Chapter 2 Arctic Circle Energy Resources and Japan’s Role

Chapter 2
Arctic Circle Energy Resources and Japan’s Role
MOTOMURA Masumi
Introduction
On November 7, 2012, the Ice-Class LNG tanker “Ob River”, with 135,000 m3 of LNG loaded
onboard, cleared the port of Hammerfest in Northern Norway, headed east on the Northern Sea
Route, passed the Bering Strait and, on December 5, entered into the LNG receiving terminal of
Kyushu Electric Power Co., in Tobata, the City of Kitakyushu.

This voyage, which took place atthe end of the navigable season of the Arctic Ocean just before the winter set in there, required 29
days at sea, which was about one week longer than normal. The LNG thus shipped came fromgas extracted from the Snohvit gas field, whose operators include Statoil of Norway, and waspurchased by Gazprom Marketing and Trading - a trading arm of Russia's state-owned Gazprom –which then transported it to Japan as just described, marking the first-ever such export. This also
provided Japan with a moment where, all of a sudden, it felt the Arctic Ocean to be so close (seeFigure 1).
In order to transit the Arctic Ocean, an application needs to be filed with the Russian government
half a year in advance. While the LNG that arrived this time as cargo was purchased on the spot
market, the voyage itself was thus a carefully prepared action. With gas prices hovering high in
the Asian region, the Japanese gas market is even more attractive in Russia's eye than European
markets.

As exporting more LNG to this market is therefore a business endeavor of high policy

priority, LNG exports to Japan that take advantage of the Northern Sea Route are likely to expand
beyond 2013 as well.
Commercial transportation from the Arctic Sea bound for Asia began in the summer of 2010.
Novatek, an independently-owned gas company in Russia, performed a trial shipment involving thetransportation of 70,000 tons of condensate from Murmansk to Ningbo in China's Zhejiang
Province by navigating the Northern Sea Route, using a tanker owned by Sovcomflot of Russia.
It took 22 days to complete the voyage, thus achieving a 45% reduction in the number ofnavigation days, but the total transportation cost-saving was just 15% because of the obligation tohave two icebreakers escort the ship.

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Novatek did this to explore a shipping route for delivering LNG to Asian markets from the
Yamal Peninsula, in accordance with its development aim for the future, as it looks at the potentialof such commercial shipments of LNG.

Given the fact that the LNG is brought to European

markets in the wintertime but demand in the European markets falls in the summertime, thecompany is turning to Asian markets, where there is substantial demand for electricity in thesummertime.

By the same token, ten tankers with condensate onboard headed for China in 2011

in preparation for LNG shipments to come.
In the meantime, the Northern Sea Route is also utilized on return trips from Asia to Europe.
On its way back from a trip to ship gas condensate, Novatek's tanker loaded jet fuel in Korea tobring home to Russia.

A technical service ship that had ended its service for Sakhalin 1 alsochose the Northern Sea Route as its return route. Going forward, the Northern Sea Route may
possibly see logistics activities bustle in both directions.

①

Figure 1: The shipping route of the LNG carrier transporting LNG to be exported to Japan via the
Arctic Ocean in the late fall of 2012 (Line ①).

Other solid and dotted lines indicate natural gas

pipelines that run on land (developed by the Japan Oil, Gas and Metals National Corporation(JOGMEC) based on information from press reports).

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Chapter 2 Arctic Circle Energy Resources and Japan’s Role

1. State of oil and gas exploration in the Arctic Ocean(1) Resource study by the US Geological Survey: "CARA"
In July 2008, the US Geological Survey made public the results of its study on resources in the
Arctic Circle, called the Circum-Arctic Resource Appraisal (CARA).1 This study covers the area
north of 66.56 degrees north latitude, which also includes land areas on the Yamal Peninsula, theTaymyr Peninsula, etc., and is therefore not strictly limited to the Arctic Ocean, but can provide theaudience with geographical evidence that countries have extended the reach of their exploration
activities into the polar zone.
According to the study, the area houses 90 billion barrels of undiscovered oil resource, making
up 13% of the world's total, and 1670 trillion cubic feet of undiscovered natural gas resource, or
30% of the world's total. Oil from the area extending from the Alaska North Slope to the Chukchi
Sea, as well as natural gas from that area and also from the Russian side of the Barents Sea and the
Kara Sea, is given a conspicuously high rating.
Russia has an area of 2,700,000 km,2 or approximately 60 percent of the continental shelf of the
Arctic Ocean, which is the largest among the five Arctic coastal nations.

