracted a wide response from

socioeconomic and geopolitical spheres worldwide. This provides a motivation

for a consecutive study of this multicomplex issue, with history as the starting

point.

The common belief is that historical method only targets the past (Golder,

2000), not the present and the future. Obtaining a better understanding of the past

makes it possible to address the future differently and to provide insight into the

present (Golder, 2000; Nevett, 1991; Savitt, 1980). It is worth underlining that

returning to history is neither purpose nor the genuine orientation of this research.

Instead, history is a tool that helps us create a mental picture of the Arctic not

only as it exists now but also in how it will shape the future by opening lifecycle

stages of oil and gas industry through time. It also provides a perspective for

further discussion and studies in fields related to both energy and the Arctic.

Methodological approach

The historical approach is the major theoretical framework because it

helps target research aims, addresses research questions and supports data

collection and analysis techniques. However, the historical approach is likely to

be used in combination with other approaches (Bayus et al., 1997; Nevett, 1991).

40

The case study has been chosen as a research strategy. The justification

for choosing this strategy was found in several sources (Saunders et al., 2009;

Robson, 2002; Morris and Wood, 1991; Bengtsson et al., 1997; etc.). Robson

(2002:178) defines the case study as “a strategy for doing research which

involves an empirical investigation of a particular contemporary phenomenon

within its real life context using multiple sources of evidence”. According to

Morris and Wood (1991), the “case study strategy is of particular interest when

the aim is to gain a rich understanding of the context of the research and the

processes being enacted”. Thus, the case study seem especially well suited to

develop rich descriptions of interdependent factors because case study research

normally is based on the goal of understanding complex phenomena (Bengtsson

et al., 1997). Because the research topic is considered complex and multivariate,

the use of the case study provides an opportunity to obtain sources of new

research questions and to gain a deeper understanding of the interplay in the

Arctic region of the exploration of offshore hydrocarbon resources.

Fig. 7: The research ‘onion’ (Saunders et. al., 2009), developed for this study

The research approach is relatively inductive. It is a proper method of

achieving the formulated aims with the use of historical and qualitative data.

Moreover, it is helpful when researchers have “special qualities and pre-

41

understandings” of the topic; the inductive approach makes it possible to

“achieve more rich and thorough understanding in research question”

(Bengtsson et al., 1997). However, in practice some of the analytical procedures

of qualitative data combine inductive and deductive approaches (Saunders et al.,

2009). This particular research tends to use a more general inductive (or

abductive) approach for the purposes of analyzing qualitative evaluation data,

summarizing data, establishing links between the evaluation or research

objectives and the end outcome.

The research methods to be used are descriptive and explanatory to

establish causal relationships among the driving factors (Sanders et al., 2009)

and to more deeply explore the history of Arctic offshore hydrocarbon resources

exploration and production using the driving factors. However, no research is

valuable without ‘finding a mystery’ and there should not be limitations to

explore.

Data collection methods

When choosing a data collection method for this research, the main

criteria were the following: to provide a deeper understanding of the topic, to

obtain proper and precise answers to research questions and to optimize time and

resources. Based on the historical framework, the historical method for data

collection was used to ensure the reliability and validity of both the data and the

sources. Although “there is no single particular method for data collection that

has advantages over the others” (Yin, 1994), there are advantages and

disadvantages depending on the issue. In the case of oil and gas companies,

access to the required information is very complicated, especially in the frontier

regions, with respect to know-how, geopolitics and commercial interest.

Managers and administrative personnel do not willingly share information about

future strategic plans. Corporate (business) data can provide all of the necessary

first-hand information, however, due to poor historical studies in the past and its

commercial value, access to these data is mostly restricted (Savitt, 1980).

Accordingly, deciding on a data-collection method requires both establishing

what data are available and designing the research to maximize that data

(Saunders et al., 2009). The advantage of the modern way of treating the

historical method is that more records are available online.

42

Some other complications have been overcome by using multiple data

sources, which makes data more reliable (Bengtsson et al., 1997:477; Srinivasan

et al., 2004). The use of both primary and secondary data can help eliminate

methodological challenges (potential sources are outlooks, companies and

governments’ strategic plans, media sources, business reports, company press

releases, internal company documentation and reviews, academic papers, and

analytical materials). The use of secondary data also saves time. Additionally,

the data collection techniques employed may vary and are likely to be used in

combination (Saunders et al., 2009:145-146). Savitt (1980) urges giving more

attention to the distinction between primary and secondary data sources to

minimize data gaps and maximize data credibility. The use of primary and

secondary sources is also a necessary condition for reliable historical research.

In this study, data collection is primarily conducted through desk research

that is applicable to the historical method. A similar data-collection method has

been used in studies by Chandy and Tellis (2000) of radical product innovation,

Sood and Tellis (2005) of technological change and innovations, and studies of

pioneer firms’ survival (Srinivasan et al., 2004), dominant designs (Srinivasan et

al., 2006), and high-tech markets (Tellis et al., 2009). The use of the historical

data collection method in these studies is primarily justified by the longitudinal

character, their easily targeted research aims, their ability to study the effects of

time, or simply the absence of databases.

