Adaptation Actions for a Changing Arctic: Perspectives from the Barents Area

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Chapter 6 · Impact analysis and consequences of change

6.3.3.1 Oil and gas industry Climate change will have variable impacts on the operational conditions for the oil and gas industry in the Arctic, in both the short term and medium term (AMAP, 2010) (Chapter 4). Some impacts are related to rising temperature and reduced sea ice which will improve the potential for oil and gas exploration offshore. Longer drilling seasons will also improve the productivity of exploration resulting in reduced logistical challenges and costs (Andrew, 2014). By replacing ice resistant constructions by conventional infrastructure, the investment costs will be reduced over the long term (Dell and Pasteris, 2010).On the other hand,a warmer climate creates conditions of ‘ice infested waters’with icebergs and broken sea ice producing new types of risk that can interrupt offshore operations and development (Eskeland and Flottorp, 2006). Other impacts in connection with thawing permafrost will reduce accessibility to onshore resources and reduce the length of the exploration activities that operate mostly in winter. Production from existing onshore installations will be disturbed because thawing permafrost will reduce the stability of the infrastructure (rigs,pipelines,roads) presenting additional logistical challenges and increasing maintenance costs (AMAP, 2010). More extreme weather conditions and their associated impacts (increasedwind,more wave action,heavier precipitation, icing conditions, shoreline erosion, variable ice cover) will make long-termplanning of offshore installations less predictable and thusmore costly (Stepien et al.,2014).Operational conditions will be also less predictable, increasing the probability that drilling, production and transportation will be disrupted which will in turn increase operational costs.Large-scale accidents,such as oil spills and blowouts, will potentially increase with more extreme weather and will be more difficult to clean up. They will also increase the potential for long-term release of contaminants to land and sea (Kolstad and Bracegirdle, 2008).

In addition to climate-related impacts and consequences, the supply of Arctic hydrocarbons is also sensitive to future oil price developments.Simulations of the relationshipbetween supply and demand for the oil (Figure 6.13) and gas (Figure 6.14) industries in the Barents Region are achieved by applying a comprehensive, global oil and gas model with prices, costs and reserves called FRISBEE (see Lindholt and Glomsrød, 2013). Figure 6.13 shows that in the high oil price scenario, production declines until production from large but currently undiscovered oil resources is graduallyphased inwithan increasing shareof offshoreproduction. This graphic also shows that in the low oil price scenario it will not be profitable to develop these resources. Figure 6.14 shows that although gas production is relatively constant over much of the period, there was a slight increase over the last 15 years in western Arctic Russia. Because oil and gas companies operate as separate industries, less profitable investment opportunities in the gas market will not affect the oil market and vice versa. Due to relatively small substitution possibilities on the demand side between oil and gas, the Arctic gas production scenario with a lower oil price is almost identical to the high oil price scenario. With favorable global prices, new investments related to oil and gas activity will follow (up to USD 100 billion according to some estimates) andproduction in the Barents Sea is expected to receive a substantial part of these investments (USD 6.5–23.4 billion to 2020) (Emmerson and Lahn, 2012). Increased oil and gas activitymay have several local and regional socio-economic impacts.Dependent upon the local procurement policies regulated by national governments and national oil companies / international oil companies,oil and gas procurement activity may potentially provide substantial economic gains to local communities and local companies with otherwise few employment opportunities (Emmerson and Lahn, 2012). For example, the volume of contracts going to local companies in northernNorwaywas in the rangeNOK3.54–5.3 billion annually

Million tonnes oil-equivalent Million to nes oil-equivalent

500

5 0

500

5 0

450

400

4 0

400

4 0

350

300

3 0

300

3 0

250

200

2 0

200

2 0

West Arctic Russia - low oil price West Arctic Russia - high oil price Arctic Norway - low oil price Arctic Norway - high oil price West Arctic Ru sia - low oil price West Arctic Ru sia - high oil price Arctic Norway - low oil price Arctic Norway - high oil price

West Arctic Russia Arctic Norway West Arctic Ru sia Arctic Norway

150

100

1 0

100

1 0

2015 0

0 2015 0

2020

2025

2030

2035

2040

2045

2050

2015