In 2011, Russia used the Vladimir Tikhonov, its big supertanker, to carry 120,000 tons of gas concentrates across its northern sea route to China — setting records along the way. (It crossed 2,220 nautical miles of northern Arctic seas in 7.5 days.) In the same year, the Japanese-owned Sanko Odyssey carried 66,000 tons of iron-ore concentrate from Russia’s Kola Peninsula to Jingtang. In 2012, Norway’s Ribera del Duero Knutsen, the world’s largest-ever bulk carrier, transported a first-ever cargo of LNG (liquid natural gas) from Norway to Japan. Russia’s northeast Arctic passage has become a global short-cut from Europe to Asia — with 34 voyages already booked for such passages this year.
Radical technological and economic change is pervasive in the Arctic. What’s next? Cargo vessels that safely sail the Arctic seas without needing icebreakers? With Arctic carriers costing as much as $1 billion to build and a decade to complete, such a fantasy proposal might seem eminent folly. For the record, Finland’s already working on them.
In this special report on the Arctic 2013, Diplomat features excerpts from an important new work (Arctic Opening: Opportunity and Risk in the High North) by the celebrated British author Charles Emmerson, who also wrote the 2011 best-seller called The Future of the History of the Arctic. We do so for a number of reasons — among them the symbolic return of Canada to the leadership of the Arctic Council, the premier forum of the eight Arctic states. (Canada held this office last in 1996, the council’s inaugural year.)
Beginning in May, Health Minister Leona Aglukkaq will assume the leadership role in an organization described by Arctic Opening as an international organization that now faces “far-reaching political developments.”
For the transformation of archaic seas are dramatically reshaping the world’s shipping lanes — always a major agent in the shaping of history. Simply put, the world looks like a very different place these days from the top down.
It’s no longer the Arctic – it’s the eight Arctics
By Charles Emmerson
The Arctic region is undergoing unprecedented and disruptive change. Its climate is changing more rapidly than anywhere else on earth. Rising temperatures are causing a retreat of sea ice and changes to seasonal length, weather patterns and ecosystems. These changes have prompted a re-assessment of economic and development potential in the Arctic and are giving rise to a set of far-reaching political developments.
Although traditional Arctic products — mostly relating to fishing, sealing, whaling and trapping — have long reached global markets and been influenced by global demands, before the 20th Century the overall role and scale of the Arctic in the global economy was minimal. The population of the Arctic — comprising the Arctic areas of Canada, Denmark (Greenland), Finland, Iceland, Sweden, Norway, Russia and the United States — is approximately one-twentieth of one percent of the world’s total population.
The combined effects of global resource depletion, climate change and technological progress mean the natural resource base of the Arctic — fisheries, minerals and oil and gas — is now increasingly significant and commercially viable. At the same time, economic value is beginning to be attached to the Arctic natural environment, both for its role in regulating global climate and for its biodiversity. This is giving rise to prospecting for commercially viable biological processes and materials.
The wind and hydro-power potential of some parts of the Arctic is being explored. The regions are attracting a growing number of tourists. Shipping activity has expanded and intercontinental shipping, though several decades away from reaching anything approaching the scale of existing major shipping routes, is a developing commercial reality.
Different regional and global economic scenarios suggest a range of possible future trajectories for Arctic development. Key uncertainties over future environmental conditions and the scale and accessibility of Arctic natural resources are compounded by uncertainty about the pace of technological development, the price of hydrocarbons, the future shape and demands of the global economy and the political choices of Arctic states. Environmental disaster — whether due to a single event, or as a cumulative result of increased economic activity — could rapidly and significantly change the Arctic’s political and economic dynamics. Still more acutely than elsewhere in the world, economic development and environmental sustainability in the Arctic are co-dependent.
If current patterns continue, however, investment in the Arctic could potentially reach $100 billion or more over the next 10 years, largely in the development of non-renewable natural resources, and in infrastructure construction and renewal. For some, this prospect represents a substantial business opportunity. But it also brings a unique and complex set of risks and raises significant policy dilemmas.
