Insurance market joins environmentalists in highlighting risks of drilling in fragile region as $100bn investment is predicted

Lloyd's of London, the world's biggest insurance market, has become the first major business organisation to raise its voice about huge potential environmental damage from oil drilling in the Arctic.

The City institution estimates that $100bn (£63bn) of new investment is heading for the far north over the next decade, but believes cleaning up any oil spill in the Arctic, particularly in ice-covered areas, would present "multiple obstacles, which together constitute a unique and hard-to-manage risk".

Richard Ward, Lloyd's chief executive, urged companies not to "rush in [but instead to] step back and think carefully about the consequences of that action" before research was carried out and the right safety measures put in place.

The main concerns, outlined in a report drawn up with the help of the Chatham House thinktank, come as the future of the Arctic is reviewed by a House of Commons select committee and just two years after the devastating BP blowout in the Gulf of Mexico.

The far north has become a centre of commercial attention as global temperatures rise, causing ice to melt in a region that could hold up to a quarter of the world's remaining hydrocarbon reserves.

Cairn Energy and Shell are among the oil companies that have either started or are planning new wells off the coasts of places such as Greenland and Canada, while Total – currently at the centre of a North Sea gas leak – wants to develop the Shtokman field off Russia.

Shtokman is the largest single potential offshore Arctic project, 350 miles into the Russian-controlled part of the Barents Sea, where investment could reach $50bn.

A BP joint venture is planning to spend up to $10bn on developing onshore oilfields in the Yamal-Nenets autonomous area of Russia, despite its experiences with the Macondo oil spill in the relatively benign waters of the Gulf. A series of onshore mining schemes are also planned, with Lakshmi Mittal, Britain's richest man, wanting to develop a new opencast mine 300 miles inside the Arctic circle in a bid to extract up to £14bn of iron ore.

But the new report from Lloyd's, written by Charles Emmerson and Glada Lahn of Chatham House, says it is "highly likely" that future economic activity in the Arctic will further disturb ecosystems already stressed by the consequences of climate change.

"Migration patterns of caribou and whales in offshore areas may be affected. Other than the direct release of pollutants into the Arctic environment, there are multiple ways in which ecosystems could be disturbed, such as the construction of pipelines and roads, noise pollution from offshore drilling, seismic survey activity or additional maritime traffic as well as through the break-up of sea ice."

The authors point out that the Arctic is not one but several ecosystems, and is "highly sensitive to damage" that would have a long-term impact. They are calling for "baseline knowledge about the natural environment and consistent environmental monitoring".

Pollution sources include mines, oil and gas installations, industrial sites and, in the Russian Arctic, nuclear waste from civilian and military installations, and from nuclear weapons testing on Novaya Zemlya. The report singles out a potential oil spill as the "greatest risk in terms of environmental damage, potential cost and insurance" – but says there are significant knowledge gaps in this area.

Rates of natural biodegradation of oil in the Arctic could be expected to be lower than in more temperate environments such as the Gulf of Mexico, although there is currently insufficient understanding of how oil will degrade over the long term in the Arctic. Sea ice could assist in some oil-spill response techniques, such as in-situ burning and chemical dispersant application, but this could lead to air pollution and the release of chemicals into the marine environment without knowing where moving ice will eventually carry them.

Unclear legal boundaries posed by a mosaic of regulations and governments in the Arctic are an additional challenge. The Lloyd's report notes that there is no international liability and compensation regime for oil spills. An EU proposal under discussion would apply to offshore oil projects in the Arctic territories of Norway and Denmark, and possibly to all EU companies anywhere they operate.

Meanwhile, a taskforce is drawing up recommendations for the intergovernmental Arctic Council on an international instrument on marine oil pollution designed to speed up the process for clean-up and compensation payments, due for release next year. This may include an international liability and compensation instrument.

Greenland has argued that "different national systems may lead to ambiguities and unnecessary delays in oil pollution responses and compensation payments" and that any regime must adapt as understanding of the worst-case scenario in the Arctic changes.

The Lloyd's report says the "inadequacies" of both company and government in the event of a disaster were demonstrated after the Macondo blowout. A smaller company than BP, faced with estimated $40bn clean-up and compensation costs, might have gone bankrupt, leaving the state to foot the bill, it notes.

Lloyd's says it is essential that there is more investment in science and research to "close knowledge gaps, reduce uncertainties and manage risks". It calls for sizeable investment in infrastructure and surveillance to enable "safe economic activity" and argues that "full-scale exercises based on worst-case scenarios of environmental disaster should be run by companies".

The Arctic's vulnerable environment, unpredictable climate and lack of a precedent on which to base cost assessments have led some environmental NGOs to argue that no compensation would be worth the risk of allowing drilling to take place in pristine offshore areas. Others are campaigning for more stringent regulations and the removal of the liability cap for investors.

(By Julia Kollewe and Terry Macalister, The Guardian, 12/04/2012)