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UK Govt Report: Oil Companies Drilling in the Arctic Will Find It's Unprofitable

The Arctic resource scramble is over—and so is the oil boom, warns UK defense ministry.
Photo: Harald Sund/Getty Images

Major oil companies from the US, UK, Norway, Sweden, and Russia are all set to drill in the Arctic, but a report from the UK Ministry of Defence (MoD) suggests they may be setting themselves up for failure.

Drilling in the Arctic is "economically prohibitive," according to the report, which was commissioned by the Swedish Armed Forces and finalized in January 2016.

In other words: The companies seeking riches from Arctic's vast untapped oil and gas wealth are going to be disappointed.

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"…It is becoming increasingly likely that low oil prices, and reducing dependence on fossil fuels, will mean that extracting much of the oil in the Arctic will be economically prohibitive," the report says. "The strategic importance of these resources may well have been overplayed."

If this analysis is accurate, then the Arctic scramble is doomed to backfire on the oil industry.

The report's authors conclude that by 2035, fossil fuel extraction will be largely unprofitable

According to another MoD report published by the DCDC in December 2015, over the next 20 years, oil majors will be driven to explore expensive resources in search of new profits as reserves become more scarce, but will face increasingly prohibitive costs in extracting those resources.

By 2035, the report says, the world may face a situation of dramatic "fossil fuel scarcity" due to rising demand and production costs.

Titled Future Operating Environment 2035, the report does not represent official government policy, but will "inform UK defence and security policy makers and our armed forces more broadly."

The report acknowledges input from US, Australian, Swedish and New Zealand defense agencies, as well as UK government departments, major defense contractors like Boeing and BAE Systems, and oil giant Shell.

Demand for a range of natural resources is likely to increase over the next two decades, the report says.

This demand could lead to rising costs, high levels of inequality, and a scarcity of fossil fuels and rare earth minerals. "To overcome these shortages, exploration will occur in remote and challenging environments, requiring new and more efficient extraction techniques to be developed," the report says. "Old grounds for extracting resources may also become profitable again as technology develops."

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The report's authors conclude that by 2035, fossil fuel extraction will be largely unprofitable—but hopes that new technology might change this grim assessment.

The MoD's analysis is corroborated by new research from oil experts in Canada and the UK.

In March, RBC Capital Markets warned that five OPEC oil economies—Nigeria, Venezuela, Algeria, Iraq and Libya—are on the verge of "collapse" if oil prices remain low.

An even more stunning verdict came last Friday from a new Chatham House report by petroleum economist Professor Paul Stevens. Stevens, who won the OPEC Award for his energy research in 2009, argues that the global oil industry faces a complete shutdown within 10 years without a radical transformation of its business model. Even Saudi Arabia is preparing for a world after oil.

Environmental campaigners will welcome the MoD's analysis for throwing cold water on Big Oil's Arctic drilling dreams. So far, though, it seems like industry fantasists won't even listen to hard-nosed government defense analysts.