The coming arms race for Arctic oil

May 10, 2012, 5:06 PM UTC

FORTUNE — The race for oil in the Arctic is on. As the polar ice cap retreats, energy companies are looking north for a potentially huge new source of crude supply. In April, Exxon Mobil (XOM) and Russian oil giant Rosneft announced a partnership to develop Arctic reserves in the Kara Sea estimated at up to 85 billion barrels. And this summer, Shell is expected to begin exploratory offshore drilling in the Arctic Ocean off the coast of Alaska. In his new book The Eskimo and the Oil Man, Bob Reiss details Shell’s (RDSA) years-long effort to win approval for this multi-billion-dollar project and explains the economic and geopolitical ramifications of the competition for control of the Arctic. But getting the oil out won’t be easy. It could require lots of nuclear-powered icebreakers.

Here, an excerpt from The Eskimo and the Oil Man, to be published in May by Business Plus, an imprint of Grand Central Publishing.

The Russian in Anchorage was amused by American gridlock in the Arctic because it was so different from the bullish attitude back home. He was 75 years old, bald and slow moving, but his mind was sharp and his eyes showed keen twinkling intelligence. His room in the Hotel Captain Cook occupied a high floor. His open laptop sat on his desk and he jabbed his index finger at the video running there, showing healthy-looking men in gym shorts running on a treadmill. His English was slow and measured.

“First we made nuclear bombs,” said Evgeny Pavlovich Velikhov.

Velikhov—a lead speaker at the conference downstairs on the opening Arctic—was an ex-winner of the Lenin Prize and was president of Russia’s prestigious Kurchatov Institute, its leading research and development institution in the field of nuclear energy.

“Then we made nuclear submarines.”

He had also been a Russian arms negotiator and had been designated by the United States as a hero of Chernobyl after he led efforts to clean up that nuclear disaster.

“Arctic is next big place!”

Now, he was promoting a new way to get hydrocarbons out of the Arctic seabed by using nuclear power. In Russia there was no question of whether drilling would proceed in the Arctic. The question was how.

From a national security standpoint, the Russian said, when it comes to the problem of terrorists of the future attacking oil infrastructure, or of fighting in the Mideast interrupting international oil supply, “Arctic is more safe than Persian Gulf, yes?

“But in Arctic we have problems, icebergs. If we stop operations in times of icebergs it is not very good, yes? Another problem is oil spill in ice. Recovery? Practically zero,” he said. But he did not look worried.

On the contrary, he was smiling. He had an answer! His eyes lit up and his blunt fingers stumbled over the keyboard, stopped, lifted a pen, sketched.

“We need special technology for Arctic, yes?”

Astounded, I realized he was drawing an underwater nuclear powered tanker, a kind of huge submarine that, he said, would travel beneath the ice, arrive at a sea bottom wellhead, attach itself to piping—as in the sketch—and suck up oil or gas.

The men running on his laptop represented the happy and physically fit staff that would manage the subsea facility.

“Our intention is to put all the exploration and production under the ice. Surface is not friendly.”

I blurted, “You’re building this in Russia?”

“We could in three years.”

“Ah, it’s just a theory?”

“No! Not theory! The Germans had underwater tankers in World War II. Deliver supplies.”

“But those were U-boats. U-boats are small. You can’t transport usable supplies of oil in little U-boats.”

Velikhov smiled. “Bigger is easier. And now government is starting interest.”

MORE: Exxon’s big bet on shale gas

Russia, he said, already operated several nuclear-powered icebreakers. Russia knew the value of Arctic oil, he explained. Russian subarctic oil had fueled that country’s resurgence as a world power. Russia’s new Prirazlomnoye Arctic offshore oil field was scheduled to come on-line soon, with 35 more wells planned offshore in the Pechora Sea.

Underwater tankers carrying highly flammable liquefied natural gas, Evgeny argued in the hotel room, would be safer than traditional tankers because they couldn’t catch fire if there was an explosion. After all, there was no oxygen under the sea to ignite. The subtankers could operate year round without worry about icebergs. They would arrive at an underwater wellhead, couple into the pipes, pump aboard gas or oil, and be on their way to supply the world.

Ve-ry safe.”

Coming from someone else these ideas might have seemed like science fiction. But Velikhov was actively involved in discussions with the Russian government about them, and his history as an innovator had gotten him invited to the gathering downstairs—Icetech—sponsored by Anchorage’s Institute of the North, started by ex–US secretary of the interior and former Alaska governor Walter Hickel.

Dedicated to the study of Arctic policy, Institute staffers believed the Arctic was opening fast, and it was clear, walking around in the packed ground-floor-ballroom conference location that although the US government was not dealing head-on with polar issues, private companies, usually from other countries, were.

Arktos Craft, based in Canada and Switzerland, was showcasing an amphibious craft specializing in “interface between ice and water.” Photos showed hard-hatted crew, in ice-covered water, carrying out an evacuation in the North Caspian Sea. The red crafts could float or use wide treads to rumble like tanks over ice. They had “the ability to maneuver through ice rubble fields and ice/water transition zones while carrying heavy loads,” the brochure bragged.

Aker Arctic Technology of Finland announced a joint project with Russian companies to develop a new “oil spill combat icebreaker” for Sovcomflot, the largest Russian shipping company.

MORE: The 3 biggest benefits of producing more oil

Oceanic Consulting Corporation of Canada promoted “solutions for the Petroleum and Shipping Industries.” Glossy brochures showed shots of ships moving through ice fields, and photos of indoor ice tanks for testing hull design. Representatives from US federal agencies, corporations and foreign governments circulated through the exhibition space. The US Coast Guard, Shell, Korea Maritime University, BOEMRE, the Canadian Navy, Rolls-Royce Marine, the Panama Canal Authority and Maritime Helicopters all had people there.

The Cook Hotel seemed an appropriate venue for a meeting designed to discuss an opening region of earth. After all, the building was named for the famed British Explorer whose sea journeys in the 1700s mapped opening areas of the globe previously unknown to Europeans—new territory eventually claimed by world powers—back then. Colorful nine-foot-tall wall murals on the ground floor showed scenes including Maoris in New Zealand, which Britain would claim; the South Seas, where they made more claims, and even waters lying within view of Mead Treadwell’s glassed-in back porch five minutes away. One mural showed Cook’s ship near icebergs in Antarctica.

Conversations in the ballroom went on in Russian, Finnish, Korean.

Speaker after speaker told the rapt audience that the Arctic was in a state of rapid change.

Velikhov, during his turn, informed several hundred listeners that on that very morning, Russia’s first portable nuclear power plant was being built to be barged up to the Arctic and supply power to communities there.

“You bring the unit to the customer and make the connection with one or two pipes. Customers not need to have any experience with nuclear power. You drop it off and come back 60 years later and pick it up,” he said.

Canadian speaker Arno Keinonen—a naval architect and marine engineer—said, “Bottom line in the Arctic? It is challenging. Potentially deadly. Costly. But it can be done. We are all going to be busy for a long time.”

I ran into two US Coast Guard representatives in the hallway outside and asked them what the Coast Guard was doing to prepare for the opening Arctic.

The younger officer looked disgusted.

“Janet Napolitano,” he said of his boss, the secretary of homeland security, “doesn’t give a shit about the Arctic. We only have one working icebreaker.”

Standing beside him, Rubin Sheinberg, a small, bald chief naval architect of the Coast Guard, cautioned the younger man to watch his language.

Then Sheinberg said, “All the other countries are ahead.”