Development challenges

From our document study, and research process we see several different development challenges to Arctic offshore oil and gas development. Some of the themes mentioned in literature and articles centre around the environmental challenges, in addition to the special Arctic weather and climate situation. Another recurring theme focuses on the infrastructure situation or even the lack of necessary infrastructure. Yet another theme relates to the regulatory and legislative characteristics and finally the conditions of the energy market itself as well as the resource potential in Arctic waters also plays in the risk/reward calculations for development projects.

Environment

Environmental challenges are often cited as one of the major challenges with Arctic offshore oil and gas development. Moscow Times (2013) points to an habitat with low temperatures, limited capacity to regenerate and rebuild, where oil spills will not be dispersed. This idea is emphasised by environmental protection organisations like Greenpeace, arguing that any spill will have huge impacts and would last for a long time (Voorhar & Myllyvirta 2013). Furthermore there is lack of knowledge about Arctic environments and habitats according to Eine (2013). Not only animals and the habitat are at risk, also indigenous peoples in the area would be impacted in the case of a worst-case scenario according to Voorhar & Myllyvirta (2013). From the Russian side, as referred by another environmental protection agency, Bellona, the Arctic shelf is considered fragile and at risk in case of opening up for hydrocarbon extraction and transportation (Bellona 2013). Whereas projects are often analysed one by one, some see the risk in totality, including all projects and activities carried out together in the Arctic as referred by an article in Moscow Times (Moscow Times 2013). The environmental situation in the Arctic is on the agenda of international media, according to Ernst &

Young Global Limited (2013), pointing to a unique environment and a place where external impacts can not be reversed.

Arctic weather and climate

The uniqueness of the Arctic weather and climate but also the consequences of such specific climate, are emphasised in many sources, not least by the non-governmental organisations. Voorhar & Myllyvirta (2013) claiming that extreme conditions of the Arctic climate would augment risk factors to operations and logistics. Loe (2011) points to similar weather conditions and Arctic specifics, mentioning fast-moving ice, ocean-spray icing up vessels and heavy-wind conditions. Such conditions means that drilling activities are reduced to a shorter period of the year, as pinpointed by Voorhar & Myl-lyvirta (2013). The unique climatic conditions will demand specialised transportation and operational equipment as noted by Fadeyev (2014). Even climate change, with warmer conditions might not necessarily be benign for Arctic development, as claimed by Loe (2011), receding permafrost might actually impact land-based infrastructure in a fundamental manner.

Infrastructure or lack thereof

Far from major population hubs and industrial sites, the lack of infrastructure is high-lighted by several sources. For instance Fadeyev (2014) arguing that necessary infras-tructure is simply not there yet. This will certainly add to the cost of the projects, as claimed by Loe (2011), noting that infrastructure development costs and longer logistics lines will influence the overall risk-reward picture and possibly put the Arctic oil and gas prospects at an disadvantage to other regions where oil and gas can be extracted.

Regulatory and legislative

The regulatory and legislative situation in Russia in general and Arctic in special have been cited as development challenges. That said there are some areas cleared up and where issues have been sorted out, like the maritime delimitation treaty between Russia and Norway establishing the maritime borders between the two countries as noted by GeoPolitics in the High North (2011). Another area where there has been clear policies and guidelines put in place relates to the allocation of Arctic oil and gas exploration acreage. According to Yarovoy, Sergunin & Heininen (2013) both Rosneft and Gazprom have got all of the recently available offshore acreage despite earlier discussions about a more open allocation process. Foreign partners are only allowed in as junior partners in the development ventures. Furthermore the tax situation has been clarified with special tax regimes and a new offshore shelf tax legislation (Yarovoy et al. 2013), for projects started after 2016.

On a more general level, the legal situation in Russia is still a cause for concern, even for companies such as Rosneft, as stated during the initial public offering of its shares (Rosneft 2006), questioning the uncertain legal environment and its possible impact on investments and business in general. Rosneft cites several legal and judicial inconsisten-cies, gaps in legal structure, competence of judges, and even judges subject to influences from external factors, and finally a bankruptcy procedure that is not sufficiently devel-oped. Rosneft even mentions that the government activities could impact business in a negative manner, for instance by changing terms of licenses, taxes and criminal laws.

Summarising the overall view and challenge with project developments in Russia, as quoted from Rosneft (2006, p. 52)

Political and governmental instability could adversely affect the value of in-vestments in Russia. Since 1991, Russia has sought to transform itself from

a one-party state with a centrally planned economy to a market-oriented economy. The Russian political system remains vulnerable to popular dis-satisfaction, including dissatisfaction with the results of privatizations in the 1990s, as well as to demands for autonomy from particular regional and eth-nic groups. The course of political, economic and other reforms has in some respects been uneven, and the composition of the Russian governmentthe prime minister and the other heads of federal ministrieshas at times been unstable.

The energy market and attractiveness of prospects

The overall situation in the energy market can and will be a challenge for any project development, be it in the Arctic or anywhere else. The risk and reward calculation will play in for all projects. Increased availability of conventional and unconventional gas resources will compete with gas development projects in the Arctic, according to Ernst

& Young Global Limited (2013), thus making gas from the Arctic less interesting. This opinion is shared by Henderson (2012), pinpointing that Arctic offshore gas would have a limited commercial value. Significant and particular development and infrastructure cost would have to be added in to the economic calculations. Some opinions also voice concern about the overall attractiveness of the acreage in the Arctic like for instance Trenin & Pavel K. Baev (2010), comparing it in unfavourable terms with the availability of resources in for instance the Middle East. Although not sharing this strong opinion, but with more nuanced perspective (Richard Milne 2013, 30 Oct.),

“No doubt there is a huge resource potential in the Arctic,” Helge Lund, chief executive [Statoil].. “But I think you need to think about the Arctic in several dimensions.” He contrasted the “workable Arctic” with the so-called

“stretch Arctic”,. “[There] you have more permanent ice conditions and a much harsher environment. I think it will be many years before you can have a development [there].”

This opinion about a tiered-level access to prospects in the Arctic is also also shared by Dynkin (2013, 28 Nov.), classifying the Arctic:

• Ice-free areas: can be developed with existing technologies

• Areas covered with ice part of the year: can be developed with incre-mental innovations

• Areas covered with ice most of the year: can be developed with break-through innovations.

An example of challenges even when the resource potential is great, is witnessed by the fate of the Shtokman project. Like analysed by Mitrova (2013), the huge size of the project proved to be of a too great financial risk, despite offering economies of scale.