Normative Narratives

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Economic Outlook: Trying to Draw Blood (Oil) From Stone (Ice)

A recent timeline highlights a year of setbacks in Arctic drilling. These setbacks, surrounding an already contentious issue, have many people (even those in the industry) rethinking the cost-effectiveness of Arctic drilling.

“In another stark warning about the dangers of Arctic Ocean drilling, the German bank WestLB announced on Friday (April 2012) that it would not provide financing to any offshore oil or gas drilling in the region. The company’s sustainability manager said the “risks and costs are simply too high…The decision was made just a week after insurance giant Lloyd’s of London issued a report concluding that offshore drilling in the Arctic would ‘constitute a unique and hard-to-manage risk’ and urged companies to ‘think carefully about the consequences of action’ before exploring for oil in the region.”

In a bit of dark irony, global warming from human based activities may be contributing to the future possibility of Arctic drilling. “The bank’s new eight-point policy on offshore drilling lays out specific criteria for the projects and companies that are eligible for financing — excluding any exploration or production activities in areas where the average temperature for the warmest month is below 10°C (50° F).” Global warming raises these average temperatures, melting ice and providing access to previously unreachable oil reserves. Oil extraction and the burning of fossil fuels in general contribute to global warming, creating a self-fulfilling cycle of energy demand, global warming, and Arctic drilling.

Companies, however, seem to be heeding WestLB and Lloyd’s warnings. Shell is already heavily invested in the region, investing over 5 billion dollars over the past 6 years. Oil drilling was set to begin this past summer, but a number of complications have delayed this drilling until after winter 2012-2013.

“A series of gaffes — from failed Coast Guard inspections to a drilling rig slipping its mooring — prevented the company from receiving its permits and commencing operations in early August as it had anticipated.”

When Shell finally seemed poised to begin drilling, another unanticipated event rained on the parade. “Just one day after beginning its long awaited drilling operations, Shell suspended drilling due to a massive ice pack covering approximately 360 square miles drifting toward the site.”

Shell may be too highly invested to think objectively about the costs and benefits of Artic drilling—in economic terms, too much of Shell’s spending constitutes “sunk costs”. However, other less invested companies are taking a “wait and see” approach to Artic oil exploration, according to a representative from Statoil, an Alaska based oil company.

“”We do think it’s important to observe whether they [Shell] will be able to obtain all necessary permits, secure regulatory approvals and kind of demonstrate exploration operations can be reliably and cost efficiently conducted in the field,”

In the most recent of many blunders, “Shell lost control of its Kulluk drilling rig as it was being towed to Seattle, and the rig ran aground near Kodiak Island in Alaska on Monday.” Shell was moving the rig on an expedited schedule to avoid higher 2013 taxes. Shell will probably profit handsomely from Arctic drilling in the long run, but right now it sure is off to an inauspicious start.

Inadequate infrastructure and uncertainty about Arctic oil spill cleanups further complicate the issue of Arctic drilling. “The U.S. Geological Survey estimates that 25% of the world’s remaining undiscovered conventional oil and gas reserves are located in the Arctic, with most of it in offshore reservoirs.” Cleanup costs in the region could end up being much higher than the oil industry is willing to admit. If recent history of the industry is any indicator, then the question is not if Arctic drilling will cause a spill, it is when and how large of a spill it will end up being.

Arctic drilling certainly could be lucrative, and may one day be an important component of a more robust energy portfolio aimed at reducing foreign dependence and enhancing American energy security. But recent failures by Royal Dutch Shell suggest that perhaps the technology does not yet exist to access the vast reserves frozen under the Arctic in a cost-effective and environmentally sustainable fashion.

Energy companies and governments should focus more on “picking the low hanging fruit” of sustainable development, such as solar and wind power, instead of investing billions of dollars in failed projects.