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Home Archive May 2011 Issue Issue Content The Prospects and the Perils of Beaufort Sea Oil: How Canada is Dealing with Its High North

The Prospects and the Perils of Beaufort Sea Oil: How Canada is Dealing with Its High North

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Canada has long looked to the petroleum resources of its North as an important part of the country’s energy supply. During the Second World War the oilfield at Norman Wells, Northwest Territory, was viewed as a critical supply source for the American fleet to withstand the expected Japanese intrusions in the North Pacific. The Canadian interest in its North last reached a peak in the late 1970s and 1980s when world oil supplies were subject to geo-political forces in the Middle East and Canada expanded its Arctic exploration programs seeking secure domestic supplies of both oil and natural gas to fuel its economy.

Most recently, and again as the result of expected increased world demand and constrained supply, Canada has returned to the North, this time to the waters of the Beaufort Sea. In anticipation of increased Beaufort activity, the National Energy Board, the federal regulatory agency for frontier lands in Canada, is currently conducting an Arctic Offshore Review to determine the terms and conditions under which oil exploration and production might take place in the Arctic waters of Canada.

This Review is expected to take until the end of this year to complete, and the regulatory regime recommended by the Board will establish the rules that will govern all future Beaufort Sea drilling, or, if viewed as too onerous by industry, might bring that exploration to a halt, in which case a much-needed source of world and domestic oil supply might remain buried under the Arctic waters.

The prospects
It is only in the last forty years that the Beaufort Sea, located off the north coast of Alaska and Canada, ranging from Point Barrow on the west to Prince Patrick Island on the east, and once known primarily as the western leg of the long-sought Northwest Passage and the home to American whalers, has become a potential oil province.
 
Map: Beaufort Sea

 
Source: Government of Canada
 
The focus on the waters of the Canadian Beaufort (see Map) began in the late 1960s and early 1970s, driven by a combination of exploration success at Alaska’s Prudhoe Bay that showed that Arctic oil production was possible, repeat gasoline shortages and price spikes, the results of the Six Day War between Israel and Egypt and the Yom Kippur War, widely forecast continuing crude oil price increases, and anticipated world oil shortages.

Between 1972 and 1989 a total of 33 wells were drilled from artificial islands constructed either by dredging material from the sea bottom and building-up an island, or by trucking gravel in from the shore. In 1976, spurred on by generous tax treatments that provided accelerated, indeed “super”, depletion, Dome Petroleum introduced drill-ships to the deeper waters of the Beaufort and over the next 13 years drilled 31 wells in waters up to 60m deep.

The ongoing national focus on oil shortages and increasing prices led to the introduction by the Liberal government of Pierre Trudeau of the National Energy Program (NEP) in 1980. This program, among its many provisions, contained several “nationalist” elements, ones that provided taxpayer support through direct financial contributions to “Canadian-owned” oil companies willing to explore in the Beaufort and the High Arctic, lands that, under Canada’s constitution, were fully under the control of the federal government. At a time when world oil supplies were uncertain and much of Canada’s petroleum business was under the control of American-owned companies, exploration by these Canadian firms was expected to help Canada ensure adequate supplies of oil, return the industry to higher levels of Canadian ownership and establish the country’s sovereignty claims in the Arctic.

This additional support led to increased activity by, among others, Dome Petroleum and Gulf Canada Resources, both of which met the Liberal government’s legislated definition of “Canadian-owned” and were therefore eligible for what were known as Petroleum Incentive Program (PIP) grants. This support allowed both companies, through their respective drilling arms, Canadian Marine Drilling and BeauDril, to design and build advanced drilling and support rigs including ice-breakers for the Beaufort, which extended both the water depths and length of the season in which they could drill.

In 1985, the Trudeau Government was defeated and the new Conservative government of Brian Mulroney made good on its campaign pledges to change the way federal lands were explored and supported. Specifically, the Conservatives made peace with the Atlantic provinces of Newfoundland and Nova Scotia over the disputed ownership of the east coast offshore, introduced new petroleum legislation that made the issuance of petroleum rights on federal lands less subject to ministerial discretion and, most importantly for the Beaufort, announced the winding down of the National Energy Program and its billions of dollars of support to explorers. During the phasing out of the federal government grants, companies continued to explore in the Beaufort; this period saw the only production from the Beaufort with some 300,000 barrels of oil produced.

