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The Arctic: Oil's last frontier
Twenty-five percent of the world's untapped reserves could lie near the North Pole, but politics could prove harder to crack than the ice.
By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Nothing says hot like an Arctic bidding war.

Last spring Canada Southern Petroleum, a company with significant reserves inside the Arctic Circle, received a takeover offer of $7.50 per share, nearly a 60 percent premium on its stock price. By the time the company was sold four months later to another Canadian firm, it went for $13.10 a share.

The Arctic is thought to hold vast amounts of oil and and gas reserves, but drilling raises sticky political and environmental questions.

While some of that excitement may have centered on the company's proximity to Canada's tar sands project in Alberta, it was also cashing in on its position in one of the last places on earth thought to hold significant amounts of untapped oil and gas.

While there is drilling in the Arctic on or close to shore, the sea under the polar cap is unlikely to remain largely untapped for long - governments and corporations are racing to carve up the Arctic oil pie.

With it comes the sticky and as yet unanswered political questions over which countries have rights to which fields and whether this development can be pulled off without too much environmental and social damage.

What's at stake

It's hard to say how much oil and gas lies buried underneath Arctic ice.



A new petroleum province will likely be needed if the world is going to both replace the output from current fields, many of which are declining, and keep up with worldwide oil demand that is expected to surge by more than 50 percent over the next 25 years. This underlay the tripling of oil prices since 2002.

This demand has led all the major players to the game.

BP (Charts), which operates the huge Prudhoe Bay field in Alaska, signed a $17 billion exploration agreement with Russia.

Statoil, Norway's state oil company, considered to have some of the best cold-weather expertise in the business from its North Sea operations, is well positioned to explore massive deposits believed to lie north of Norway in the Barents Sea.

Royal Dutch Shell (Charts), ExxonMobil (Charts), Chevron (Charts) and ConocoPhillips (Charts) have interests as well.

The hard part

Getting this oil won't be easy, and problems start before drilling even begins.

Unlike Antarctica, a landmass whose territory is shared by all the world's nations, no such treaty exists in the Arctic. So questions over who can drill where, who can use which shipping lanes and who gets what royalties are all unanswered.

Several nations that border the Arctic are signatories to a treaty that gives them exclusive control over coastal waters extending 200 miles from shore.

But under this treaty, it is possible to file a petition to extend that range beyond 200 miles, and that's exactly what several countries have done.

Robert Corell, a member of the multigovernment forum the Arctic Council, said Russia basically drew a line from one tip of its territory to the other, running through the North Pole. This would effectively give Russia exclusive rights to nearly half the area.

A senior State Department official, speaking on condition of anonymity, said the Russian claim wasn't quite that large, although he did say it extended well beyond the 200-mile zone.

The official also said Denmark, Canada and Norway have filed claims to extend their territory as well and that the United States would soon follow.

He said the final outcome, which will be mediated through the United Nations, is anybody's guess.

It's also reasonable to think that other countries that don't have coastal territory bordering the Arctic - which would be every country besides Russia, the United States (via Alaska), Canada, Norway and Denmark (via Greenland) - would support a shared system like Antarctica.

"There's remarkably few agreements up there between any of the bordering nations," said Corell. "There are going to be some geopolitical issues on the plate."

Then there's the matter of drilling itself. The Arctic ice pack, three to 10 meters thick and always shifting, poses significant challenges: think of those crushed ships from the early days of exploration.

The solution involves heavy reinforcement of rigs or drill ships and using steel that is less brittle, as normal steel can more easily break at temperatures below 20 degrees Fahrenheit, said Alan Spackman, director of offshore technical and regulatory affairs for the International Association for Drilling Contractors.

"They're made horrendously strong," said Spackman. "The common rigs working in the Gulf of Mexico wouldn't survive."

Whether even the reinforced rigs survive is a concern for environmentalists, who fear the ice could cause a spill by damaging equipment and make a cleanup next to impossible.

Corell said a tanker spill in the region would be unlikely, as most would be double hulled. It's the hundreds of other ships required to support a drilling effort that are more of a concern, not just for the environment but for the effect that industrializing the area would have on the way of life of the region's traditional inhabitants.

And there's also a feeling that drilling in the Arctic, made possible largely by global warming at least partially caused by burning fossil fuels, is perverse.

"It just feeds a vicious cycle," said Athan Manuel, director of lands protection for the Sierra Club.

Manuel said meeting the world's energy needs should first start with a serious commitment to conservation combined with expanded use of cleaner technologies.

"More drilling is not the solution," he said. "We think this is a terrible idea."


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