Also notable is the factthat the Barents Sea and the Kara Sea are located in the northward extensions of the establishedonshore oil and gas producing areas, namely, the Timan-Pechora Basin and the West Siberian Basinrespectively, implying a very high level of oil and natural gas resource potential. Further still, theBarents Sea, where the Gulf Stream flows in, does not freeze even in the wintertime and thus
presents the best operational conditions.

Although the Kara Sea does freeze in winter, the ice isthin and operations are therefore possible except in the midwinter season. Russia's Barents Sea isendowed with the most favorable environment on three counts – a vast continental-shelf area,
resource potential and ice conditions – followed by the Kara Sea.
(2) Russia's Arctic Circle (See Figure 2)(a) Barents Sea: Shtokman gas field
The Shtokman gas field is the world's eighth largest gas field, discovered in 1988, located almost
right in the middle of the Barents Sea.

There is 133 trillion m3 of gas in reserves. It is thesecond largest gas field in the Arctic Ocean after the Bovanenkov gas field, which is situated－3－

Chapter 2 Arctic Circle Energy Resources and Japan’s Roleroughly in the central part of the Yamal Peninsula.

As, however, it is far – 565 km in offshore

distance - from Teriberka, a village near Murmansk where an LNG hub is located, natural gas andcondensate would be carried to the land in a multiphase system, for which technology development
is challenging. The original plan envisaged a final investment decision (FID) to be made at theend of 2011 and the production start timing to be 2016, but more than one year has passed without
an FID being made yet.

It is believed that production cannot begin before 2019.

Diminishing

demand for natural gas in Europe has been a factor behind this.
Another point is that while the total cost to be incurred, from the Shtokman project to LNG
shipments, would, given the current state of affairs, amount to approximately $500 per 1,000 m3, anaverage spot price in European markets in 2011 was merely around $300 per 1,000 m3, providing
grim prospects in terms of profitability.

On top of that, there is another issue that has been pointed

out: gas sourced from the Shtokman project might result in cannibalistic competition in markets
against a new Yamal LNG project or conventional natural gas projects in the northern part of West
Siberia.2
Statoil of Norway, a project partner, transferred 24% of its owned stake to the 51% owner
Gazprom at the end of July 2012.

The remaining 25% is held by Total S.A. of France.

Gazprom

is requesting that preferential tax treatment be applied to the gas production tax for the Shtokman
gas field.
This is an indication of just how difficult it is to make the development of an offshore gas field in
the Arctic Ocean commercially viable when it involves a great offshore distance, even in the caseof a giant gas field in terms of reserves.
(b) Pechora Sea: Prirazlomnoye gas field
The Pechora Sea is the area of waters that makes up the southern part of the Barents Sea andborders on the Nenets Autonomous Okrug; as the Gulf Stream does not flow in sufficiently
southwards, its tendency to freeze in the wintertime is higher than in the central part of the Barents
Sea.

It was in 1989 when the Prirazlomnoye gas field was discovered in the southeastern part of

the Pechora Sea and finally, in 2011, a seafloor-grounded platform was installed there.

This is thesame type of platform as the Vityaz platform for Sakhalin 2, one designed to avoid impacts of drift
ice by having the sides of the structure angled.

Work of drilling a production well is currently－4－Chapter 2 Arctic Circle Energy Resources and Japan’s Role

underway, with the aim of beginning production in mid-2013.

It is operated by Gazprom's

subsidiary called Sevmorneftegaz, CJSC. The field has 610 million barrels in reserves and ischaracterized by an average temperature of – 4℃, the offshore distance of 60 km and a water depthof 19 to 20 m.
In the summer of 2012, Greenpeace and the WWF lodged fierce protests, arguing that steps
against crude oil spillages had not been put in place, and industry also agrees that theseenvironmental organizations have a point in that argument.

Protection against crude oil spills in

ice-bound seas still remains a major research topic for the purpose of safe operations.
(c) Western Barents Sea: exploration blocks along the Russia-Norway border
After a 40-year-long dispute, an agreement on the delimitation of the Russia-Norway border inthe Barents Sea was reached in April 2010, setting the border along the middle line between what
they had respectively been claiming.

