Negotiating the rapids of Arctic and Alaska oil and natural gas reserves.

Author:Hullavarad, Shiva
Position:SPECIAL SECTION: Arctic Oil & Gas

"You can never cross the ocean until you have the courage to lose sight of the shore."

--Christopher Columbus

"In the afternoon they came unto a land In which it seemed always afternoon. All round the coast the languid air did swoon, Breathing like one that hath a weary dream."

--Lord Alfred Tennyson

Three major events occurring between 2006 and 2008 depict the increasing interest for access and control of oil and natural gas resources in the Arctic and its major passages. These three events are: the opening of the Northwest-East passage through the Bearing Sea due to a decline in sea ice; oil prices reaching $147 a barrel causing concern that the current global oil production will not be able to meet demand from the emerging markets of China, India, and Brazil; and Russia planting a deep-sea flag--as a strategic signal to the world of the importance of Arctic to the leadership in Moscow. Concurrently in the same time frame, the US Geological Survey estimated that approximately 25 percent of the world's recoverable oil and natural gas deposits were most likely located in the Arctic.

The recent oil price declines are primarily the result of a price war by Saudi Aramco. According to Yardeni Research, an independent investment strategy and economics research firm, the goal of Saudi Aramco is to maintain its market share by pairing oil output to supply. Another factor contributing to the declining oil prices is supply--higher oil production by the United States and Canada (from 0.9 million barrel per day, or mbd, to 12.7 mbd, exceeding Saudi Arabia's 9.6 mbd and Russia's 10.6 mbd in the second quarter of 2014). Demand, on the other hand, is not meeting the surplus due to a slower growth rate in advanced economies. Strong declines in commodity prices typically signify a supply-demand imbalance.

As to how low the oil prices can go may depend on how much China's economy slows down as the world's largest consumer of oil. Falling oil prices could prove an advantage for Mexico since its new oil costs only approximately $45 a barrel, which is well below the Texas crude; and the proposed one thousand mile natural gas pipeline from Los Ramones to Texas may also spur global firms to lose interest in the more costly Arctic. Goldman Sachs estimated in mid-2014 that US shale producers will need about $85 a barrel to break even.

It must be noted that there are a number of challenges in aggressively pursuing oil and natural gas exploration. First, the ramifications of an environmental impact in the event of a major oil spill will have to be considered. Second, because of inadequate geological maps, patchy communication systems, and polar icecap melting, iceberg movements become uncertain and unpredictable. Third, the lack of transportation infrastructure to move the extracts from the drilling sites to the...

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