Combined data collection techniques are likely to be used during

additional research (i.e., not only documentary analysis but also interviews and

expert rounds, following the collection of the primary data).

Arctic offshore hydrocarbon resource exploration is a hot topic in world

economics and geopolitics and the situation around it changes rapidly while new

information appears, new cooperation agreements are concluded, new oil and

natural gas field discoveries are being made, etc. That is why on the one hand, it

is crucial to monitor media and periodical sources continuously. On the other

hand, there is no methodological need for a deeper recollection of events and

opinions. Theories and explanations can be formed based on the historical data

by using methods of analogy and homology. In the way, there is historical

continuity with the present day.

The choice of data sources and data collection methods is strongly

connected to information trustworthiness. Secondary data sometimes could fail

to provide the information that is needed to answer research questions. To make

43

information more reliable, Dochartaigh (2002) therefore suggests choosing a

number of areas and checking the authority of documents available via the

Internet to increase each source’s reliability. Moreover, it is important for case

researchers to achieve a high level of reliability and to provide a full and detailed

description of their data and sources by gathering information from multiple

sources. This can be accomplished by investigating authorship and classification,

describing how data is gathered, compared and confronted, determining whether

multiple investigators were used, etc. (Bengtsson et al., 1997; Golder, 2000).

Moreover, according to Bengtsson et al. (1997), such a detailed description

serves two purposes. First, it increases the reader’s confidence in the author’s

thoroughness and in-depth understanding of the case material. Second, it

improves the reader’s ability to gain insight into the study and to make an

independent interpretation of the data. A detailed description of data, sources and

additional researcher comments not only increase reliability but also provide a

better understanding to readers of both the topic and the research outcome.

Ethical issues related to accuracy and interpretation can arise during data

collection. This means that to avoid ethical issues, it is worth to confirming that

data are collected accurately and fully. Another general ethical principle is

related to researcher objectivity. To avoid biases, especially while using the

historical method, a researcher must be aware of his or her own subjectivity and

understand its influence on data collection and analysis (Savitt, 1980). These

conditions can be fulfilled by following a well-planned initial research structure

and by depending on researchers’ competence and knowledge of both the

research topic and the research process. Data can be verified by comparing

qualitative factors or by conducting a statistical analysis; they can be analyzed

through quantitative or graphical analysis (as done by Tellis et al., 2009).

The group of studied sources was significantly extended because both

primary and secondary sources in English and Russian were used. Sources in

Russian are not widely available for studies, because primary corporate reports

and press releases usually are not translated. The use of Russian-language

sources provided a broader data overview and significantly contributed to the

study. These sources also helped verify quantitative data and render those data

trustworthier.

44

A case of Arctic offshore hydrocarbon resources: identifying factors

Framing Arctic issues as a separate case helps to show Arctic resource

extraction in a more specific and precise manner. The historical context refers to

political, environmental, cultural and other decisions and events that can be

linked to the studied issues (Given, 2008:392). A critical perspective in a

historical context provides an opportunity to identify and examine factors that

influence Arctic offshore oil and natural gas resources development from a

longitudinal perspective and provides an opportunity to evaluate the key

perspectives.

The identification of factors is a broadly used method of conducting a

qualitative study. It is also a matter of choice and theory. There are some

examples of how it can be done, especially in energy research. The study in the

area of energy savings by De Groot et al. (2001) suggests an extensive survey

among numerous firms to investigate empirically how they can potentially be

influenced by environmental policies. This strategy has helped to achieve

research aims and study decision-making process in firms. In a sphere of

environmental standardizing and standardization certifications (Curkovic et al.,

2005), the number of factors or influences are analyzed through qualitative case

studies. This study used exploratory, qualitative data collection methods

(structured interviews) and field data collection; it also used examples from

managerial experiences. This study concludes with an evaluation of the driving

factors. In another energy study, in which the aim was to identify factors that

predict attitudes toward local onshore wind development, the method used was

the case study with questionnaire data collection and multiple regression analysis

(Jones and Eiser, 2009). These are good examples of identifying factors of

influence for in-depth study.

In the case of this particular project, the historical framework and

historical (longitudinal) method of data collection provide an opportunity to

identify the number of influencing factors (studied together for oil and natural

gas). As in previously mentioned studies, this research uses a case study strategy

and a literature and historical review to identify the relevant factors. There are

numerous factors that make the Arctic a challenging and interesting subject of

exploration, namely, geopolitics, governance, climate change, indigenous issues

and economic opportunities, all of which were identified from the global context.

The factors follow from the historical overview are: geopolitics of energy

resources, the economic interests both of industry and government, strategic and

45

governance issues, and the availability of technologies and infrastructure. These

factors are validated both from the literature and the historical review. Three

factors have been chosen to access, measure and evaluate Arctic offshore oil and

natural gas development according to the research aims: geopolitics, investments

and technology. Geopolitics is a background factor.

Empirical data collection and sources

To target the research aims and answer the questions posed, desk research

was conducted based on the principles of the historical method of data collection

(additional research steps touched upon in previous chapters may include

primary data collection through interviews). The chosen method is based on a

country-by-country approach. Therefore, data on discovered fields have been

collected, focusing on operating oil and natural gas fields. Some fields are

planned to produce oil or natural gas (or both) for some time and other fields are

planned to be turned into production during upcoming years and have approved

operation plans. Accordingly, information on those topics has also been collected.

