Gas fuels new cold war in the Arctic

http://news.scotsman.com/international.cfm?id=824612006

IAN MATHER DIPLOMATIC CORRESPONDENT IN HAMMERFEST

On A small island off the coast of the world's most northerly town, workers are putting the finishing touches to a vast structure that will transform the politics of the Arctic.

Soon gas will flow from nearly 100 miles out at sea, and the great rush to exploit virgin territory that is estimated to contain 25% of the world's undiscovered petroleum resources will have begun.

"This will be Europe's new oil and gas province and will play a key role in energy supplies for Europe and the US for many years to come," said Sverre Kojedal, a senior official with Statoil, the Norwegian state oil and gas company.

At first the gas will be used to test Europe's first Liquefied Natural Gas plant, where the gas is to be frozen to minus 165 degrees so that it can be transported in liquid form in tankers to world markets. Then in 2007, full production will begin, with gas worth €2bn a year, equal in value to more than half the total energy consumption of Norway, being pumped through a 100-mile-long pipeline.

But already the project is the subject of bitter controversy. For the development of the Snohvit field (Snow White in English), which is entirely within Norwegian waters, is only the first step. Statoil calls it "the door-opener to the Barents Sea", which has so far remained untouched.
The big prize is the Shtokman field, which is 10 times bigger than Snohvit, but which lies in the Russian sector of the Barents Sea.

The waters in that part of the Arctic Circle used to be the scene of cat-and-mouse games between Nato and Soviet submarines. Now it is being eyed enviously by the old superpower rivals because technological advances are making lucrative oil and gas exploitation possible for the first time.

Russia holds most of the cards and Moscow is already being accused of playing politics. It has just postponed the announcement of the names of foreign partners to join them, with Norway, in the extraction of gas from Barents Sea, amid suspicions that, as the world's largest gas producer, it is prepared to flex its muscles over the contracts because of increasingly chilly relations with Washington.

Arctic reserves are estimated at 3,600 billion cubic metres, more than Russia's existing known reserves, which stand at 3,169 billion cubic metres.

The Russian oil giant, Gazprom, will take the lead in the Arctic, and is run by Putin's close ally, Alexei Miller.

Analysts say the latest delay could signal a threat to shut out the American oil companies in reaction to criticisms from US Vice President Dick Cheney, who warned last month that Moscow was playing power politics with its natural resources, and added that there must be no attempt to turn oil and gas into tools of intimidation or blackmail.

"If relations between Russia and the US were not rocky, Gazprom could have shared a slice of Shtokman for political reasons, but Cheney's comments made these chances very slim," says Sergei Glazer from Vostok Nafta, a Swedish investment company specialising in Russian oil interests. "Short-lived political interests will unfortunately prevail over longer-term and more important issues of stability of energy supplies from Russia to the world."

Two French companies, Gaz de France and Total, and a German company, RWE Dea, are hoping to cash in on Moscow's antipathy to the US oil giants, and are part of a consortium with Statoil in the Snohvit field.

Whatever else happens, Norway is bound to be part of the Shtokman development because Russia needs the expertise in offshore technology in the frigid northern waters that Norway has developed over four decades.

Relations between Norway and Russia are complicated because of a dispute over how to demarcate their border in the Barents Sea. Prior to the 1970s, the Soviet government drew a maritime line from its north-western coast straight up to the North Pole. Norway is seeking an internationally-recognised "median line principle", that creates a border equally distant from each nation's coastal borders.

The result is that a 66,800 square mile area, estimated to hold 12 billion barrels of oil equivalent, has remained untouched by exploration for 30 years because of a failure to agree on who owns it.

However, the frozen dialogue between the two countries has thawed recently as both have come to recognise that their cooperation could unlock the Barents Sea's vast resources, and the two governments have signed a memorandum of understanding to co-operate on Arctic oil and gas exploration.

Bjoern Brustad, an analyst at Oslo-based think-tank Econ Analysis, says that the two sides might be more ready than ever to compromise.

"We think of this area as one field for co-operation, and that is why we are eager for good relations with our Russian neighbours," said Kojedal of Statoil.

Norway wants to make sure it gets in early on Arctic oil and gas development, while Russia may see co-operation with the Norwegians as more palatable than allowing free access to US oil giants, which have traditionally taken a more dominant role in developing other countries' natural resources, he says.

For the US, the issue is serious. Washington is trying to diversify its imports away from the Middle East and other politically unstable areas. The Barents Sea could offer a stable alternative for both crude oil and liquefied natural gas. As the US is the fastest growing Liquefied Natural Gas market in the world, much of the gas from the Arctic will be sold there.

According to US ambassador to Norway Benson Whitney, the Barents Sea conflict is a "security issue".

He says: "We see the border dispute from an energy security perspective. We have an interest in it and would like to see it resolved. Uncertainty caused by the dispute can inhibit development and production in the Barents Sea, and that can have an impact on the global market."

Whoever wins the political game, the loser cannot be Norway. Since the nation does not need natural gas, virtually every cubic metre of Barents Sea gas will be exported. Since Statoil, the company building the Hammerfest plant, is 70% owned by the government and the government will also collect taxes on the gas, around 90% of the revenues will accrue to the Norwegian state.
Few oil and gas development projects have been subject to more environmental concerns than Snohvit. The EU and environmental groups were originally against it, though the EU has now dropped its opposition.

Statoil describes itself as "the world's best oil and gas company in terms of sustainable development". It is proud of its environmentally-friendly approach and claims that all equipment for extracting the gas will be on the sea bed, and will be "overtrawable" so that fishing nets do not get caught up in it.

Nothing will be visible on the surface, it says, and all harmful carbon emissions will be extracted from the gas and returned to the underwater reservoir by another pipeline.

Concerns remain that the Arctic, which is melting rapidly, should remain free from exploitation. However, Hans- Aasmund Frisak, senior adviser at Statoil's EU Affairs Office, says: "Climate change is a problem for us all. For many years to come the world will need energy from fossil fuels. Our approach to the climate problem is to find ways to cope with carbon emissions."

This article: http://news.scotsman.com/international.cfm?id=824612006

Last updated: 03-Jun-06 23:58 BST