GREENLAND’S PLENTIFUL RESOURCES REQUIRE SPECIAL DELIBERATIONS
Exploration and production in
the Arctic region: Greenland’s
plentiful resources require
special deliberations
C
overing more than one-sixth of the
earth’s total land mass, the Arctic
consists of parts of Canada, Denmark
(Greenland), Finland, Iceland, Norway,
Sweden, Russia and the United States (Alaska).
In 1996, these nations formed the Arctic
Council as a formalisation of previous
cooperation regarding protection of the
environment and the indigenous people
of the Arctic. Besides being a forum for
discussion and policy-making by top-ranking
government officials, treaties with an Arctic
focus are discussed and adopted. One
example is a treaty on cooperative search and
rescue efforts. In its latest declaration, the
Arctic Council identified several key strategies
for the region; among these are increased
efforts to protect the environment, but also
joint efforts by the Arctic states to promote
infrastructure and economic development.
The five Arctic coastal nations (the ‘Arctic
Five’) – Canada, Denmark, Norway, Russia and
the United States – have agreed on a political
declaration, the Ilulissat Declaration, confirming
that the five countries will strengthen their
cooperation in key areas. In this forum,
questions of land claims are discussed, such as
the ‘Hans Island’ dispute between Canada and
Denmark, and the planting of a Russian flag on
the seabed of the North Pole.
Oil and natural gas in the Arctic region
Oil and natural gas discoveries in the Arctic
region began in Russia in 1962 and in the
United States in 1967. To date, 61 large oil
and natural gas fields have been discovered
within the Arctic Circle – 43 in Russia, 11 in
Canada, six in the United States (Alaska) and
one in Norway.
The Arctic region is estimated to hold up
to 30 per cent of the world’s undiscovered
natural gas resources and about ten per cent
of the undiscovered oil resources.
There are, however, challenges involved with
Arctic drilling and extraction. The conditions
8 of freezing temperatures and the logistical
challenges in remote areas are substantial.
Year-round snow storms can limit
productivity and maintenance. Sites can be cut
off for periods raising the risk of production
halts. The ultra-harsh environment means
new design and testing of equipment are very
difficult. The same conditions can challenge
the transport of oil and natural gas from
remote locations to refineries and storage
facilities closer to consumers. From this it
follows that the investments needed in the
Arctic region in order to maintain a reliable
and productive extraction will be substantial.
Being a frontier business, some technological
boundaries will need to be pushed in order to
achieve the goals, but this is not uncommon
in the hydrocarbon business, and there is
no reason why innovative engineers would
not be able to cope with the Arctic’s logistic
challenges; similar challenges are routinely
incorporated in the hydrocarbon business
cases around the world.
However, production and access to market
costs will definitely be significantly higher than
for many other production fields worldwide,
and thus Arctic exploration will only be
commenced if there is a firm belief that the oil
price will also be high, in the long term.
Another challenge facing would-be
extractors is the environmental debate and
public opinion. In the public eye, the Arctic
is considered a pristine environment with
unique wildlife. The mere thought of spillage
in such a place stirs strong emotions globally.
Black oil on white ice or snow is a publicity
nightmare. A blow-out comparable to the one
that happened in the Gulf of Mexico in 2010
could cause even more damage owing to the
temperatures and logistical challenges in the
Arctic. Activists from Greenpeace have been
focused on the issue. The unwillingness to
share any spill response plan publicly led to
protestors taking over Cairn’s headquarters in
Edinburgh dressed as polar bears. Previously
in 2011, a Cairn offshore drilling rig had
INTERNATIONAL BAR ASSOCIATION LEGAL PRACTICE DIVISION
Philip Graff
MAQS Law Firm,
Copenhagen
philip.graff@
dk.maqs.com
GREENLAND’S PLENTIFUL RESOURCES REQUIRE SPECIAL DELIBERATIONS
been invaded by Greenpeace activists. The
most recent event has been the scaling of
the ‘Shard’ building in London by protesters
demanding that Royal Dutch Shell put a stop
to Arctic drilling plans.
Despite the above, the quest for oil is so
strong that oil and gas activities are expected
to increase further in the Arctic region.
Greenland
Currently Greenland is in focus as a candidate
for further hydrocarbon exploration.
Greenland is part of the Kingdom of
Denmark, but has self-government holding
legislative and executive power in certain
subject matters. The area of natural resources
is, however, so economically important that
Denmark is still politically involved. For the
most part, Greenland is administering the
area itself through the Bureau of Minerals
and Petroleum (BMP), the 2009 Mineral Act
and the 2013 Large Scale Projects Act.
In 2010, Cairn Energy discovered biogenic
gas also containing thermogenic gas, thus
indicating that oil may be found. Greenland’s
self-government has put a preliminary stop
to new licences (20 have been issued to date)
for oil exploration. This is largely a result of
internal political pressure and public opinion
among Greenland’s population. However,
other companies are preparing for renewed
exploration efforts in 2014. They can do so
in accordance with existing licences. There
is still a belief internationally that Greenland
offers an advantageous business case for
further exploration.
contractors are required to set up two drilling
rigs for redundancy and safety, even though
this might harm the business cases.
Legal issues
In order to reap the more immediate benefits
of the expected rush by internationals to
exploit natural resources in Greenland, the
self-government is focusing on royalty-based
taxation. Greenland is facing a huge national
budget deficit for many years to come and
therefore simply has no time to wait for
traditional corporate taxes generated from the
exploration of hydrocarbons and minerals.
Accordingly, the newly appointed head of
the self-government, Aleqa Hammond, very
recently announced that she expects to close a
mining royalty agreement with London Mining.
The same tax framework is also expected to be
applied to hydrocarbon ventures.
The Minerals Act as well as the recent
Large Project Act put further demands on
projects in Greenland. Among the main
issues that are regulated are the protection
of the Greenlandic workforce and the socioeconomic stability and development of
Greenland. The self-government intends to
make sure that large projects do not come
with a tidal wave of foreign cheap labour, that
Greenlandic subcontractors are preferred and
that the wealth generated and the economic
activity benefit the inhabitants of Greenland.
These considerations are important since
Greenland has a relatively small population
and expertise from abroad will be needed.
Next steps
The environment
Environmentalists strongly warn against
drilling in the Baffin Bay area, and also the
Greens in the EU Parliament want to have the
drilling stopped. They fear an environmental
disaster. The risk of leakage is high, and the
consequences are enormous. The technology
for drilling in ice is not fully developed, and
the issues on safety are many. Some of the
environmental risks are being met. The selfgovernment of Greenland has mandated that
Potential investors and entrepreneurs looking
to find a foothold in the nascent hydrocarbon
adventure in Greenland are faced with unique
challenges. The sometimes fickle internal
politics of Greenland as well as the special
laws governing exploration and extraction
necessitate that local Greenlandic legal and
political expertise is used. Several accounting
firms and legal firms have foreseen this need,
and a few have opened offices in Greenland
to accommodate such needs.
OIL AND GAS LAW NEWSLETTER SEPTEMBER 2013
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