One Arctic, many Arctics
This report uses a broad definition of the Arctic, corresponding most closely to that used by the Arctic states themselves. This encompasses land and sea areas north of 60° for the United States, Canada, Russia, Norway, Sweden and Finland and the whole of Greenland and Iceland.
In the end, however, there is not one Arctic, but many. Environmental conditions, geological prospectivity, physical accessibility, population levels, economic development and political salience all vary. The balance of risk and opportunity for major Arctic development projects depends on a range of further factors:
• For oil and gas developments, there is a key distinction between onshore and offshore developments, between shallow water offshore and deep water offshore, and between developments close to existing pipelines and transport infrastructure and those that would require the construction of entirely new pipelines and infrastructure.
• For Arctic shipping, the widely varying quality of seabed mapping in different parts of the Arctic, and disparities in port infrastructure, surveillance and search and rescue capability, create an uneven matrix of risk and opportunity.
• The Arctic is not — nor is it likely to become — a truly single regulatory space, even while the Arctic Council, Arctic states and other interested parties are increasingly forging common approaches to shared challenges.
One Arctic, many temperatures
On an average day in January, the minimum temperature in Tromsø in northern Norway will be -6.7°C. In Salekhard, capital of Russia’s Yamal-Nenets district and focus of Russia’s Arctic natural gas prospects, it will be -29.7°C. In Tiksi, on the east Siberian shoreline, it will be colder still: -36.7°C.
Across the Bering Strait and far inland, the temperature in Fairbanks, Alaska will be -28.1°C. It will not be much different in Iqaluit, capital of Canada’s Nunavut territory. Meanwhile, in Nuuk, capital of Greenland and part of the kingdom of Denmark, it will be relatively warm: around -10°C.
What unites the Arctic, however, is the rate at which it is warming and the speed of change this implies for its natural environment as a whole — transforming the Arctic’s geography, ecosystems and how it relates to the rest of the world.
Climate Change: Global Early-Warning
The Arctic is not only warming — it is warming more rapidly than anywhere else on earth, acting as an early-warning signal for the globe. In 2011, annual near-surface air temperatures over much of the Arctic Ocean were 1.5°C warmer than the 1981-2010 baseline.
The feedback loops that explain this process are collectively known as ‘Arctic amplification.’ Reductions in sea ice and snow cover are one factor: As the Arctic becomes less white, it absorbs more heat and reflects less. But there are also factors that relate to cloud and wind patterns, themselves affected by broader climate change and the enhanced movement of moisture and heat from the equator towards the poles.
The ice
In September 2011, the month when Arctic sea ice extent is typically at its lowest, ice coverage fell to a low of 4.33 million square kilometres (1.67 million square miles), some 2.38 million square kilometres less than the 1979-2000 average. The NSIDC (U.S. National Snow and Ice Data Center) records show ice extent lower in only one other year, 2007, when it reached 4.17 million square kilometres.
Arctic ice is also both thinner and younger than it used to be. In the early 1980s, the NSIDC estimated that as much as 40 percent of Arctic September ice was more than five years old. In 2011, that proportion had declined to five percent.
Infrastructure
Existing infrastructure — buildings, bridges, roads, railways and pipelines — built on permafrost will become more expensive to maintain as the permafrost layer across northern Alaska, Canada and Russia becomes unstable.
A shortening season for winter roads (temporary roads carved out of snow or ice) is already creating access challenges for communities and mine sites across northern Canada. Winter road seasons for travel across northern Alaskan tundra have declined from over 200 days in the 1970s to around 100 days in the early 2000s. People and some goods can be flown in by air, albeit at considerable expense, but heavy machinery cannot.
Given conditions of rapid change in the physical environment, Arctic infrastructure will need to adapt to a much wider range of potential environmental conditions over the course of a multi-decade life. This means that all across the north, future infrastructure will have to conform to different technical specifications, and may be more expensive to build.
