CRACKS IN THE ICE: THE NEED FOR A REVIEW OF THE LEGAL STATUS OF THE ARCTIC OUTER CONTINENTAL SHELF

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2011)
CHAPTER 6C
CRACKS IN THE ICE: THE NEED FOR A REVIEW OF THE LEGAL STATUS OF THE ARCTIC OUTER CONTINENTAL SHELF
Reg Fowler
Shell International B.V.
The Hague, The Netherlands

RICHARD FOWLER (aka Reg) is senior legal counsel at Shell International in The Hague, the Netherlands. His work focuses on the Russia and Caspian Sea regions, particularly the transportation and marketing of oil, gas and sulphur from the Kashagan field in the Caspian Sea. Previously, he worked for seven years in Shell's oil and gas trading division in London, advising all aspects of physical and derivative trading as well as shipping across Europe, Russia, Africa and the Middle East. Before joining Shell, Reg worked at Agip and ARCO in the UK, handling upstream gas assets in the North Sea. He began his legal career at Clyde & co. in London specialising in insurance litigation.

Summary

The purpose of this paper is to provide a thought-provoking, but not exhaustive, legal risk assessment for hydrocarbon exploration in Arctic waters. It focuses on the potential for unintended consequences in the exploitation of the continental shelves of the region's coastal states. The United Nations Convention on the Law of the Sea imaginatively created the opportunity for coastal states to exploit the nonliving resources of their continental shelves beyond the limit of their exclusive economic zones. Unfortunately, other conventions have not shared the same imagination and have left this "hybrid" area uncovered. As the pressure for exploitation of the Arctic increases, the Commission on the Limits of the Continental Shelf and the International Seabed Authority will find themselves overstretched in trying to "plug" these legislative gaps as ever increasing cracks appear in the system of international law which supposedly covers the Arctic and other expanses of Ocean beyond any state's Exclusive Economic Zone.

Hydrocarbon resources and the Arctic Sea

The last 12 months have seen a series of significant events which have cast the last few hydrocarbon bearing wildernesses of the planet in a new and meaningful light. The first such event was the loss of the "Deep Water Horizon" oil rig executing a well 18,000 feet below the surface of the Gulf of Mexico. The second event was the signature by Norway and Russia (subject to ratification) of a Maritime Limitation and Co-operation Treaty in respect of the Barents Sea and Arctic Ocean on the 15th of September 2010. The third event was the disclosure by Rosneft and BP of their strategic partnership to develop hydrocarbon resources in the Kara Sea on the Russian continental shelf of the Arctic. The fourth event was the political collapse of the Republic of Libya and the oil spike consequent upon it. But there is one previous event which also needs to be understood in the context of this paper. That is the planting of a Russian flag on the seabed 14,000 feet over the North Pole in September 2007.¹ The connection between these events in terms of a new rush for hydrocarbon resources is easy to grasp. However, there is also an underlying legal connection between these events which this paper will explore.

The Arctic Sea presents a legal conundrum. The fact that it is mostly frozen from most of the year has so far not caused a legal issue in the sense that the coastal states of the Arctic have treated it as a sea and not as territory capable of occupation. Those coastal states occupying the Arctic basin, being the United States, Canada, Greenland, Norway and Russia recognize the authority of the United Nations Convention on the Law of the Sea as it relates to the Arctic, though the United States has yet to become a party.

Geographically, the Arctic is surprisingly diverse. From the Chukchi Sea in the Far East to the Barents Sea which Russia shares with Norway, the Russian Arctic coast is characterised by the estuaries of enormous Siberian rivers such as the Ob, Yenisey and Elena, and one of the largest submerged continental shelves of the planet. It is only matched by the continental shelf stretching offshore Brazil from the estuary of the River Amazon. The Russian continental shelf, a natural continuation

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of the Siberian plateau, is clearly "the next place to go" in hydrocarbon exploration. On the other side of the Arctic, the Northern Slope of Alaska is a well-established oil province, though companies such as Royal Dutch Shell are still struggling to secure rights to prospect offshore in the Beaufort Sea. The Canadian Arctic shoreline is much more complex, with a scattering of uninhabited islands to the

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north and west of Greenland. The Canadian shorelines do not have much of a continental shelf at all. Finally, the Norwegian interest in the Arctic Sea arises largely from its territorial interests in the Spitsbergen Islands which themselves have little or no continental shelf, but enable Norway to claim a substantial Exclusive Economic Zone around them.