To store the information, data tables have been constructed. Fifty-five fields

located in the above-mentioned area were identified as follows: Canada - 3,

Norway - 14, Russia - 29, US - 9, Greenland - 0.

The following information was collected for each identified oil and

natural gas deposit: country, area, field name, resource type (oil, natural gas,

condensate) and volume, date of discovery, date of development start, date of

production start, project costs, operator, license holder, number of wells drilled

and host type (development concept). Data on oil prices during the studied

period were also collected.

The data search included primary and secondary sources both in English

and Russian (for details, see the Appendix). The data collection was conducted

in the following way. First, an extensive search for oil and natural gas deposits

was conducted using primary official sources from the governmental institutions

responsible for mineral resources extraction in each Arctic-five country. The

completeness of data available differs among the countries. In the USA (Alaska

oil and gas conservation commission, Minerals Management Service Alaska

Region and U.S. Department of the Interior Bureau of Land Management), there

is full information available describing fields and provinces oil and natural gas

production on a monthly and yearly basis. In Norway (Norwegian Petroleum

46

Directorate, “Oil Facts” report), official information reviews for each field are

published annually and a mobile application (“Oil Facts” by Norwegian

Petroleum Directorate and Norwegian Ministry of Petroleum and Energy)

provides monthly production volumes. Canadian (National Energy Board

Canada, Government of Newfoundland and Labrador, Aboriginal Affairs and

Northern Development Canada, Canada-Newfoundland and Labrador Offshore

Petroleum Board) and Greenlandic (Naalakkersuisut Government of Greenland)

official institutions provide data on production volumes. However, it is difficult

to evaluate the quality of that information because of the absence of Arctic

offshore production and thus, no particular data were obtained from these

sources. In Russia (Government of Russian Federation, Ministry of Natural

Resources and Environment of the Russian Federation), it is more challenging to

find data: field-related data are not very openly provided compared to other

countries, and the data that are provided are primarily in Russian. Others Arctic-

five countries’ data are translated into both English and any other native or state

language.

The data from official governmental sources were verified and

supplemented by primary corporate public sources of oil and gas companies

working offshore in the Arctic (BP, CairnEnergy, Eni, ExxonMobil, Gazprom,

Rosneft, Shell, Statoil, etc.). Most companies operating in Arctic offshore fields

do corporate reports on volumes of oil and natural gas produced, along with

plans for production start-ups, technological approaches, etc. This information is

public and can be used as a trustworthy source to complement and verify

governmental sources. Because the Arctic offshore is a frontier, companies are

mostly willing to show their expertise on such fields and therefore data are

available.

Missing data were taken from secondary sources such as academic peer-

reviewed publications and public media sources (company announcements, on-

line professional journals such as the Oil & Gas Journal, ROGTEC Magazine,

etc.). These sources provide wider perspective on the topic, along with expert

opinions and forecasts. Some online databases (Offshore Technology and

SubSeaIQ) have chronological descriptive data on fields and their development.

However, these sources were used with great attention to their credibility.

Because data sourced from different places can sometimes be expressed

in differing units, the data were unified. Further information on terminology and

units is included in the corresponding chapter.

47

Justification for the data-collection method was found in (Kjärstad and

Johnsson, 2009). In an attempt to obtain deeper insight into global oil resources

and the balance of oil supply and demand, Kjärstad and Johnsson (2009)

analyzed a variety of sources from different levels (country, company and field

levels). Kjärstad and Johnsson (2009) use data sources and databases of

institutions such as AAPG (American Association of Petroleum Geologists), IEA

(International Energy Agency), USGS (United States Geological Survey) and

IHS Energy, which are considered the most comprehensive databases in the

energy industry. Information has also been sourced from countries’ official

resource ministries and agencies (including the Norwegian Petroleum Directorate,

the US Minerals Management Service, Canada’s National Energy Board and

other authorities) annual reports, company reports, consulting companies,

professional journals (e.g., the Oil & Gas Journal), conference presentations and

other contemporary sources of information. Shafiee and Topal (2010) have also

used databases such as EIA and BP in their attempt to study fossil fuel prices

from a long-term perspective. In studies that apply the historical data method,

scholarly journals, books and online business databases are also used (Srinivasan

et al., 2006; Tellis et al., 2009).

Following the data collection, criteria were applied depending on the

purposes of each paper. For the first paper, the oil and natural gas deposits for

which the investment data were known were selected because that is the key

element of analysis. The investment data used are either data about total project

development investments or capital project costs that have been announced and

published. For the second paper, the criteria were actual oil and gas production

and known technological development concepts. The technical details of these

concepts are beyond the scope of the study.

The time frames for the studies were identified based on empirical data.

That means that the earliest time frames were chosen according to the first wells

drilled in the offshore Arctic, first discoveries or investment projects, and first

volumes of offshore oil and natural gas produced. The final time frame was

chosen based on production plans and approved development plans. However, it

is important to note that this study does not make any forecasts; instead, it makes

projections based on approved development plans.

Detailed information on what fields were studied and what sources of data

were used are available in the Appendix.

