July 2016

The last barrel

It isn’t just about oil
Roger Jordan / World Oil

When 16 national security experts—including a former Secretary of Defense—give Washington’s political elite a warning shot, you’d better hope they’re paying attention. After all, the future security of the nation has to trump—not a reference to The Donald—the preferences of even the most ideologically driven politician.

Since the U.S. Department of the Interior released its plans for the 2017–2022 OCS leasing plan earlier this year, activists have been calling for the Arctic leases to be dropped. The draft plan proposed 10 lease sales in the Gulf of Mexico and three offshore Alaska—two of which are in the Arctic. Interior did, however, rule out exploration in the Atlantic, citing a variety of reasons, which included objections from the military.

Military and security leaders express concerns. Since the draft program was released, concerns have been growing that the feds may now try and remove the Arctic sales from the final program. With this in mind, a rather distinguished group of foreign policy and national security leaders submitted formal comments, as part of the public consultation into the leasing round, calling for the retention of the two Arctic leasing areas.

While we would expect operators and stakeholders of various sorts to speak out in favor of such developments, the fact that so many high-profile security experts felt compelled to speak up should give us pause for thought. The question is, will the establishment listen?

The “58-star” letter, which includes former Secretary of Defense William S. Cohen and former Supreme Allied Commander and Vice Chairman of the Joint Chiefs of Staff General Joseph Ralston, as well as 14 former high-ranking military officers, warns that excluding the Arctic “would harm our ability to protect our interests and to promote cooperation in the region.”

Russian and Chinese activism. One of the more salient points is that offshore energy development will take place in the Arctic, regardless of whether or not the U.S. chooses to participate. Russia, for example, is already active in the region, with Gazprom Neft pumping crude from Prirazlomnoye field on the Russian Arctic Shelf.

Noting that both Russia and China continue to expand their military footprints in the Arctic, the comments warn that the strategic significance of the region is growing. They argue that private sector involvement plays an essential role in supporting military activity. According to the group, Russia “has been investing heavily in the region, with a world-leading 40 ice breakers, new Arctic bases, airfields, and ports, and ambitious new energy development projects.”

Meanwhile, China, which calls itself a “‘near-Arctic’ state, has been building new icebreakers, encouraging Chinese shipping companies to use Arctic sea routes, and making resource-oriented investments in Arctic countries.”

And, incidentally, while not exactly a military threat, Norway is continuing its push into Arctic waters, as it seeks to protect the nation’s future interests.

U.S. malaise. The developments stand in stark contrast to the U.S., where, according to the comments, the nation’s own Arctic capabilities have “dramatically declined,” with the U.S. Coast Guard boasting just two functional icebreakers—the same as Estonia.

As the comments—which were signed by six generals, seven admirals and two vice admirals—point out, including the Arctic leases wouldn’t commit the government to auctioning them, but it would give the country options. After all, once the program is finalized, the Secretary of the Interior can still cancel a lease sale or narrow the scope of a leasing area. The opposite, however, is not true—if the leases are excluded, the nation will need to wait for the next licensing period, during which time even more ground will be ceded to other nations.

One of the other objections likely to be raised against the proposed Arctic lease sales relates to depressed commodity prices. However, such objections ignore the fact that it will be years before these leases become available, and it will take even longer to develop any resources discovered.

As Lucas Francis, spokesperson for the Arctic Energy Center, pointed out, the first Arctic leases wouldn’t even be open for bidding until 2020.

Given how many experts have been proven wrong throughout the course of this downturn, we would do well to heed Francis’ advice that there is “no way of predicting what the energy landscape will look like by that point, so making assumptions about future industry interest based on today’s commodity environment would be shortsighted.”

The campaign for the Arctic also was lent a hand last month by Congressman Devin Nunes (R – Calif.), chairman of the House Permanent Select Committee on Intelligence. Nunes introduced a bill in the House of Representatives to encourage Interior to keep the Arctic leases, saying, “Canceling the Arctic lease sales would be a self-defeating action that would not have the slightest effect on global warming—it would merely surrender the development of Arctic energy to rival nations like Russia.”

So given the U.S.’ position as the world’s only remaining superpower, a status that was acknowledged publicly by Russian President Vladimir Putin last month, one has to wonder at the fact that so much pressure needs to be imposed to make sure the federal government acts in the best interests of the country—surely, politicians should do that as a matter of course.

Given events over the past couple of years, many in the industry may be wondering what all of the fuss is about. After all, many companies are still reeling from the downturn and struggling to adapt to the new normal. The Arctic is the last thing on their minds. But if history has taught us anything, we should know that sooner or later, there will be a need for more oil. So, it’s in all of our interests that the domestic industry is positioned as strongly as it can be. wo-box_blue.gif

About the Authors
Roger Jordan
World Oil
Roger Jordan roger.jordan@worldoil.com
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