Oil from the Arctic: a price worth paying?

Investors in Cairn Energy may be disappointed this morning. The company struck gas in Greenland, but not quite the rich font of oil it had hoped for.

Greenland’s government will also be dismayed at this news. Barring a little tourism, the fragile economy is almost entirely dependent on exports of shrimp and fish and needs to diversify.

It will likely be only a temporary sticking point. Cairn said its target well had not yet reached its target depth and further evaluation was needed before a conclusion could be made. It is spending $400 million this year on drilling four wells off Greenland.

And if Cairn fails, others will step in. Its current target area, Baffin Bay, on the western side of Greenland, may eventually prove too expensive as a source of oil, but north of Greenland the Arctic Ocean is thought to hide a bounteous supply of hydrocarbons – as much as 22% of the world's undiscovered fossil fuel resources according to the US Geological Survey.

Even as the polar icecap melts and the Greenland ice sheet thins, governments and business are scrambling for a piece of one of the last great untapped resources.

In May, the Obama administration postponed the planned exploratory oil drilling in the Arctic Ocean off Alaska until 2011 in order to learn more about the ability to respond to a crisis and avoid a repeat of BP’s Gulf of Mexico disaster. But this is only a temporary reprieve and Shell Oil has several leases and the backing of Alaskan political leaders – who are heavily dependent on the petroleum industry – to begin exploratory drilling on the edge of the Arctic Ocean.

Environmental groups such as Greenpeace – which has mobilized a ship to confront Cairn in Baffin Bay – want an immediate ban on oil and gas drilling in the Arctic. Others at least want further studies of the risks of an accident in the area before any further action is taken.

One of the biggest problems for those hoping to prevent the exploitation of the Arctic is the lack of a clear over-riding governance system. Governments argue that this isn’t a problem - the Arctic after all comes under the Law of the Sea. Yet there are a number of disagreements over maritime jurisdiction in the Arctic region. In 2007, the Russians even sent a submarine to the North Pole to plant a flag. The European Parliament is concerned enough - and eager enough to share the spoils - that it passed a resolution calling for an international treaty for the protection of the Arctic.

Then there is of course the argument of 'Peak Oil' - the need to look beyond current oil reserves before production levels reach their zenith and eventually decline. Many interpret this as reason to find alternatives to oil, but in the scramble for profit oil companies use it to justify expanding their reach into areas once considered too expensive or damaging to exploit, like the Canadian tar sands or the Arctic.

Oil may or may not be running out any time soon, but how far are companies, the governments that regulate them and investors that fund them, willing to go in the scramble for ‘black gold’ and at what cost to the environment?