48

Research limitations

This research has both strengths and weaknesses in its structure and in the

topic itself. Conducting research on energy issues is challenging because energy

has a strong influence on global economics and growth.

One of the main diverging points of research is its timeliness. Currently,

the Arctic is of particular importance to circumpolar countries and world

geopolitics. That means research is both in demand and influential. It also means

that data can be politicized or biased due to the turbulent economic and political

environment: the researcher needs to be aware of that issue and address it. Here,

the researcher had the will and motivation to overcome these limitations to show

the variety of implications and to make a contribution. Limitations in the

availability of data that show the historical perspective are also challenging both

because of such data’s possible commercial value and because of the absence of

relevant studies or records. This has a direct impact on data credibility and the

trustworthiness of the results. Methods of overcoming data limitations were

discussed in previous sections.

The weaknesses of the research structure are as follows: numerous points

of drivers’ intersections in the case, a strong geopolitical context and a debatable

research subject. The driving factors of Arctic offshore hydrocarbon resources

development may have crossing, reinforcing and/or reversing influences on each

other and on Arctic offshore oil and gas production. An improper study outline

may result in an inaccurate analysis and invalid outcomes.

It is believed that limiting the research scope will help overcome

challenges and improve the study. It was decided to conduct research on a

country-by-country basis with a focus on Arctic offshore oil and natural gas

resources development in a pre-defined offshore area of the five Arctic countries.

The focus of the study is oil and natural gas offshore development in the Arctic

through oil and gas fields. Other factors of Arctic regional development and both

external and internal factors of influence are studied through the prism of the

main focus. These limitations were applied to the research frameworks and

methodological approaches.

This study has been conducted independent of any

oil/gas/energy/operation/state-owned/private company involved in Arctic oil and

natural gas resources exploration and development; that independence has both

advantages and disadvantages. Access to data and their interpretation without

49

additional professional support might result in incorrect interpretations. However,

conducting independent research renders it less company-biased. This is how to

obtain a clear view without any company biased, contribute to the Arctic

offshore resources exploration process, and provide society with researchers and

analysts’ opinions.

The research scope limitations apply to the number of issues studied in

the case, which are primarily limited by capacity and timing. The main issues are

(actual and projected) volumes of oil and natural gas produced in the offshore

Arctic, investments into offshore oil and natural gas resources development and

the technological approaches used to extract these resources. It limits other

important factors, such as climate change, governance and infrastructure

availability. However, it is strongly believed that the chosen key factors are

capable of serving the research goals and can provide an answer to the research

questions. The factors that fall out of this particular research provide material for

future studies.

50

Terminology and units

Energy is a broad term. It includes variety of sources and their use. To

eliminate possible misunderstanding, some working definitions were sourced

from the World Energy Outlook of the International Energy Agency (WEO,

2013), an authoritative analytical publication in the energy sphere.

“Oil includes crude oil, condensates, natural gas liquids, refinery

feedstocks and additives, other hydrocarbons (including emulsified oils,

synthetic crude oil, mineral oils extracted from bituminous minerals such as oil

shale, bituminous sand and oils from coal liquefaction) and petroleum products

(refinery gas, ethane, LPG, aviation gasoline, motor gasoline, jet fuels, kerosene,

gas/diesel oil, heavy fuel oil, naphtha, white spirit, lubricants, bitumen, paraffin

waxes and petroleum coke)” (WEO, 2013:664). However, this research

addresses hydrocarbon production. Consequently, the variety of hydrocarbons

listed in this definition is irrelevant. “[Natural] Gas includes natural gas, both

associated and non-associated with petroleum deposits, but excludes natural gas

liquids” (WEO, 2013:661). “Condensates are liquid hydrocarbon mixtures

recovered from associated or non-associated gas reservoirs” (WEO, 2013:661).

‘Hydrocarbons’ usually refers to oil and oil products in the WEO (2013).

From the chemical point of view, hydrocarbons are organic compounds

consisting entirely of hydrogen and carbon. As defined by Schlumberger (2014),

the most common hydrocarbons are natural gas, oil and coal, which are a

complex mixture of hydrogen and carbon. For the purposes of this study and to

simplify its language, ‘hydrocarbons’ is used to designate a combination of oil,

natural gas and condensate. It is also the most appropriate definition for this

purpose.

The next issue is the definition of (hydrocarbon) resources and reserves,

both conventional and unconventional. The definition of resources and reserves

differ depending on country. In the USA, the petroleum classification scheme of

the USGS and the Minerals Management Service is used, whereas Canada uses

the Canadian Securities Administration (these two are correlated), and in

Norway, the responsible governmental institute is the Norwegian Petroleum

Directorate (which is more or less correlated with the others).

51

Fig. 8: Resource classification scheme (AMAP, 2010:2_5)

The Russian petroleum classification is quite different. Those differences,

however, are beyond the scope of this research. More information on resources

and reserves classification can be found in AMAP (2010) and the Society of

Petroleum Engineers (2005). Because the research in the two paper studies

targets produced volumes of oil, natural gas and condensate, only the short

definition is sourced from AMAP (2010) for the reader’s information and is

presented in Fig. 8. This definition is recommended by the Society of Petroleum

Engineers, the World Petroleum Congress and the American Association of

Petroleum Geologists resource classification scheme, which accounts for major

elements of petroleum assessment.

