"The eyes of the world are turning north. We must start using our Arctic resources … And we need to move right now," said twice Alaska Governor and Secretary of the Interior Walter Hickel 40 years ago. In the wake of Shell's decision to delay 2014 drilling in Chukchi Sea, one can't help but wonder how much time is enough for the U.S. to start using its Arctic resources.
While economists point to a notable upswing in commercial activity in the Arctic, which is shared by eight nations, including the U.S., critics say the U.S. is far from being in the lead. Other countries are busy upgrading Arctic infrastructure and claiming their respective slices of shipping, tourism, and resource development opportunities, often by attracting global lenders and multinational developers. But attracting investment and the most technologically-advanced developers is not enough. All stakeholders to the economic development process, including academia and scientific research institutions, public and non-governmental organizations, regulatory agencies and legislative bodies must cooperate on the local level to succeed in the global race for resources.
In anticipation of the U.S. assuming the two-year rotating chairmanship of the Arctic Council in 2015, Alaska's U.S. Senators note inadequate infrastructure and funding commitments for what's to come and regulatory uncertainty along with the lack of a common vision among stakeholders for Alaska's Arctic. To bring about the common vision, in January the White House released the Implementation Plan for the National Strategy for the Arctic Region and is now seeking public comment to that plan. Federal regulatory agencies would use the final plan to implement the National Strategy to ensure safe and responsible development in the Arctic.
There are many plans for development: ports, icebreakers, defense, food security, and scientific research, just to name a few. On the basis of increased vessel traffic due to reduced ice cover, increased search and rescue capability is more than justified. But the economic crown jewel goes to the promise of hydrocarbon resources in the shared Arctic, which are estimated at 13 and 30 percent of the world's untapped oil and gas reserves, respectively. To venture a guess on what could take place in Alaska, let's examine the energy stakeholders. Currently, three global producers plan to explore in the Alaska Outer Continental Shelf: Shell, Statoil, and ConocoPhillips. Each has a vision of success involving multiple offshore platforms in Chukchi and Beaufort Seas tied back to Prudhoe Bay infrastructure through hundreds of miles of onshore and offshore pipelines. Factors motivating these oil giants are similar to what motivates any business owner: the return on investment, the level of risk vs. reward, the fiscal stability and the regulatory certainty. What sets Alaska's Arctic apart, however, is the magnitude of the undertaking and the long time it takes to monetize it.
According to industry experts, investing in the first oil production in Alaska Arctic is likely to take $50 billion. This investment would fund about a 300,000-barrel-per-day output from multiple platforms, which would likely bring a producer to the break-even point. Additional projects and investment would have to take place. With economics of oil business coming under pressure (oil prices peaked in 2011, but the production costs have continued to rise) producers do whatever it takes to stay economically viable. For example, Pioneer Resources sold its Alaska assets; ConocoPhillips and Statoil appear to be in a holding pattern, while keeping close watch on Shell, which abandoned 2014 plans to drill in the Chukchi. Producers, like bankers, cut their losses when they see a bad investment, even at a cost of becoming smaller companies. One way for a government to maintain attention of these strictly business fellows is to be a "good cop" and help the local managers deliver returns with predictable regulation and competitive tax policies. The other is to be a "bad cop" through sanctions and various disincentives. However, maintaining a producer's attention is different from maintaining an appetite for long-term commitment, which requires confidence, especially in the regulatory regime.
While tension among regulators is common due to differing mandates and jurisdictions, it is even greater in the Alaska OCS simply because it's a new development area. Regulators contend proposed Alaska OCS projects are larger in magnitude, with less information on potential impacts and more new technologies involved than a development in the Gulf of Mexico OCS. As individuals, regulators are not exempt from biases stemming from their political views, personal opinions on constitutional, state and tribal rights, or on when, where and to what extent development should take place. Add jurisdictional muddiness, freezes on new hires, varying interpretations of the law, and you have quite a complex situation.
To understand what it's like to be regulated, imagine a caterpillar eating through a layered cake with overlaps across federal, state, borough and private landowner requirements. Depending on the project's scope, dozens of government agencies could form the regulatory layers. Each regulator is able to grant or withhold permits, financially penalize, and for serious negligence, criminally charge project owners personally. Approved permits could be suspended or pulled if the granting agency's decision is successfully challenged in court.
