Losing The Arctic Edge

This article appears in the July 2008 issue of Oilweek.

Canada needs to move quickly to join international rivals exploiting the potential of the Arctic

By Peter McKenzie-Brown
Canada began to explore the far north for oil almost a century ago. In 1911 Jim Cornwall, a northern businessman, saw oil on the Mackenzie River and hired an Aboriginal named Karkesee to look for seepages. Karkesee found several. Later analysis showed the oil to be medium in gravity and low in sulphur.

Cornwall formed a syndicate with two Calgary businessmen and the group engaged T.O. Bosworth, a prominent petroleum geologist, to study the area. During his 1914 expedition, Bosworth staked three claims on behalf of his backers and reported enthusiastically on the area’s prospects. Ironically, given later events, Bosworth stressed that his supporters should take every effort to control pipeline transportation from the North to southern markets.

World War I put a halt to the group’s exploration plans, and by Armistice Day Imperial Oil owned Bosworth’s claims. The company began exploratory drilling along the Mackenzie in 1919, first drilling two salt water wells near Great Slave Lake. Farther down the Mackenzie, near Fort Norman, the third showed oil. Led by Ted Link, who later became Imperial's chief geologist, the crew drilled the successful well with a cable tool rig. Legend has it that Link chose the site by waving his arm and saying, “Drill anywhere around here.”

In August 1920, at a depth of about 1,240 metres, the world's most northerly oil well came in; Imperial put it on production the very same year. Although just south of the Arctic Circle, the Norman Wells field established Canada as the world’s undisputed leader in northern exploration and production, and she retained that title for more than 60 years. Led by Dome Petroleum and a series of attractive federal grants, the industry’s golden age of Arctic exploration in the 1960s and 70s delivered huge natural gas discoveries and a number of small oil finds.

Let’s fast forward to the present. In petroleum terms Canada has become a second-tier Arctic nation. The US, Norway and Russia are all Arctic producers. In recent years, Denmark has done some drilling off the eastern shore of Greenland. Canada is clearly the laggard. Despite skyrocketing oil and gas prices and the many successes of Canada’s golden age, exploration in our Arctic is almost at a standstill.

As if to rub our collective nose in it, Enbridge Inc. and Gaz Metro recently announced that their proposed Rabaska liquid natural gas terminal in Québec had found a secure source of LNG. The source will be Russian energy giant Gazprom, which will deliver cargoes from an Arctic facility in the Barents Sea due to begin deliveries in 2014. By the terms of the agreement, Gazprom and Gaz de France will become equity partners with the two Canadian companies in the $840-million regasification plant.

The Great Abandon: In a sobering presentation to the Canadian Society of Petroleum Geologists, Dave Russum (VP of geosciences for AJM Petroleum Consultants) made a compelling case that Canada has fallen behind its rivals in the development of Arctic oil and gas, and that she needs to catch up. Only five countries have claims to mineral rights in the Arctic – the others are the United States, Russia, Norway and Denmark. 

The United States became a major oil producer at Prudhoe Bay in 1977, and continues to produce from that supergiant field. Last year Norway began producing LNG from its Snøhvit field. Russia, which already has Arctic production in Siberia, will begin producing from Shtokman in the Barents Sea in 2014. And Canada?

This country’s most northerly oil production still comes from the 88-year-old Norman Wells field. A tiny amount of gas production serves a few small towns and villages in the Mackenzie Delta, but this service has as much to do with local development as petroleum economics. When energy prices crashed and Dome Petroleum collapsed in the mid-1980s, the industry decamped from Canada’s Arctic with great abandon. Why? Several concerns have discouraged Arctic exploration for a generation. The main issue is geology. “In the Arctic most of the expected resources are gas,” says Russum, “and they are devilishly expensive to develop. Except for Prudhoe Bay, (the Arctic basins) have pretty much been gas plays, and we expect about 75% of the resource there to be gas. Oil has been the prize. If you couldn’t find oil, you didn’t want to develop there.”

During the last two decades the expense and difficulty of Arctic development was worsened by surplus natural gas supplies in North America. The situation has greatly changed in recent years, says the executive director of the Arctic Institute of North America. Benoît Beauchamp agrees that the Arctic is gas-prone, but says this is no longer an obstacle to development. In recent years natural gas has become recognized as a premium source of energy, although it generally serves continental rather than global markets.

This continental character raises the spectre of Canada’s tradition of bitter disputes over northern pipelines. It now appears that the joint federal and provincial panel evaluating the social and environmental impacts of the present Mackenzie Valley Pipeline proposal – this one put forward by Imperial Oil in 2004 – will delay the environmental decision on the $16.2-billion project by at least another year. This adds to a string of such problems that date back to the mid-1970s.

Like previous proposals, Imperial’s pipeline project has been dogged by setbacks. The company has yet to resolve Aboriginal land access issues or come to an agreement with Ottawa on how to finance the project. According to Beauchamp, construction of this pipeline is critical for renewed exploration in the North. “The announcement of the Mackenzie Valley Pipeline will be the gunshot that starts the race up there. Then there will be a bonanza.”