Figure 1 The Arctic Ocean region, illustrating area within 200M of baselines in pale blue, and beyond this, the areas currently submitted by coastal States in respect of outer continental shelf.

Purple - The Russian Federation

Blue - Norway;

Olive green -Iceland;

Lime green - Denmark. Hatched colouring denotes where shelf areas overlap.²

This perceived iniquity in the distribution of continental shelves in the Arctic Sea is in fact compounded by another factor. The international media reports various predictions for the first complete melting of the polar ice cap, perhaps as soon as 2013, and the possibilities for shorter sea voyages between the North Sea and the Bering Sea, it is less well known that the Arctic ice cover is substantially thicker on the US Canadian side of the pole compared to the Russian side. Prevailing Arctic winds have acted as a consistent conveyor transferring mobile ice in a westward direction so that the ice pack which forms around the Canadian shoreline is deeper and much more long-lasting than ice on the Russian coastline. Whilst the Russian Arctic Sea is regularly free of ice for three to four months of the year, any temporary loss of the Arctic ice cap on the Canadian side will make a substantial difference in terms of accessibility to hydrocarbon resources and to freedom of sea passage. For the first time in the current interglacial period, the Canadian pack ice will be replaced by annual ice. Indeed, when in 2007 the veteran Russian explorer Artur Chilingarov used a Finnish built icebreaker and a Russian submarine to navigate his way to the waters beneath the North Pole, many western commentators lamented the fact that neither Canada nor the US had anything approaching the Russian icebreaker fleet to deploy. They were missing the point; the strongest icebreakers are not particularly effective in the compacted and established ice of the Western Arctic, whereas they are at their most effective breaking annual ice over the Russian continental shelf.

Russia's large Arctic continental shelf is very likely to contain substantial hydrocarbon resources. The shelf itself covers 6.2 million square kilometres and is estimated to hold 80% of the 100 billion tons of offshore hydrocarbon resources Russia holds. In terms of resources yet to find, the US Geological Survey and Statoil estimate that the Arctic holds 25% of global undiscovered hydrocarbon resources; the Russian Ministry of Natural Resources estimates that the Russian share equates to about 80 billion tons or 586 billion barrels equivalent. Significantly, only 9 to 12% of Russia's Arctic continental shelf has been adequately explored, and exploration in the eastern sector of the Arctic shelf has hardly begun. Vitally, the subject of this paper addresses Russia's claim to an extra 10 billion tons of resources potentially located in its continental shelf but beyond its Exclusive Economic Zone.³

Russia may have another card to play. Since the recovery of oil production after the collapse of the Soviet Union, Russia has found it difficult to establish and maintain sufficient export routes to deliver more than about 35 to 40% of its onshore production to international markets. However, its central and eastern Siberian oilfields may now encounter a new lease of life if Russia's northern shores become navigable for a greater part of the year. The cost of establishing oil terminals and marine bases to support Arctic offshore developments may be offset by the benefits of using those terminals for shipping existing onshore production as well, to eastern or western markets.

Some commentators have doubted whether exploration and exploitation of hydrocarbon resources in the Arctic is safe or feasible. Very poignantly, the International Seabed Authority of the United Nations published a technical paper in 2010 in which they reflected on the ability of the oil industry to drill at increasingly spectacular depths, referring to the successful operations of the "Deep Water

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Horizon" rig developing of the Tiber field 250 miles southeast of Houston; the water depth was nearly 4000 feet and the well completed at an astonishing 28,000 feet.⁴ Gazprom is presently deploying the Prirazlomnaya oil rig to drill 40 wells in the Barents Sea despite exceptional storms reaching wind speeds of 37 m per second,⁵ but it is also experiencing delays and substantial cost increases in development of the Shtokman field, also in the Barents Sea.⁶ Since the announcement of the Rosneft and BP Arctic joint-venture, other international oil companies have swiftly followed up with disclosure of their own special Arctic projects in partnership with either Rosneft or Gazprom.⁷ In the meantime, Royal Dutch Shell's campaign to persuade the US government to permit it to drill in the Beaufort Sea is still in the doldrums.⁸ Put simply, the technology to drill exploration wells in almost any...