52

Reserves are “the quantities of hydrocarbon resources anticipated to be

recovered from known accumulations from a given date forward” (AMAP,

2010:2_8) (given by U.S. resource definitions for assessing resources on the

Outer Continental Shelf). According to WEO (2013) (which also uses USGS

classification), resources include everything: known oil (including cumulative

production and reserves in reservoirs), reserves growth and undiscovered oil.

Undiscovered resources are the most topical resources in the frame of this

study. They are resources “postulated, on the basis of geologic knowledge and

theory, to exist outside of known fields or accumulations…” (AMAP, 2010:2_8).

There are two types of resources distinguished - conventional and

unconventional. According to WEO’s (2013) liquid fuels classification,

conventional refers to crude oil and natural gas liquids, when unconventional

resources accumulate extra heavy and oil bitumen, light tight oil, gas-to-liquids,

coal-to-liquids, kerogen oil and additives. In other words, conventionals are

comparatively easy-to-access, medium gravity and medium viscosity (for oil)

resources, whereas unconventionals are difficult-to-access, of greater density and

viscosity, and occur in tight formations. It is worth mentioning that some criteria

diverge from this classification in academic sources (Laherrere, 2001; cited in

Greene et al., 2006). Greene et al. (2006:516) argue, “the distinction between

conventional and unconventional resources is based on technology and

economics”. Some time ago, offshore crude was classified as unconventional

(Adelman, 2003); now, however, Canadian oil sands are sometimes referred to

conventionals (Greene et al., 2006). Rogner (1997) distinguishes between

conventional and unconventional hydrocarbons by the possibility of exploiting

them with current technologies and under current market conditions. According

to Schlumberger (2014:no page), unconventionals are qualified at a particular

time by “a complex function of resource characteristics, the available

exploration and production technologies, the economic environment, and the

scale, frequency and duration of production from the resource”; gas hydrates,

shale gas, fractured reservoirs, and tight gas sands are considered

unconventionals. Arctic oil and natural gas is treated by the International Energy

Agency (IEA, 2008) as conventionals with respect to the complexity of their

extraction technologies. Because perceptions of Arctic (offshore) hydrocarbons

differ - mainly because of their extraction complexity, not their chemical

composition - they may be called as frontier locations for conventional

hydrocarbons (IEA, 2013b:19). In this study, Arctic offshore hydrocarbons are

addressed as frontier conventionals because they can be recovered in relatively

53

conventional manner, but they are proximate to unconventionals due to their

remote geographical location, harsh operation conditions and technological

extraction advances.

The most-used units in the oil and gas industry are field units (Robelius,

2007). Because this study addresses oil and natural gas production, all of the

units in standard use should be addressed. Crude oil is measured in barrels (bbl),

barrels per day (bpd), tons (t), etc. Gas can be measured in billions of cubic

meters (bcm), billions of cubic feet (bcf), or million tons of oil equivalent (mln

toe) (which is a unified measurement to sum oil, gas and condensate volumes).

Field units differ among the countries. In the USA, gas is measured by

thousand cubic feet (1000 cf) and oil is measured in millions of barrels (mln boe).

Norwegian official sources publish data in million standard square meters (mln

Sm3) for oil and condensate, and billion standard square meters (bln Sm

3) for gas.

Russian companies use billion cubic meters of gas (bcm) and million tons (mln t)

for oil. To summarize all of the volumes of oil, natural gas and condensate

produced, the million tons of oil equivalent (mln toe) measure has been chosen

in this study. The approximate conversion factors were sourced from the BP

Statistical Review of World Energy (BP, 2013b) and Facts, the Norwegian

Petroleum Directorate’s yearly report (NPD, 2013).

Finally, the definitions of ‘field’ and ‘deposit’ were examined. An ‘oil

field’ or ‘oilfield’ is an area of land or seabed underlain by strata yielding

petroleum, especially in amounts that justify commercial exploitation (New

Oxford American Dictionary, 2005; Schlumberger, 2014), whereas ‘oil deposit’

can also mean an accumulation of oil that is not exploitable. Fields placed on the

land are called onshore ones, fields on the bottom of the sea or ocean - offshore

fields. On the shoreline, fields can be partly onshore or partly offshore.

54

Study results

This study aimed to give deeper insight into Arctic offshore hydrocarbon

development activities by analyzing the relevant investments and technologies

from a historical perspective by answering the following research questions: (1)

Why does Arctic offshore hydrocarbon production matter?; (2) What factors

influence Arctic offshore hydrocarbon production and how?; and (3) How much

oil and natural gas production occurs offshore in the Arctic? A brief overview of

studies can be found in Table 2.

Table 2: Summary of studies

Cover Essay Paper I Paper II

Title Why does Arctic

offshore hydrocarbon

production matter?

