The Arctic Oil Rush

The fight was over almost before it began. A short, middle-aged woman had smashed her fist into the face of another female drinker, and within seconds was dragged to the door by a hulking bouncer and flung on to the streets of Nuuk. It was midnight on a Tuesday but the atmosphere in the Kristinemut bar resembled a hardcore weekend: raucous band, chaotic dancing, and more than a handful of revellers (of all ages) best described as "blotto".

Not everyone in the bar may have realised it, but these residents of Greenland's capital had good reason to celebrate. That morning, local television reported that traces of gas had been discovered by the British exploration company Cairn Energy in Baffin Bay a few hundred miles to the north-west. If these first hydrocarbon traces prove an accurate indicator of major reserves below the Arctic seabed, they may in time produce untold wealth for Greenland's population - financially dependent on Denmark - of 56,000 Inuit and other ethnic groups, clinging to existence 460 miles from the North Pole in one of the world's harshest terrains.

The bulk of this huge land is a vast - and breathtakingly beautiful - white desert. A layer of ice, 3km thick, covers 80% of the country for 12 months of the year. Even along the coastline, where the population is huddled, the black rock of the precipitous mountains and brown vegetation are only visible during the summer months. With virtually no trees and a winter temperature that can sink as low as -70C, the name Greenland is misleading - deliberately so, in fact. It was an early "marketing tool" used by Erik the Red in 982, as he tried to lure fellow Vikings from warmer climes to settle here, having failed to sell a similar message about Iceland.

These days the terrain is even bleaker (where once pigs and cattle roamed in the south of the country, now there are polar bears, seals and walruses), but this frozen and largely unexplored land will not deter today's prospectors, tempted by the possibility of an Arctic "oil rush". The kind of oil and gas reserves believed to reside in the wider Arctic region could be worth as much as $7tn, which is why all the big oil companies are queueing up to woo the Greenland government into granting them exploration licences.

Ever since the days of John D Rockefeller's Standard Oil, the oil industry has thrived on breaking open new energy frontiers - and there is no greater challenge than the Arctic, particularly in the wake of BP's Gulf of Mexico nightmare.

Environmentalists, of course, regard the exploitation of one of the last remaining areas of pristine wilderness on the planet with horror, and up in Baffin Bay, there has been an ongoing physical confrontation between a Greenpeace ship, Esperanza, and the Danish navy as it defends the Cairn Energy rig from marauding protesters. The setting could not be more symbolic: around them, glaciers and icebergs melt as a direct result of global warming, a phenomenon that will only be exacerbated should the Arctic be allowed to give up its oil and gas reserves.

Inside the Kristinemut bar, Nive Nielsen, a local singer with a growing international reputation, is decidedly sober about the implications of any major oil find in Greenland. "I guess what I would like to see is the government tread very carefully. I am worried they are rushing ahead too quickly [with oil licensing]," she says. "Most people here - possibly 80% - think this drilling can only be good for Greenland, but we have already seen the traditional ways of doing things being eroded, and people herded into [modern town-housing] blocks."

Kenni Rende, a 44-year-old shop assistant at the Nota Bene electronics shop, is more positive about the prospect. "We have always believed there was oil and gas off this island; we've been waiting for something like this to happen for decades. I hope it will provide income for Greenland, so we can finance our way to becoming a more independent nation."

His upbeat mood is, not surprisingly, shared at the Bureau of Minerals and Petroleum a few blocks away, where Henrik Stendal has been digesting the news of the Cairn find in a presentation room packed with rock samples and geological maps. "It is exciting . . . This amounts to an appetiser for all oil companies to come here and do more exploration," says Stendal, who is head of the bureau's geology department. The affable rocks specialist claims not to have known about Cairn's find until the company announced it on 24 Augustwith a simple statement: "First hydrocarbons discovered in Baffin Bay basin by T8-1 well, which has encountered gas."

The release of drilling information is always sensitive. It can send a company's share price soaring and act as a magnet for competitors. As a result, relations between small government and Big Oil are complex. The Greenland government is keen to keep the discovery's momentum going and attract new investment; but it is also anxious not to upset Cairn and its City investors by speaking out of turn (when the Guardian quoted a foreign ministry official as saying he was "hopeful" of a positive drilling result the day before Cairn announced it, a government public relations adviser was quickly in touch to admonish me).

Cairn Energy's founder and chief executive officer is Sir Bill Gammell, a former Scottish rugby international and public-school friend of Tony Blair. His Edinburgh-based company, while not in the Shell or BP league in scale, likes to work in frontier areas and has already attracted a stream of loyal investors after striking oil in the Indian state of Rajasthan, on acreage sold to it for a song by an unusually slipshod Shell.

Speaking about Cairn's Arctic find, Gammell said he was "encouraged that we have early indications of a working hydrocarbon system with our first well in Greenland, confirming our belief in the exploration potential". Yet even such tentative enthusiasm was dampened by one worker on the rig who, asking to remain anonymous, told the Guardian that there had been laughter aboard Cairn's Stena Don drilling unit when newspapers and television began to report the discovery. "We thought the media had made it up until we saw the company's statements," said the rig worker, adding that the quantity found was little more than you might find if you drilled a hole in your back garden.

Cairn has dismissed this version of events and most industry commentators do not take it seriously. Tellingly, it is not what the majority of Greenland's politicians and public want to hear either, determined as they are to loosen their sovereign ties with Denmark and, ultimately, establish independence.