As the 1980s came to an end so did drilling in the Beaufort because of a combination of new-found supplies in other, more accessible areas of the world, declining oil prices and an environmental review process of Gulf Oil’s proposed 1989 Kulluk drilling program that recommended the program not proceed. The drilling and support infrastructure left the Beaufort with CanMar’s four drill ships (themselves converted 1944 Victory Ships) being either mothballed, sold for scrap or sent to warmer climates to search for diamonds off the west coast of Africa.

During the seventeen years of offshore exploration, a mere 86 wells had been drilled, and it would be some 15 years before another well would be spudded in the Beaufort. In 2007, Imperial Oil won a bid on an exploration parcel in the deeper waters of the Beaufort with a work bid of $585 million. This was followed in 2008 by a winning bid submitted by BP Exploration on a nearby parcel that committed the company to a work expenditure of nearly $1.2 billion, and in 2010 Chevron Canada won the exploration rights to a parcel in yet deeper Beaufort waters with a bid in excess of $100 million. (Under the licensing system for federal lands, including the Beaufort Sea, winning bidders are selected on the basis of the dollar value of the work program they propose to carry out during the nine year term of the Exploration License.) These dollar amounts are even more impressive because, unlike the government-supported exploration spending of the 1970s and 1980s, the money here will all be coming from the companies themselves.

This return to the Beaufort is the result of a number of factors including the increasingly limited acreages now available to international oil companies - the result of the growth in national oil companies; the better understood petroleum potential of the Arctic region in general - owing most recently to widely publicized reports by the United States Geological Survey that estimate the Arctic to be home to nearly ninety billion barrels of oil of which nearly 10 billion is in the Amerasia Basin, an area that includes the Beaufort Sea; world oil price increases (WTI had increased by a factor of three in the seven years since the start of 2000); and, in an ironic twist, the continued impacts of global climate change in reducing the Arctic ice cover and thereby making the region more accessible for exploration and development.

The perils
The first and most obvious peril facing explorers in the Beaufort Sea is its very location and the climate to be found there. The exploration occurs from roughly 69 degrees N to 72 degrees North latitude and between 132 and 140 degrees West longitude. (By way of comparison, the Snohvit development in the Barents Sea is at 70 degrees N.) The Beaufort waters range from several meters depth near shore to nearly 2000 meters at the Chevron license. (The Shtokman project is in 300 meters of water by way of comparison.)

Air temperatures range from summer highs of +59 F to winter lows of -40 F with December to February means of -27 F. The Beaufort is predominantly a frozen sea with open water generally occurring only between July and October, although winds and currents can quickly bring the ice pack close to shore during the open water season. While global climate change has affected this region of the Arctic reducing the areal extent of ice cover (March, 2011 was the lowest Arctic ice cover recorded to date), it has also increased the extent of the transition zone between the shore-fast ice and the permanent ice pack, making ice movements less predictable than in the past and posing new dangers to exploration and shipping. The ice, the cold and the abrupt wave action of the shallow waters of the Beaufort are made more challenging by the near total darkness that covers the region from roughly the late October until March.

Into this environment is added the standard perils of offshore drilling, perils that are, regrettably, only too well known through incidents ranging from the Piper Alpha, the Ocean Ranger, the Montara and, most recently, the BP Macondo blow-out in the Gulf of Mexico. While these four are among the most infamous incidents in offshore exploration, numerous government and commission reports over the years have clearly shown that the offshore is a very dangerous place with all-too-common accidents, many resulting in the loss of life.

Indeed, the most recent such report, that of the Norway Petroleum Safety Authority, released this past April, noted that “[t]he 2010 study of trends in risk level in the Norwegian petroleum activity shows a sharp rise in well control incidents and gas leaks back at a high level.” This trend, in what is generally considered to be the best regulated jurisdiction, was described by Magne Ognedal, Director-General of the Petroleum Safety Authority Norway, as “a matter of concern”.