Offshore Arctic

Hydrocarbon Resource

Development: Past and Present

Role of technology in

expanding accessible oil

and natural gas resources in the offshore Arctic

Research

question RQ1 RQ2, RQ3 RQ2, RQ3

Method historical method historical method, case study, quantification

historical method, quantitative analysis

Unit of

analysis

Arctic offshore oil and

natural gas development in the global context

Arctic offshore oil and

natural gas fields, investments

Arctic offshore oil and

natural gas production, technological concepts

Time

period 1920 – 2014 years 1968 – 2014 years 1986 – 2025 years

The study provides several insights into Arctic offshore oil and natural

gas resources development in the global context via an analysis of the relevant

investments and technology from a country-by-country and historical perspective

in the maximum period time frame between 1920 and 2025.

Literature and historical reviews show that Arctic issues are broad and

appear in a great number of academic studies. There are numerous factors that

make the Arctic a challenging and interesting issue to explore: geopolitics,

governance, climate change, indigenous issues and economic opportunities.

Depending on the methodology, data collection and analysis methods used, these

factors are analyzed in combination, in consecutive order or separately.

55

Based on available data for 55 studied deposits, through 2014, 10 are

producing, 6 have approved development plans and 18 have investment data,

which were studied. According to the development programs, there will be 22

Arctic offshore fields in production before 2030.

According to the collected data, the Arctic contains approximately 14.8%

of the total mean undiscovered oil and natural gas resources compared to the

world’s total proven oil and natural gas reserves through the end of 2012, 5.2%

of the world’s oil resources and almost 29% of the world’s natural gas resources

(including NGL) (USGS 2008b; Gautier et al., 2009; Budzik, 2009; BP 2014c).

To date, approximately 550 oil and natural gas fields have been found in the

Arctic basins (Budzik, 2009). The cumulative production of the offshore Arctic

has reached almost 600 mln toe by the end of 2014, whereas the offshore Arctic

produced 55 mln toe in 2013 and 60 mln toe in 2014. This is less than 1% of

total world oil and natural gas production (according to total world oil and

natural gas production data from BP, 2014c:10,26). It is projected that

cumulative hydrocarbon production will double by the end of 2025, however,

yearly production volumes are expected to attain 2006 production levels.

Data show that Arctic offshore oil and natural gas resources development

is ongoing. In the 2000s, Arctic offshore oil and natural gas production began to

grow visibly. Its development is uneven and consists of numerous peaks and

gaps in total Arctic offshore oil and natural gas production. These are mostly

connected to new production start-ups or the depletion of producing fields,

respectively, where the ability to intensify production is also dependent on

technology. Over the studied period, the amount of real investments has risen

considerably, peaking in 2011-2012. Here, start-ups follow investment programs

on a time lag, which shows the influence of the decrease in investments after the

crisis events of 2008-2009. Although in upcoming years the cumulative

investment trend is likely to remain on the growth track, the oil and natural gas

production peak is expected to occur in approximately 2018. There is an explicit

tendency for steep decrease, at least in the short term. Further Arctic offshore

production will be dependent on production start-up plans after 2020. There are

potentially 12 fields, prospects and license areas identified in the offshore Arctic,

all of which may contribute to total production in the future.

On a country-by-country level the spread in development is dramatic.

Norway is an investment leader, the USA has the largest amount of producing

fields, and Canada has almost no ongoing activities, whereas Arctic offshore

hydrocarbon resources play a strategic role for Russia. Development is very

56

dependent on the Arctic countries’ priorities. At the same time, the countries’

trends are not obvious. Alarming changes are occurring in the USA and

Norwegian Arctic offshore, where investment trends have diverging tendencies.

In the short term, development intensity may continue to decrease due to

growing upstream costs, especially in Norway. The currently increasing

production in Russia, the majority of which is from one giant field

(Yurkharovskoye), is not receiving a proper amount of investment into future

production.

Following the period of individualism in Arctic exploration, cooperation

agreements between the major energy companies with governmental support

have provided an opportunity to scale up development. The main region of

cooperation was the resource-rich offshore Russian Arctic. Global geopolitical

tensions can seriously harm the business environment. It is most likely that

Russia’s massive plans for exploration of Arctic hydrocarbon resources will be

postponed due to the highly turbulent economic and geopolitical situations.

However, it is most likely that other countries will provide cooperation

opportunities in the Arctic later, albeit on a modest scale.

There is also a sharp differentiation between Arctic countries and the

most used technologies. The choice of technologies is most likely to follow a

path from easy to access nearby shore fields to more distant ones, where

technologies used to minimize development costs. Otherwise, the contribution of

technology to production volumes is not obvious. More advanced and far-

reaching technologies do not visibly extend the projected output of oil and

natural gas. Technological choice can also be dictated by climate conditions and

ecological requirements. The historical overview has demonstrated a sharp

differentiation between Arctic countries and the most used technologies that is

dependent on technological availability and climate-geographical characteristics.

The trend of Arctic offshore oil and natural gas development will be very

dependent on technological factors in the sense of the availability of technologies

and technological progress.

57

Discussion

Arctic offshore oil and natural gas development, being very challenging

and investment demanding, has shown to be sensitive to geopolitical and

economic events. Production gaps may indicate a variety of crises, structural

changes, and geopolitical instability, all revealed in a certain time lag (moreover,

these time-lags should be a subject of additional study). This study has shown

the possibility of both a negative and positive influence by the changing

geopolitical environment on Arctic offshore hydrocarbon resources development.