Norway's claim relied on the normal median line, while

Russia's claim was founded on what is called the "sector principle," which considers that due to theproximity to the polar zone, the border should be the line that extends from the overland border
point and runs parallel to the meridian in the direction of the North Pole.

Factors that can be citedas contributing to the agreement being reached by the two countries include the increased
feasibility of resource development in the Arctic Ocean and the progress of their cooperation in the
Shtokman gas field development project, etc., which worked to foster trust in each other.
Rosneft acquired license in this area of waters and proceeded to reach an agreement in April
2012 with ENI of Italy on a joint exploration venture in the Tsentralno-Barentsyevsky exploration
block (Central Barents) in the southern part of the waters, followed by another such agreement with
Statoil of Norway for the Perseevsky exploration block in the northern part of the waters in May ofthe same year, with a foreign investor stake of 33.3% in each deal.
(d) Kara Sea: exploration blocks under a joint venture with ExxonMobil
In August 2011, Rosneft and ExxonMobil Corporation reached a strategic alliance agreement,
which included a particularly significant agreement on explorations in the East Prinovozemelsky
exploration blocks 1, 2 and 3 in the Kara Sea, among other waters.

The deal is formulated so that

Rosneft should acquire license and ExxonMobil should acquire a 33.3% stake in that.
exploratory drilling operation is scheduled for 2014.

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An

Chapter 2 Arctic Circle Energy Resources and Japan’s Role

While the Kara Sea comes with tougher development conditions than those of the Barents Sea as
it freezes in the wintertime, the degree of ice development there is still lower than the Laptev Sea orthe East Siberian Sea in Eastern Russia.

To the south of the exploration blocks, two enormous gas

fields lie in the central part of the Kara Sea, namely, Rusanov and Leningrad, an indication of astrong gas tendency in the area.

ExxonMobil is aiming for discovering oil in the area closer toNovaya Zemlya.

Figure 2: Major oil and gas projects in Russia's Arctic Circle (developed by JOGMEC)(3) Norway
On the Norwegian side of the Barents Sea, the Snohvit gas field was discovered in 1984, where
LNG production finally began in 2006 with an annual output of 4.2 million tons of LNG.
reserves are small: 6.8 trillion cubic feet.

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Its

Chapter 2 Arctic Circle Energy Resources and Japan’s Role

Bids were announced for exploration blocks located over a vast area of waters in Norway's
Barents Sea in December 2012, and more bids are slated to be opened in 2013 for exploration
blocks in the Norwegian territory, which resulted from the agreement with Russia on thedelimitation on a middle-line basis.

The Russian side is also scheduled to take part in a joint bid

for this round.
(4) US's Chukchi Sea and Beaufort Sea
Explorations of the US's Beaufort Sea and Chukchi Sea were initiated in the 1980s and resulted
in, as a marked example, the Burger gas field being discovered in the Chukchi Sea in 1990 by
Royal Dutch Shell, which, with reserves of 5 trillion cubic feet, was insufficient for commercial
development purposes and was therefore once given up, together with other areas explored,reflecting the trend of low oil prices that lingered afterwards.
The Burger gas field was reassessed by Royal Dutch Shell in 2000, which led to its reserves
soaring to 14 trillion cubic feet; as a result, a licensing round for this section of the sea wasannounced once again in 2002 and Royal Dutch Shell won the bids for vast exploration blocks
including the said gas field (each of the small green squares shown in the Chukchi Sea and theBeaufort Sea in Figure 3 is a single exploration block).

This drilling plan, however, had to be

postponed for two years because the oil spews in the Gulf of Mexico caused by BP in April 2010
triggered the US Department of the Interior to review its environment and safety standards.
Royal Dutch Shell began its exploratory drilling operations in the Chukchi Sea and the Beaufort
Sea in 2012, but the severe ice conditions in that year resulted in major delays in the start of theoperations; as a consequence, the workers left the site before winter after performing only a minor
amount of drilling.

The drilling is scheduled to resume in 2013 by reentering the well that was

drilled and left unfinished in 2013.