At around four times the size of Britain, Greenland is the least densely populated country in the world, and desperately dependent on fishing, a small amount of tourism, and one working goldmine. The national books are balanced courtesy of a DKK3bn (PS333m) annual handout from the Danish taxpayer. While the hunting of seals and other local animals is still practised by a handful of Greenlanders, the bulk of the population finds work in the public sector - in schools, hospitals or administration. But all that would change if the oil industry moved in.

The town of Nuuk is a strange mixture of attractive clapboard houses painted in bright colours typical of the Nordic region, and drab apartment blocks with graffitied stairwells that might look more at home in the former Soviet Union. Mineral extraction - be it oil or gas, gold or diamonds - is seen as a huge opportunity by the residents here. Already, crude oil has been found leaking out of the rocks in the Disko Bay area, and offshore, Greenland's west coast is believed to possess the same basic rock formations as those on the Canadian east coast, where massive oil finds have already been made.

According to a 2009 US Geological survey, there could be 90bn barrels of oil - a third of the size of Saudi Arabia's reserves - and 5otn cubic metres of gas in the wider Arctic region. Tentative drilling has already been happening all the way from the Chukotka Sea off Alaska to the Faroe Islands north of Scotland, although some has been halted while safety agencies reconsider the risks in the light of the Deepwater Horizon spill.

Few regions, though, have been pushing as hard to attract Big Oil as Greenland. As early as this week, its government may announce the winners of new exploration licenses, with many of the big names including Shell and Statoil of Norway - but not BP - expected to begin frontier-drilling here for the first time. With the continued rise in global commodity prices, this could yet turn into a fully fledged oil rush.

And, while the Cairn gas discovery has centred attention on hydrocarbons, there is a parallel drive to uncover all sorts of precious metals including diamonds, rubies and other rare earth products. This autumn, the Greenland government will decide whether uranium for nuclear power stations could also be mined here.

Dennis Thomas, a veteran British mining prospector, is currently making his first visit to Greenland in more than 40 years, as he scouts the world for new projects. "I have seen gold prospects, iron, copper, rare earths," he says. "It's all very early stage, but the time is right in terms of the economics and the willingness of the government [to open up]."

But it is not going to be easy. While global commodity prices have boomed over the last decade due to demand from countries such as China, Greenland remains a high-cost place to mine, not least because of the treacherous weather conditions. "You have to bring in everything by helicopter and you might have only a three-month season to do the work," Thomas says. But the prospector, who lives near Yeovil in Somerset but works for financial and mining investors around the world, still describes Greenland as an "exciting" prospect.

As for the islanders themselves, they are very focused on self-determination and self-sufficiency. Unemployment in some towns now runs as high as 15%, and the standard of food in the shops is often rudimentary. And while the number of people living below the poverty line was last measured at 9% - lower than in the United Kingdom - the suicide rate here increased from a historically very low level in the 70s to one of the highest in the world by the mid-90s, at 107 per 100,000 people.

Clearly, politicians in Nuuk regard economic and political independence as the path to a better future for their people. (This, remember, is a country that has already stuck its nose up to the west by leaving a club that everyone wants to join: the European Union.) But while they want to see more oil exploration - and hopefully production - they also insist their safety regulations meet the world's toughest standards, aware that most Greenlanders fear the health issues that could arise from an influx of oil companies.

The politicians' and public's views on global warming - another key reason for Greenpeace's presence in Baffin Bay - are more mixed, however. Global warming might be threatening to harpoon the local hunting way of life, but it will also lessen the hardships of living in a country where burying dead bodies in the frozen ground can be problematic. The melting of the local ice cap, which currently covers 80% of the country's land mass, will raise sea levels in countries such as Bangladesh and the Maldives - but it could open up further economic opportunities in Greenland. In future, Nuuk might act as a lucrative stop-off point for ships traversing the world via the currently iced-up North West Passage, and also make it a centre of onshore mineral mining.

"Yes, we are gaining more land, you can say that," says Stendal. And a spokesman from the Greenland Natural Institute of Resources and Climate Change talks about the possibility of "golden years" ahead, as the temperature warms up.

This is not the only unexpected view that foreign visitors encounter in Nuuk. Greenpeace, which has hero status in most capitals of the world, is fairly unpopular here, even among the young - not so much because the environmental group is opposed to an oil industry that could be good for Greenland's political self-determination, but because it once opposed seal hunting. Greenpeace now says its campaign was only ever aimed at "unsustainable" activities in Canada, but it admits that Greenland got caught in the slipstream, because any kind of seal hunting was deemed unacceptable by a north European public. As a result, what was a healthy export trade of the distinctive and mottled skins has been stopped in its tracks. Seal skins still cover rows of seats in the otherwise rudimentary airport lounges around this vast country, but only locals will buy a seal-skin waistcoat.

So, while a top team of daredevil environmentalists has led (only temporarily successful) raids on the Cairn rig, others have been making an equally brave attempt to appease vocal critics in Nuuk - without, apparently, much success.

Political correctness as prescribed by the west is not something that hangs heavy in the priorities of the Greenlander. The tourism industry on the island is built around the top end of the market, not least because it costs a pretty penny to fly here, involving a transit in Denmark or Iceland. Once here, visitors are still forced to move around by plane because no towns are connected by road - in fact, there are only two traffic lights on the entire island, a vast country of 840,000 square miles.

It is hardly an easy place for Nive Nielsen to fulfil her musical ambitions. Despite having recorded in Britain, she must still shrug off depressing attempts to label her Deer Children band "eskimo rock", and ignorant questions such as "How do you plug in an electric guitar in an igloo?" But Nielsen, and her fellow Greenlanders too, are determined to shape their own destiny - with or without oil.