The first issue related to the current geopolitical turbulence. Because

geopolitics are a canvas for most political and economic decisions, they seem to

play a significant, multidirectional role in Arctic offshore activities. The Arctic is

a relatively stable region with few political risks. Growing instability in the

Middle East and North African countries as traditional hydrocarbon producing

regions can result in the transfer of oil and natural gas investments to the North.

However, the conflict in Ukraine destabilizes achieved cooperation in the Arctic

and transforms it into a field of confrontation due to sanctions on technology

transfer. However, the substitution of European and American investments and

technologies by Asian ones can open up new economic opportunities.

Second, governmental socio-economic incentives to develop the Arctic

regions (which have multiple effects on related industries) may reinforce or

restrict offshore hydrocarbon resource production. On the one hand,

governmental authorities can stimulate industries through investment and tax

regimes to advance new projects, such as Goliat in Norway or the Kara Sea

projects in Russia. On the other hand, state interest in the Arctic offshore differs

from low commercial interest in the West to strategic prioritization in the East.

Greenland sees a potential path to independence from Denmark through natural

resource exploration, the USA gives a higher strategic priority to shale gas

projects than to any others, and Canada ties long-lead-time decisions on Arctic

offshore exploration to ecological and infrastructure issues. Economics play a

substantial role in most of the projects, but it is political decisions that can

significantly influence future development plans. Countries’ internal incentives

related to Arctic offshore exploration should be a subject of further investigation.

Governance and geopolitics play significant roles in the ability of the

business sector to cooperate on an international level. Cooperation agreements

with governmental support are a way to share the risks and exchange technical

58

expertise. This can be one of the strongest factors positively influencing

development with mutual benefits. The main area of cooperation development

was Russia and the Norwegian part of Barents Sea. Technology is the most

promising area for cooperation given the challenging nature of Arctic offshore

activities, however, immediate political issues can postpone such cooperation.

From this perspective, technology is a tool used in the geopolitical field:

currently, it is used in a manner that is destructive to Arctic offshore oil and

natural resources development and cooperation. There is still hope that Arctic

offshore oil and gas exploration technologies, in particular subsea technologies,

can clear a path to more automatized, safe, and therefore sustainable offshore

Arctic activities.

Finally, there is a perpetual issue of oil price. Numerous studies show the

direct relationship between crude oil price and industrial development (e.g., BP

Energy Outlook 2035 (BP, 2014b)). Rising oil prices place upward pressure

(both directly and indirectly) not only on inflation, prices of commodities, etc.,

but also on economic indicators (IEA, 2011). According to Bøhren and Ekern

(1987), petroleum prices volatility and the USD/NOK exchange rate presents the

highest risk to the Norwegian petroleum industry (cited in Osmundsen, 1999).

The study of Mohn and Osmundsen (2008) shows that there is a direct, robust,

long-term influence of oil prices on exploration activities on the Norwegian

continental shelf. Crisis events, such as the 2008-2009 world economic crisis,

followed by decreasing oil prices, resulted in a lack of necessary investments and

the delay or cancellation of some Arctic offshore projects. This is the case of

Goliat in the Norwegian part of the Barents Sea and the Shtokman project in the

Russian part of the Barents Sea. With respect to correlations between oil price

and geopolitics, and the depth of the influence of oil prices on Arctic offshore

activities, the current issue of oil price instability at the end of 2014 and price

minimum in January 2015 ($45 per barrel, Finam, 2015) can seriously affect

future Arctic offshore production plans. As was discussed above, crude oil prices

are not the only factor that drives or stalls Arctic offshore oil and natural gas

production. From a global perspective, the dependency of Arctic offshore oil and

natural gas development on other internal and external factors is very high.

A further step to deepen the analysis of Arctic offshore hydrocarbon

resources development is to analyze influential factors together in one basket,

aiming to understand causal relationships and to evaluate the ‘power’ of their

influence.

59

Conclusion

The energy world faces dramatic uncertainty, and geopolitics makes a

substantial contribution to that uncertainty. New geopolitical and resources

perspectives make Arctic offshore hydrocarbon development an international

issue of particular interest for the circumpolar and non-circumpolar countries,

institutions and international energy companies involved. Arctic issues form a

tangle of international relations that are both cooperative and confrontational.

The study has shown the importance of Arctic issues globally and

regionally and has provided deeper insight into Arctic offshore hydrocarbon

development activities. The factors identified in literature and historical reviews

provided an opportunity to measure of the scope of Arctic offshore hydrocarbon

development. The study’s results provided an understanding of current trends in

Arctic offshore hydrocarbon resources development.

The implications of this study’s results can be useful to help explore other

factors that influence Arctic offshore hydrocarbon resources development and to

make assumptions about future development. The results of investment and

production trends can be used to forecast assumptions. Future studies can

address the driving geopolitical and other factors (climate issues, governance or

cooperation) in the attitudes of energy companies toward Arctic offshore

exploration. These factors should be studied both separately and together. To do

so may provide an understanding of future trends in Arctic offshore oil and

natural gas resources development, along with the Arctic region overall.

