As the global lockdown approaches its second anniversary, the economic costs of the coronavirus pandemic are starting to be felt from multiple quarters, including in the energy industry. One of the more bizarre effects of the shutdown was witnessed last week when the West Texas Intermediate (WTI) index, a US-based measurement of oil price futures, fell into negative territory, related to oil orders in May, for the first time in history.
This situation reflected a petroleum glut on the market, due to stoppages in transportation as more people are asked to shelter in place, as well as policy frictions between major oil producers, especially Russia and Saudi Arabia, and a dearth of oil storage facilities as demand remains low, with no endpoint yet in sight. Along with other major fossil fuel-producing regions, many parts of the Arctic are facing looming questions about their oil and gas sectors.
Fossil fuels were widely viewed not long ago as key players in the economic expansion of the Arctic, especially when petroleum prices were well over US$100 per barrel a little over a decade ago, before steeply falling during 2014. It was arguably a 2008 publication [pdf] by the United States Geological Service, which suggested that the Arctic Circle contained about thirteen percent of the world’s ‘undiscovered’ oil and thirty percent of the globe’s undiscovered natural gas, that represented the main catalyst for prevalent speculation about an immanent scramble for the region’s energy supplies, despite the fact that a majority of these resources were hypothesised to be within the offshore exclusive economic zones of the Arctic states themselves.
The prospect of a mad dash to the region for Arctic fossil fuels faded quickly as oil prices tumbled on global markets during 2014-5, caused in part by aftershocks from the post-2008 global recession, cooling demand in China, the acceleration of hydraulic fracturing (‘fracking’) of shale oil in the United States, (which caused that country to become less dependent on foreign energy imports), and an overall oversupply in the market. This spelled trouble ahead for the major oil and gas producing regions of the Arctic, (notably Alaska, Canada, Norway, Russia), as questions regarding the cost-benefit ratio of future fossil fuel exploration began to be too pressing to ignore.
In some cases, however, there has been a ‘press forward’ approach to Arctic oil and gas exploration. The US government of Donald Trump continued to push for the opening up of Alaskan wilderness areas to oil drilling, despite low prices and environmental opposition, with a formal call by the White House to commence operations given in September last year. At the October 2019 Arctic Circle conference in Reykjavík, US Secretary of Energy Rick Perry gave an ebullient, (and as one commentary noted, anachronistic), plug for Alaskan fossil fuels while brushing off economic and environmental concerns.
However, the current state of oil prices, the coronavirus, and ongoing opposition from green activist groups continue to upset Washington’s regional exploration schedules. As well, several US banks, including most recently the financial firms Citigroup and Morgan Stanley, have announced that they will not support new financing for Arctic energy projects, despite criticism from Alaskan officials and Washington, reflecting the growing backlash from environmentalists and Indigenous organisations.
Russia, even under current global circumstances, has also pressed forward with Arctic oil and gas operations, hoping to match Arctic drilling with regional development plans for Siberia and the opening up of the Northern Sea Route and other Arctic Ocean sea channels in the coming years. In late January of this year, tax incentives were introduced to Russian companies interested in Arctic operations were announced, and during the following month information was released about an ambitious plan, spearheaded by the Russian energy firm Rosneft (Роснефть) to tap oil reserves in the Vankor (Ванкорское) region of the northern Ural Mountains.
According to Rosneft representatives, the proposed Vostok Oil (Восток Ойл) project would necessitate major new regional infrastructure, (airports, pipelines and roads), including an expanded port facility in the Taymyr Peninsula in Siberia. By March however, Russia had found itself on one side of a thorny oil trade war with the Saudi Arabian government, when Moscow declined to support proposed cuts in production to slow down falling global prices caused by the coronavirus and especially a steep drop in Chinese demand. Riyadh responded by reducing its own oil prices and planning production increases, pushing prices down further and placing strains on the energy sectors of several other countries, including the US fracking industry.
A tentative truce in the dispute was reached earlier this month, assisted by Washington, but the damage to the industry has been widespread, especially in the US, which is now facing serious questions [paywall] over whether its shale oil industry will survive the current crises. The unprecedented phenomenon of an oil price index falling below zero dollars per barrel reflected the growing dearth of oil storage facilities in the US as contracts for May 2020 were coming into effect and buyers were de facto paid to receive petroleum shipments.
The plunge in the WTI index last week, reaching minus US$37.63 before recovering slightly, reflected uncertainty as to when global prices will recover, an answer which can only be provided when the coronavirus situation stabilises and economies are able to fully open again.
The Norwegian oil industry, as well its drilling plans in the Arctic, have also faced a series of hits due to both the coronavirus and opposition by environmental concerns. Last, Oslo agreed to move the boundary line for Barents Sea oil and gas drilling southwards, expanding the ‘no-go’ area, to reflect changed local ice conditions and to strike and improved balance between energy and environmental interests, but critics argued that the plans did not go far enough to protect local marine life. The Norwegian oil industry, including those within the overall North Sea region, are all facing coronavirus-led strains, with both the country’s Brobdingnagian oil fund and its currency taking market hits. Last month, new oil exploration regions were suggested by the country’s oil ministry, but none of these blocks were within the Arctic-Barents region.
Still another wild card for Norway’s petroleum industry has been an ongoing campaign by environmental organisations, including Greenpeace, to mount a legal challenge to Arctic drilling, arguing that such activities were in violation of the country’s constitution, specifically Article 112, which states that the people, along with future generations, have the right to a healthy and diverse environment. The legal challenges began in 2016, and this month it was confirmed that the case would be heard by the Norwegian Supreme Court after previous lower court challenges were thrown out.
In looking at the future of Arctic energy, which will likely face continued economic challenges at least in the short term, there are no shortages of unknown factors. At the centre of this debate is the state of the global economy, which is unambiguously moving towards recession but with an indeterminate duration. A ‘V-shaped recession’, meaning a sudden downturn followed by an equally swift recovery, could create a whiplash effect on fossil fuel prices as numerous economies race to return to pre-COVID-19 productivity. China, which appears to be moving away from the worst of its coronavirus outbreak, may experience a slow but steady economic revival after experiencing its most serious economic contraction loss since the late 1970s earlier this year. Should that be the case, this would mean a ramping up of energy imports for the country.
However, it has also been argued that a window of sorts has been created for arguments that a greater effort should be made to curtail oil and gas production, including in the Arctic, on environmental grounds, as the situation in Alaska has suggested.