A good example of the double-edged consequences of climate change on access is the (sub-Arctic) port of Churchill in northern Manitoba, one end of the long-promised ‘Arctic Bridge’ from northern Canada to Murmansk in northern Russia. While maritime access to Churchill has increased in recent years, creating the possibility of expanding sea-borne grain exports, the periodic thawing of permafrost on which the single-track railway line to Churchill is built can cause the track to buckle. This increases the risk of derailments, slows traffic and sometimes halts it altogether. Millions of dollars have been spent on repairing the line, but the costs of upgrading it permanently would be much greater.
The importance of Greenland
The main global consequence of Arctic environmental change is through a diminishing Greenland ice sheet [which] contains approximately 2.85 million cubic kilometres of freshwater.
For a range of reasons — including meltwater lubrication of the underside of glaciers, feedback mechanisms and the general trend of global warming — the rate of decline is accelerating. Total ice sheet loss in 2011 was 70 percent greater than the average of 2003-2009. The rate of Greenland melt is one of the key drivers of global sea level rise. The influx of increased amounts of freshwater into the North Atlantic … could have consequences for weather patterns.
Ecosystems on the edge
As the prevailing environmental conditions in the Arctic change, so do the living ecosystems adapted to those particular conditions. Some benefit from climate change: At the bottom of the marine food chain, primary production by phytoplankton in the Arctic increased by 20 percent between 1998 and 2009 (and the increase has been as much as 70 percent in the Kara Sea and 135 percent in the Siberian sectors of the eastern Arctic Ocean).
On land, the Arctic is becoming increasingly green. Some lose: walrus and polar bear populations have tended to decline because of reductions in sea ice, while ocean acidification due to increased carbon dioxide uptake in warmer seas can harm some marine life and the fisheries associated with them. Others adapt: some fishstocks have moved, and flourished, as a result of warmer waters.
In the short term, cod stocks in the Barents Sea and off the coast of Greenland have become more productive, and have moved further north than ever. Over time, however, the impacts of climate change — and greater economic development — are more complex than identifying winners and losers. As with sea ice, changes in ecosystems can be discontinuous and abrupt. Marine ecosystems inter-relate in previously unexpected ways.
Northward-moving fish stocks inevitably alter the balance in the ecosystem into which they migrate, including out-competing or preying upon established Arctic species.
Some invasive species — introduced as a result of greater human activity — can destroy existing ecosystems. Though the impact of increased ocean noise from shipping on those is not clear, it is likely to have a negative impact on marine mammals that use acoustics for prey location and navigation.
At the same time, air- and sea-borne pollution from the industrialized south, such as persistent organic pollutants (POPs), can pose a serious challenge to ecosystems that, in the Arctic, tend to be relatively simple, vulnerable and difficult to re-establish. The increasing rate of disruption to Arctic ecosystems makes their future structure increasingly hard to predict. It also makes establishing environmental baseline data — against which change is measured and potential future changes are assessed — even more important.
Vast Arctic oil and gas potential
The price of oil has increased. In 2008, the United States Geological Survey estimated that the Arctic contained some 412.2 billion barrels of undiscovered oil and oil equivalent. More than two-thirds of this was estimated to be natural gas — approximately 46 trillion cubic metres, representing 30 percent of global undiscovered natural gas (approximately equivalent to Russia’s entire current proven reserves of natural gas).
Some 90 billion barrels were estimated to be oil — 13 percent of the estimated global total of undiscovered oil, approximately three times the current total proven reserves of oil of the United States and more than three times the proven reserves of the world’s largest non-state oil company, ExxonMobil.
The balance of oil and gas across the Arctic will vary. In general, the Russian Arctic is considered to be more gas-prone and the offshore Norwegian and American Arctics (including Greenland) more oil-prone. Most Arctic hydrocarbon resources are likely to be on the near-shore continental shelves of the Arctic states.