60

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Appendix

Identified deposits, license areas and prospects (55):

Canada (3): Amauligak, Hecla, Drake Point. Norway (14): Aasta Hansteen (Luva), Skuld

(Fossekall / Dompap), Asterix (6705/10-1), Snøhvit (Snøhvit, Albatross and Askeladd), Goliat, Johan

Castberg (Skrugard and Havis), Gohta, Skavl, Salina (Pulk), Skalle, Snurrevad, Caurus, Tornerose, Wisting Central. Russia (29): Shtokman, North-Kildinskoye, Murmanskoye, Ludlovskoye, Ledovoye,

Fedynsky High structure, Tsentralno-Barentsevsky license block, Perseyevsky license block, Demidovsky license block, Fersmanovsky license block, Prirazlomnoe, Pomorskoye, North-

Gulyaevskoye, Dolginskoye, Varandey-Sea, Medyinskoye-Sea, Pakhtusovsky and Admiralteisky

license blocks, Rusanovskoye, Leningradskoye, Beloostrovskoye, Vostochno-Prinovozemelsky

license blocks 1,2,3, Kharasaveyskoye, Kruzenshternskoye, Yurkharovskoye, North-

Kamennomysskoye, Kamennomysskoye-Sea, Semakovskoye, Tota-Yahinskoye, Antipayutinskoye

USA (9): Nikaitchuq, Oooguruk, Northstar, Endicott, Liberty, Pt. McIntyre, Point Thomson, Badami, Burger.

Data collection sources:

Primary official sources: Government of Russian Federation, Norwegian Petroleum Directorate

(www.npd.no), National Energy Board Canada (www.neb-one.gc.ca ), Alaska oil and gas

conservation commission (www.doa.alaska.gov), Minerals Management Service Alaska Region, Government of Newfoundland and Labrador (www.releases.gov.nl.ca ), Aboriginal Affairs and

Northern Development Canada (www.aadnc-aandc.gc.ca), Ministry of Industries and Innovation

Island, Naalakkersuisut Government of Greenland (www.govmin.gl), Canada-Newfoundland and Labrador Offshore Petroleum Board (http://www.cnlopb.nl.ca), U.S. Department of the Interior

Bureau of Land Management (www.blm.gov).

Primary corporate public sources: CairnEnergy (www.cairnenergy.com), Skolkovo

(www.skolkovo.ru), Lundin Petroleum (www.lundin-petroleum.com), Gazprom

(www.gazprom.com), Arktikmorneftegazrazvedka (www.amngr.ru), Rosneft (www.rosneft.ru),

Severneftegaz (severneftegaz.ru), Novatek (www.novatek.ru), Gazprom Dobycha Yamburg (www.yamburg.ru), VNIIBT OAO NPO «Burovaja Tehnika» (www.vniibt.ru), BP (www.bp.com),

Chevron (www.chevron.com), Eni (www.eni.com), Eni Norge (www.eninorge.com), HIS

(www.ihs.com), Suncor Energy (www.suncor.com), Statoil (www.statoil.com), Tullow Oil (www.tullowoil.com), Shell (www.shell.com), Nunaoil (www.nunaoil.gl).

Secondary sources professional journals: Neftegazovaja Vertikal' (www.ngv.ru), Oil & Gas Journal

Russia (www.ogjrussia.com), ROGTEC Magazine (www.rogtecmagazine.com), Neft’ Rossii (www.oilru.com), Alaska Journal of Commerce (www.alaskajournal.com), Oil&Gas Journal

(www.ogj.com).

Secondary sources, public media sources: Bellona (www.bellona.ru), Vedomosti (www.vedomosti.ru), Kommersant (www.kommersant.ru), Arctic-info (www.arctic-info.ru), RBC

(www.rbc.ru), Expert Online (www.expert.ru), Vesti Finance (www.vestifinance.ru), Barents

Observer (www.barentsobserver.com), Reuters (www.reuters.com), Daily Oil Bulletin

(www.dailyoilbulletin.com), Alaska Dispatch (www.alaskadispatch.com), Bloomberg

(www.bloomberg.com), Scandoil (www.scandoil.com), The Independent (www.independent.co.uk),

BBC News (www.bbc.co.uk), Financial Times (www.ft.com), The Telegraph (www.telegraph.co.uk), Svalbard Museum (www.svalbardmuseum.no), The Arctic Institute (www.thearcticinstitute.org), )

Petroleum Exploration Society of Great Britain (www.pesgb.org.uk), World Maritime News

(www.worldmaritimenews.com) Offshore.no (www.offshore.no), Offshore technology (www.offshore-technology.com), Subsea IQ (www.subseaiq.com), Rigzone (www.rigzone.com),

Neftegaz.ru (www.neftegaz.ru), Neftyaniki.ru (www.neftyaniki.ru), Lenta information portal

(lenta.ru), OilCapital.ru (www.oilcapital.ru), Hydrocarbons Technology (www.hydrocarbons-technology.com), Gubkinskaja Centralizovannaja Bibliotechnaja Sistema (www.gublibrary.ru), RIA

(en.ria.ru), Finam (www.finam.ru), Anchorage Daily News (www.adn.com), Petroleum News

(www.petroleumnews.com), Alaska Public Media (www.alaskapublic.org), Forbes (www.forbes.com).