The recent publication of the BP Oil Spill Commission report has provided little comfort that incidents such as have been experienced in the past will not be repeated. Among its findings was the statement that “[t]he blowout was not the product of a series of aberrational decisions made by rogue industry or government officials that could not have been anticipated or expected to occur again. Rather, the root causes are systemic and, absent significant reform in both industry practices and government policies, might well recur.”

To these known perils must then be added the complete lack of experience on the part of both operators and regulators in deep-water Beaufort Sea operations. No drilling has ever taken place in such waters, and indeed no drilling equipment yet exists to drill in such waters. If this were not enough to cause concern, it must be noted that the Canadian regulator charged with overseeing the proposed drilling operations, the National Energy Board, has regulated exactly one offshore well in the last nineteen years.

If the US Government Accountability Office can conclude that the Department of the Interior, the regulator for federal oil and gas, with years of experience and thousands of wells in its portfolio “continues to experience problems in hiring, training, and retaining sufficient staff to provide oversight and management of oil and gas operations on federal lands and waters”, what might it make of a regulator with only one well to its credit?

Numerous studies have documented the difficulties in responding to blowouts in Arctic waters, ranging from the difficulty in attempting such a response in the climate of the area, the lack of response infrastructure such as accommodation, roads, airstrips, manpower, vessels and the like, and other hazards such as the near impossibility of collecting oil among floating ice.

It becomes clear that the prevention or rapid control of a blowout is a fundamental condition for any drilling program in the Beaufort Sea. To their credit, successive Canadian governments have insisted that all such Beaufort wells should have well-control technology installed and, perhaps most importantly, that the capacity to drill a relief well be readily available.

The introduction of drill-ships into the Beaufort in the mid-1970s gave rise to one very significant change in well control technology – as the drill rig was by definition floating, and might have to pull off location at any time if the ice pack began to move in, the well control equipment had to be installed on the seafloor. But, should a blow-out occur, unlike one occurring on a gravel island in the water, it would now be a subsurface one and, if the drill ship was unable to control the flow and had to leave the site, either owing to ice intrusion or rig incapacity, the oil could flow uncontrolled under the now solid ice cover and no drill ship could hope to begin to drill a relief well until some seven or eight months later.

In anticipation of such a situation, the federal government of the time established the “same season relief well policy.” The policy was relatively simple in concept – if the open water drilling season was estimated to be 120 days and, if it took 60 days to drill a well, then all work on the original well must be completed within the first 60 days, thereby leaving a further 60 days for the relief well should it be needed. While this policy did limit the amount of drilling that could be concluded in one season and, consequently, increased operating costs, industry concurred with it. With the recent planned exploration in the deep water Beaufort, this concurrence came to an end, and in late 2009 Imperial Oil Resources Ventures Limited (Imperial) approached the National Energy Board seeking the abandonment of the policy. The company’s position can be understood from both an economic and a technical point of view.

First, the very deep waters in which it planned to explore will require a purpose-built, Arctic specific drilling rig, one that undoubtedly will be very expensive both to build and to operate. It would make little sense to pay for a second rig to be on standby for a possible, and by industry claims, highly unlikely relief well. Secondly the company argued that alternative well control technologies had been developed since the early days of Beaufort exploration, technologies that would ensure that a well could be controlled should it threaten to blow, thus obviating the need for a relief well.

In February of 2010, the National Energy Board agreed to a review of the relief well issue and ordered written submissions from interested parties on the matter. On April 20, 2010, the BP Macondo prospect blew out. The proposed review of the same season relief well policy was dropped on May 11th, and the National Energy Board’s Arctic Offshore Review was born.