Beauchamp is more sanguine about Canada’s place in the North than Russum. “It’s true that there hasn’t been much drilling in the Arctic Islands since the 70s, but there is a great deal of interest now in the Mackenzie Delta – no drilling, but seismic and other preliminary work. A few years ago an ExxonMobil/Imperial partnership acquired a large land parcel in the shallow Beaufort, on an extension of the Delta.

That’s likely an oil prospect, and three parcels adjacent to that property will be up for grabs in June. It will be extremely interesting to see how strong the interest is.” As it happened, BP acquired one of those properties for $1.2 billion. The other two went for a mere $10 million combined. Beauchamp expects an Arctic boom. “Interest in the Arctic is mounting. There are very few places left in the world with the potential of the Arctic, and companies need to develop reserves in order to grow. Canada is likely to be a focus because we are a stable country. Corruption is not a problem here, unlike Russia. We aren’t likely to abrogate signed agreements, as the Russians did at Sakhalin Island, for example. The problems in Canada are mostly related to the approval process.

Canada Rules! Russum sees the issue as being somewhat more urgent. “For security, sovereignty and economic reasons, Canada should take an active role in Arctic development.” That’s an opinion shared by Federal Natural Resources Minister, Gary Lunn, who met in May with leaders from the United States, Russia, Norway and Denmark to sort out how best to deal with conflicting sovereignty claims in the Arctic, including Canada’s.

“It is critically important that it’s under our sovereign control so that we set the parameters for the environment and that we make the decisions whether or not even to allow exploration,” Lund said on the eve of the meetings, which were held in Ilulissat, Greenland. “We are going up to reaffirm our commitment on defending and protecting our sovereignty in the Arctic.” On an immediate front, Russum notes that depletion rates have been accelerating in all of Canada’s gas-producing regions. “In every area, particularly those in Alberta, we have seen declines. This is not particularly surprising, given the drop-off in drilling,” but it is an important reason to move back into the Arctic. “Estimates suggest that there might be 10 billion barrels of oil and 181 trillion cubic feet of gas in the Canadian Arctic. With high production rates depleting gas reserves across Canada, we need to be considering all opportunities.”

“Conventional and unconventional gas in southern Canada will not satisfy future North American needs,” he adds. “We have to recognize the need to develop a wide range of energy sources.” Energy is the vital commodity, he says; it equals power. In a rather unCanadian way, he argues that “countries with abundant energy (like Canada?) will control the world. Net consumer countries (like the United States?) will be at the mercy of world economics and politics.”

In the case of natural gas, the Arctic will soon become a particularly important source of supply. According to Russum, a quarter of the world’s undiscovered gas is likely to be there. Looking at the entire transpolar region, 26 geological basins make up the Arctic. Of those, 21 have had some exploration activity, and explorers have found oil or gas in ten. There is commercial production in four basins (two in Russia, one in Norway and Alaska’s North Slope). Two - Canada’s Cameron Island and the Mackenzie Delta – have been the source of minor production volumes. Given the small number of wells drilled and the Arctic’s challenges to development, these results are impressive.

Imagination Beckons: Given the prospects for huge Arctic gas discoveries and the controversy over gas pipelines to the large North American markets – in addition to the Mackenzie Valley line, there have been disputes for 30 years over a line from Prudhoe Bay through the Yukon into the Alberta network – Russum argues that Canada should consider LNG production from the Arctic. “Although there are big problems with sea ice in the winter, these are problems the Norwegians have solved” he says, “and which the Russians obviously believe are solvable. Certainly one ‘benefit’ of global warming is ice shrinkage, which means more open water in the Arctic and a more easily passable Northwest Passage.”

Another advantage of LNG is that producers have more market options – especially since “world demand is now driving gas movement.” This point harks back to the geographical maps that Dome Petroleum made famous in the early 1980s. As those maps pointed out, the Beaufort Sea is roughly in the geographic centre of the developed world. If sea ice were no problem, LNG tankers loading up in the Arctic would find themselves about equidistant from London, New York, San Francisco and Seoul.

Destination decisions for cargoes from that region could be based purely on best price; the calculation of transportation costs would be largely redundant. By contrast, traditional pipelines have a number of drawbacks quite apart from political wrangling. One of those is greater terrorist risk. Others include long timelines, the enormous capital required and the fixed destination. Pipelines from stranded resources don’t have much market flexibility.

Whether developed through traditional pipelines or LNG or both, Russum believes it needs to be done. “In the Canadian Arctic, the long-term costs of frontier gas production are going to be similar to the costs of producing unconventional gas – shale gas, coal bed methane – in large volumes. Imagination will be required for development, and we will need to apply out-of-the-box thinking. If we do this, there is no reason our Arctic production can’t be economically viable in the global market place.”

The resources are there and the technology is available. The world’s hydrocarbon markets have never been stronger. According to Russum, “We used to be the leader in exploring the Arctic, along with the Americans. Now we have a real opportunity. We have to move beyond discussing development. We have to pursue it in an economic, environmentally sensitive and socially responsible manner.” He pauses for effect. “We only have four competitors. Three of them have already proved that Arctic development is viable in this environment.”