On a related note, the drilling rig used for this operation was

involved in a grounding accident in the Pacific Ocean off the Alaskan coast in December 2012 on
its way back to the US west coast.
In the US Arctic Ocean, it is compulsory to drill two wells at the same time.

The reason for thisis to ensure that in the event that a spewing disaster is caused in one well, the other drilling rig
could be rushed to the site immediately to drill a relief well (a well drilled anew in the oil stratum
that is spewing oil so that oil and gas should be let out in a different direction to have the pressure－7－Chapter 2 Arctic Circle Energy Resources and Japan’s Rolein the stratum lowered), which is an obligation that constitutes part of the new regulations that the
US has established to address environmental issues.

It can be viewed as an example of tightenvironmental regulations applied in the Arctic Ocean.

Exploration blocks
acquired by RoyalDutch Shell

Figure 3: The Chukchi Sea and the Beaufort Sea on the Alaskan Arctic Ocean (the circled area
indicates the exploration blocks acquired by Royal Dutch Shell)(5) Iceland
On January 4, 2013, the National Energy Authority of Iceland (Orkustofnun) granted a
medium-sized UK oil company with an exploration block in relation to the exploration of its
Northeastern waters.

This is a micro-continent on which the Jan Mayan Island in the vicinity lies

and is said to potentially contain hydrocarbon reserves.

That being the case, Iceland is a volcanicisland formed on the Mid-Atlantic Ridge and sediments in its neighboring areas are therefore
mainly of volcanic origin, a fact that suggests an extremely low probability that the areas have a
distribution of sediments with enough organic materials to generate petroleum.
are thus skeptical about the alleged hydrocarbon potential.

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Specialist circles

Chapter 2 Arctic Circle Energy Resources and Japan’s Role

(6) Greenland
After a licensing round was announced for Baffin Bay (to the southwest of Greenland), Cairn
Energy plc of the UK performed drilling to discover a small quantity of gas in 2010; this, however,
did not lead to the discovery of oil in a follow-up well.

In 2012 to 2013, a licensing round wasannounced for exploration blocks in the Northeastern coast of Greenland and its bidding results
should come out sooner or later.

An exploratory drilling is scheduled for 2014.

Although

Northeastern Greenland has shown plenty of oil indications on land and its offshore exploration
blocks are believed to be promising as well, it is also a place with a concentration of considerable
volumes of drift ice, as with the east coast of Sakhalin, and thus poses severe development
conditions.

It cries out for the application of technologies like a subsea production system.

2. Policy recommendations from Japan's perspective: our role in the Arctic(1) Promoting Japan's LNG imports from the Arctic Circle and assisting in upstream interest
acquisition
The year 2012 saw the first-ever introduction of LNG from the Arctic Ocean to the Japanesemarket.

This works as a good example to show that Japan is a valuable market of LNG in the

Arctic Circle.
Demand for gas in Northern Europe is not high, particularly in the summertime. In contrast,electricity demand shoots up in East Asian nations, including Japan, for air-conditioning use.
Given these two demand peaks for LNG, the one in the summertime in Asia and the other in thewintertime in Europe, LNG production operations in the Arctic Circle can expect to achieve higher
economic efficiency by serving both markets, as they have mutually complementary demand
periods.
Currently, there are two LNG projects in progress in the Arctic Circle – Yamal LNG (FID
scheduled for mid-2013) and Shtokman LNG (FID scheduled for 2011 but held off) – and the East
Asian market, including Japan, is very much in the mind of the operators as potential export
markets in the summer and fall seasons.

For Japan, becoming an active purchasing market for

LNG from those projects will contribute to diversifying the sources of its LNG supply.

Moreover,diversifying supply sources can also be expected to have an effect of curtailing LNG prices in
Asian markets, which have soared as they are interlocked with oil prices, posing a problem in－9－Chapter 2 Arctic Circle Energy Resources and Japan’s Role

recent years.
Presumably, over the longer term, Japan should aim for participating as an operator with
upstream interest. To that end, JOGMEC has already set in place a system of exploration equity
financing, etc. to provide the means for businesses to proactively pursue such a course.
(2) Supplying Japan's satellite information to carriers navigating Arctic shipping routes
In order to support logistics using Arctic navigation routes, it is necessary to develop a structure
for actively providing the ships with information on drift ice and meteorological conditions throughJapan's weather observation satellite.