The Arctic offshore-review-process
The review is unusual for a number of reasons ranging from its genesis through to its proposed conduct. Unlike previous safety and drilling reviews, such as those that followed the Piper Alpha fire, the Ocean Ranger sinking or the BP blowout, the NEB Review was not precipitated by any single event in Canadian waters under the Board’s jurisdiction. Rather, it came into being based on a general level of discomfort with Arctic exploration among many observers, a level that was then greatly inflamed by the Gulf of Mexico disaster. To its credit, the Board will “examine the best available information concerning the hazards, risks and mitigation measures associated with offshore drilling activities in the Canadian Arctic and measures to both prevent and respond to accidents and malfunctions.”

It should be noted however that the review is limited in area to the offshore Arctic waters under the Board’s jurisdiction. There is no review of drilling in the waters off the east coast of Canada, waters under the jurisdiction of other tribunals, nor those off the West coast, an area long subject to a drilling moratorium.

Public engagement is encouraged by the Board and, again, in a somewhat unusual touch, the NEB Chairman has been holding individual meetings with a number of interested parties including territorial government leaders, northern Aboriginal groups and others. Such meetings will presumably provide northern leaders an opportunity to express their thoughts on the subject of offshore drilling. These meetings are expected to continue through the early summer, and the public engagement will culminate in a ‘round-table” open to all groups in September. Following this meeting, the Board will begin to write its report and recommendations, a process that is expected to take until the end of the year.

Given the now well known costs associated with the BP blowout, the NEB will likely recommend an increase in the current liability limits of $40 million established for Arctic exploration. This amount will be seen as far too low by the public, and the Board may want to provide some “public” liability cover.

There is at present a dearth of oil-spill response equipment in the Beaufort Sea, and while such equipment was rushed to the Gulf of Mexico following the BP blowout, the lack of Arctic infrastructure would make such rapid movement impossible. This would argue for recommending the placement of equipment such as booms, skimmers, dispersants and the like in an easily accessible northern location.

While the Board does not have jurisdiction over East coast waters, the Arctic review will likely have an impact on how these waters are regulated. And given the noted lack of experience within the NEB in regulating the Arctic offshore, one might expect the Board to recommend, indeed to announce, some form of inter-jurisdictional sharing of offshore expertise with the Norwegian or the British authorities. Perhaps most troubling will be the Board’s recommendation concerning the continuation, or not, of the current government policy regarding the same season relief well capability of an explorer.

The ability to drill such a relief well is clearly the last line of defense in dealing with a blow-out and the public may well reject any attempt to remove this defense. Shell Oil’s recently proposed exploration program in the Beaufort Sea waters off the coast of Alaska contains a provision for same season relief well capability. On the other hand, the additional costs associated with maintaining this capability may lead industry to flee the Beaufort, much to the economic and sovereignty distress of the federal government. Such an outcome would have varying degrees of impact on energy security for the country and, indeed, for the market as a whole. For Canada, the resources of the deep-water Beaufort would add a significant new source of oil and, more importantly, one under the regulation of, and financially beneficial to, the federal government.

For specific countries other than Canada, particularly the import-dependent ones of the Far East, the Beaufort reserves could provide a new source of “equity oil”, the result of their investments into the highly expensive exploration and production that will be required to develop the Arctic finds. While no such investments have occurred recently, past exploration by Dome Petroleum in the late 1970s was financed in part by hundreds of millions of dollars of loans from Japan. More recently, the Korean gas company, KOGAS, has been holding preliminary discussions with the Inuvialuit of the region with a view to developing some of their natural gas resources.

Canada is viewed by these countries as a suitable investment destination, one with a low tolerance for corruption (Canada scored 8.9 out of a possible 10 in Transparency International’s 2010 Corruption Index) and therefore not only a rich source of petroleum and other commodities, but a secure source, one governed by the rule of law and transparent business practices. And lastly, successful exploration in the deep waters of the Beaufort Sea, exploration that was subject to strict and publicly acceptable regulation, could serve as a template for further Arctic exploration in the waters of Alaska, Russia and Greenland to the benefit of world oil supplies. How the National Energy Board handles this issue may well determine the future of Beaufort Sea exploration.

Contributor Doug Matthews is the Founder of Matthews Energy Consulting based in Calgary, Canada. He can be contacted at matthews.energy@gmail.com
 

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