All stakeholders use the judicial system to point out the ambiguities and counterproductive provisions in a particular law, the gaps and loopholes in its regulatory scheme, or the unanticipated effects of one of its provisions. The result is a continuously changing regulatory system. Delays are a consequence of a regulatory system that relies on the rule of law. But, more must be done to ensure the regulators have mature internal processes in place to prepare them for judicial scrutiny and successful defense of their decisions in court.
The public, too, participates in this process by submitting comments to the regulators, by advocating and lobbying elected officials, and suing the regulators and project owners. Commonly, public is represented by non-governmental organizations or a law practice with varying financial sources. Critics suggest doing away with public interest lawsuits by holding unsuccessful litigants responsible for the plaintiffs' legal fees. Multi-year delays in advancing Conoco's CD5 and Shell's Arctic drilling exemplify this tension and also demonstrate a very long road, sometimes decades-long, for a proposed project to advance from a conceptual to a construction stage.
This triangle of the regulated, regulating, and NGO community is connected to each other by any given project that stands to succeed, fail or get caught in a stalemate. In 2011, presidential Executive Order 13580 somewhat remedied the regulatory standoff by creating a Federal Interagency Working Group on Coordination of Domestic Energy Development and Permitting in Alaska. This cabinet-level working group continues to be one of the most effective red tape-cutting tools. Also in 2011, a Memorandum of Understanding regarding OCS Energy Development and Environmental Stewardship was reached between commerce and regulation-oriented agencies of the federal government.
Because Arctic projects could involve onshore, near-shore and offshore activities, local, state, and federal levels of government could have jurisdiction over aspects of permitting. Depending on the ownership of land and waters involved, each regulator reviews specific project components, such as access, surface use, facility siting, drilling, waste disposal, etc. Tribal governments, too, are recognized and formally consulted on a government-to-government level by the federal agencies taking action. By law, the regulators act on their permitting authority separately. In the past, this separation resulted in somewhat of a piecemeal approach to regulatory review and comment resolution. This limited the regulators' and public's ability to take a comprehensive look at the entire development and required the project owners to cycle through fragmented and often contradictory comments from both. To remedy this inherent jurisdictional separation on the state level, the state of Alaska established the Office of Project Management and Permitting to handle large projects. There is no direct equivalent of this mechanism on the federal side. A federal agency with the most permits typically becomes a lead permitting agency with all others cooperating. The Federal Interagency Working Group is a great tool that promotes cooperation, but it does not necessarily compel it. Thus, progressive steps notwithstanding, project owners, tend to turn the money faucet from a gusher to a trickle until all permits are in hand.
Alaska, a resource state before and after the statehood, became a state under a condition that it would use its lands, waters and resources to be self-sufficient and pay its own way. But these days, not everyone agrees that being a fossil fuel supplier to others is all that Alaska could or should be. Nevertheless, in terms of current net benefit to its citizens, hydrocarbon resource extraction is what pays the bill to maintain Alaska's clean water, healthy fish stocks, and healthy communities. Unless cash-strapped federal government is prepared to subsidize Alaska to even greater extent, it's best Washington D.C. regulators keep their eyes on the Arctic prize and work well with each other and the remaining stakeholders to the permitting process.
Alaska's state history demonstrates knowledge and ability to do things right: add value where feasible, adapt to changing conditions, and regulate development responsibly. Other countries, for instance Russia, learned from Alaska's experience of working with industry, NGOs, and the public in advancing a fair share of revenues, maximizing local hire, utilizing traditional knowledge, and fostering regional empowerment. They now advance their Arctic projects. The White House National Strategy for the Arctic Region is not enough for the U.S. to catch up to the other Arctic nations. Alaska's Arctic must become the U.S. National Strategy. After all, that's what it took to build the trans-Alaska pipeline.
Rada Khadjinova, PMP, holds graduate accreditation in International Relations and Applied Environmental Science. She works as Environmental Project Manager for an international engineering firm.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch, which welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.