In particular, Japan needs to augment its presence in thewaters where shipping routes extend from the East Siberian Sea, the Chukchi Sea and past theBering Strait to reach Japan's neighboring seas, by providing detailed information on those waters.
(3) Promoting basic research on steps against crude oil spillages in ice-covered seas on theassumption of accidents involving oil development in the Arctic Circle
The basic step against crude oil spill accidents is to isolate crude oil on the ocean with fences, etc.
to prevent it from approaching land.

Due to the properties of crude oil, its light, volatile portions

evaporate first, which gradually increases its gravity, eventually resulting in oil shaping into aball-like form and falling downward to reach the seabed.

There, it will be decomposed bybacteria and go back to nature. If crude oil hits a shore, it causes tremendous damage and requires
more convoluted treatment and steps – therefore, such an occurrence must be avoided at all costs.
Polar seas are quite different from normal seas in two respects: due to low temperatures, thespeed of biodegradation there is slow and; due to an extensive distribution of multiyear ice in thevicinity, crude oil, if it sticks to such ice, will remain untreatable for a long period of time.
Therefore, steps against crude oil spillages in ice-bound seas still remain underdeveloped in thedomain of technology.
Although oil companies from various nations are working on developing steps in this area, there
is presumably enormous room for Japan to make international contributions by launching somedistinctive initiative.
experiments in.

The wintertime Sea of Okhotsk can serve as a site to accumulate basic

By thus accumulating research results there and performing demonstrative

experiments in the Arctic Ocean as appropriate, Japan needs to further the presence of－10－Chapter 2 Arctic Circle Energy Resources and Japan’s Role

Japan-originated environmental technologies in the polar region.
That can go a long way if Japanese companies have a part in resource development in the Arctic
Ocean in the future, as they will be able to deliver a broad range of capabilities by, for instance,
providing technologies as part of HSE (Health, Safety and Environment) operations.
Conclusion: Japan's action: what is the significance of resource development in the Arctic
Ocean?
As a conclusion, the significance for Japan to participate in the energy resource development in
the Arctic Circle will be discussed.
As a general rule, energy resource development is carried out as a commercial project.

This issimply because the primary purpose of resource development lies in the pursuit of profits. As an
industry, it also involves very high margins.

Resource development is an area that any country

with capital and technology engages in as a natural course of action.

On top of that, it is quite

significant to continue working on such activities for the purpose of cultivating technologicalstrengths and establishing them as an industry.
The next point relates to the importance of acting as a principal in development from aperspective of energy security as well.

Even in the event of emergency leading to an embargo thatshuts a country off from the world's regular trade structure as means to obtain oil and gas, it retains
the right to bring them securely into its territory if they are from oil or gas fields that it has its own
interest in, and that would remain possible as long as there is no physical obstacle.
The significance of resource development does not stop there, however.

Developing an oil orgas field in a given region means making a large amount of investment, creating infrastructure,generating jobs, establishing rules to conserve the environment and defining long-term
profit-sharing with the country that has sovereignty over the oil or gas field.

This is precisely aprocess of civilization that encompasses not the oil or gas field alone but also extends to markets
via transportation infrastructure from neighboring areas.

The activities in that process represent

none other than the establishment of an "order" in the region that covers all of those elements.
Resource development is something to be carried out not in the form of a "resource plunder" in that
locality but the "development of a regional order," with consensus from all participants, in pursuitof plus-sum interactions.

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Chapter 2 Arctic Circle Energy Resources and Japan’s Role

As a venue of resource development, the Arctic Circle is a frontier that allows for more room for
new entrants in comparison to other regions and, hence, presents the opportunity for a first-moveradvantage; further, in a sense that a player with advanced technology could have a leg up, it should
naturally be considered as a destination of Japan's resource development efforts.

As, over andabove that, taking part in the development of a regional order in the Arctic Circle represents an actof having a part in the international order, it will most likely lead to the achievement of a higher
value as well.

- Notes –USGS(2008), Circum-Arctic Resource Appraisal: Estimates of Undiscovered Oil and Gas North of the
Arctic Circle. http://pubs.usgs.gov/fs/2008/3049/fs2008-3049.pdf
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Interfax, 2012/10/17
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