Stumbling Block: China-Iceland Oil Exploration Reaches an Impasse

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CNOOC headquarters in Beijing. (Photo via Wikimedia Commons.)

This week, it was announced that the China National Offshore Oil Cooperation / 中国海洋石油总公司 (CNOOC) intended to withdraw [In Icelandic] from what was an ambitious oil exploration project in the waters off Iceland. In October 2013, an agreement had been finalised which granted a licence to the partnership of CNOOC and Eykon, a Reykjavík-based energy firm, to jointly explore for oil and gas within designated blocks in the Dreki region, (also known as the ‘Dragon Zone’ or Drekasvæðinu), of the North Atlantic, between Iceland and Norway near Jan Mayen Island. After Eykon expressed its interest in developing potential fossil fuels in the Dreki area, the Icelandic National Energy Authority (Orkustofnun) or NEA, stated that Eykon would require a foreign partner to assist with financing before commencing any exploration.

The Icelandic firm ultimately chose CNOOC, thus marking the first time the Chinese company had embarked on oil exploration in the Nordic Arctic region and representing a major step in Beijing’s Arctic economic interests. The deal took place at a time when high oil prices, averaging more than US$90 per barrel in 2013, had made Arctic fossil fuel exploration especially attractive. Iceland, which was in the process of recovering economically from its 2008-9 banking crisis (or kreppa), envisioned a lucrative economic sector opening up. The CNOOC deal also took place following China’s successful admittance to the Arctic Council as a formal observer and shortly after a bilateral free trade agreement had been finalised between Beijing and Reykjavík.

A third company, Petoro Iceland AS, with its parent firm based in Stavanger, Norway, joined the partnership shortly after it was announced, despite the then-diplomatic freeze between China and Norway created by the 2010 Nobel Peace Prize incident. Under the terms of a 1981 agreement [pdf] between Iceland and Norway, both parties had the option of requesting a 25% stake in any exploration licence issued by the other’s government. However, the then-centre-right Norwegian government under Prime Minister Erna Solberg, elected in October 2013, declined to participate in the Dreki project. A de facto moratorium on Arctic oil exploration was announced that month, a compromise allowing Prime Minister Solberg’s minority government to be assured of support from centrist parties, especially the Christian Democratic party, in the Norwegian parliament.

Oslo altered that stance the following month and then agreed to act as a third partner in the Dreki licence via the Norwegian firm Petoro, agreeing to a 25% stake with the remaining 75% split between CNOOC (60%) and Eykon (15%). Initial surveys were to begin in mid-2014 and, assuming sufficient quantities of fossil fuels were located, production was estimated to begin by 2022. Due to environmental concerns, any offshore platforms constructed in the Dreki region, like any installations elsewhere in the Arctic, would have had to take into account the difficult climate, including high winds and fog, ice in the form of a frozen sea surface and icebergs. There would have been a need to add mechanisms to prevent oil spills in the environmentally delicate region, especially in the wake of the Deepwater Horizon massive oil spill in the Gulf of Mexico in 2010. At the time, the joint Dreki project not only increased Beijing’s energy presence in the Arctic but also had the potential of bolstering Iceland as a fossil fuel producer at a time when Arctic energy appeared to be opening up, due to ice erosion in the far north.

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Hafnarfjörður harbour, Iceland (Photo by Marc Lanteigne)

The Dreki project began in 2015 with seismic surveys in the designated search region generating much initial optimism. However, in the wake of the collapse of global oil and gas prices after 2014, Arctic energy surveys came under increasing strain, with several projects being delayed or abandoned due to cost concerns. This week, CNOOC announced that it was not going to continue maintaining the current exploration licence in the wake of insufficient evidence thus far of enough potential fossil fuel supplies to continue the project.

Petoro Iceland also announced its decision to withdraw from further involvement in the Dreki enterprise, despite the fact that the Norwegian government has confirmed its interest in searching for new Arctic oil and gas in the wake of misgivings expressed by some government actors both about the viability of Arctic oil prospects, as well as environmental concerns. Earlier this month, a lawsuit against the Norwegian government by three environmental groups was dismissed by the Oslo district court, but political debates over potential new Arctic oil and gas exploration and drilling is likely to continue.

For Iceland, the falling apart of the Dreki partnership is a setback for the country’s interests in developing its energy sector for international markets. However, Eykon has expressed its willingness to press on [In Icelandic] with regional exploration, and has lobbied the NEA that it should be given the option to do so, but new partners would very likely be necessary. China’s energy interests in the Arctic have also not abated, but Russia is now the centrepiece of Beijing’s investments in potential Arctic oil and gas, including the watershed Yamal Liquefied Natural Gas project in Siberia. The improvement in Sino-Norwegian relations since late 2016, and the recent resumption of bilateral free trade talks, may also open the door to energy cooperation in the near future.