All these estimates are highly uncertain. Drilling data is scarce relative to highly developed areas such as the North Sea or the Gulf of Mexico.
Potential petro payoffs
Expectations that the price of oil will remain in the $80-$120 range in real terms for the foreseeable future provide a strong incentive for exploration and increase confidence that prices will cushion the high costs of Arctic development. However, global energy markets are in flux. Several studies suggest the potential of a peak in global oil demand, rather than supply, leading to subsequent terminal decline and lower prices. A sustained oil price spike in the near term might accelerate that process.
The outlook for Arctic natural gas is different. In the future, European Arctic gas can be expected to reach consumers by pipeline, partly through existing Russian or Norwegian networks, and partly to compensate for declining gas production elsewhere in Europe and Russia.
The scope of this market is constrained by the level of European demand. The Russian government intends to use Arctic production to allow it to keep to its European commitments while attempting to capture a part of the growing Asian gas market.
The broader global dynamics of natural gas are shifting, however. Natural gas is priced and sourced regionally, often resulting in significant price differences between markets — there are currently low natural gas prices in North America and high ones in East Asia. However, gas is increasingly marketed internationally in LNG form. Prices for gas could change dramatically if prices were decoupled from oil, or if there is a move towards a global price, as with oil, or if significant new gas supplies come on stream.
Shale gas production in the U.S., for example, has already led companies to drop out of the $30–$40 billion project to pipe gas from Alaska’s North Slope to U.S. and Canadian markets. In Asian markets, Arctic LNG would have to compete with Australian and other Asian sources. In time, the continental United States may itself become a significant exporter if natural gas production is not diverted to its transport sector.
There is considerable variation amongst Arctic hydrocarbon projects. This has implications for their commercial viability, and for the business, operational and environmental risks associated with developing them. The estimated cost of producing a barrel of Arctic oil ranges from $35 to $100 (production costs in the Middle East are sometimes as little as $5 per barrel).
Government take
A recent study suggested that, at a sale price of $80 and a production price of $25, the government take for Arctic oil projects would range from 100 percent in Russia (though this is changing) to 40–45 percent in Greenland and Canada. As governments offer incentives for development, or as geological uncertainties are reduced, the government take is likely to shift. The Russian government’s terms for Yamal’s LNG development are described as being “among the lowest in the world.”
Mining
At the time of writing, there are 25 mines in operation in the Russian Arctic. These include the mines of Norilsk Nickel, a large Russian diversified mining company, the largest nickel producer in the world and a major producer of palladium and platinum.
In 2010, 36.8 percent of Alaska’s foreign (non-U.S.) export earnings came from exports of zinc, lead, gold and copper, generating $1.3 billion. The Red Dog mine is one of the largest lead-zinc mines in the world, employing 700 people, mostly year-round.
Greenland is already home to a number of mines, such as Swedish company LKAB’s Seqi Olivine mine. The opening of coastal areas of Greenland to development, partly as a result of climate change, has increased the potential attraction of a range of other projects including gold, platinum and rare earth metals with high-technology applications at the Kvanefjeld deposit. Greenland’s government does not currently allow development of the island’s well-known uranium deposits, though its stance on exploration has recently been partially relaxed.
In Canada, mining accounts for half the income of the Northwest Territories and geological mapping is strongly supported by the federal government. Diamond mining north of Yellowknife has expanded rapidly. Between 2003 and 2008, total spending at a single mine, the Diavik diamond mine, amounted to $4 billion, of which a substantial share was with local businesses. The Mary River iron ore project on Baffin Island in Canada’s Nunavut territory is due to enter development in 2013 and will require an estimated $4.1 billion of direct investment up to 2040.
In northern Scandinavia, there are mining prospects across northern Sweden and Finland, and iron mines in Kirkenes (in northern Norway) and Kiruna. The latter is the world’s largest underground iron ore mine and the world’s largest Arctic mine — yet most of the ore is currently unmined.
Fishing
Fish represent 90 percent of the exports of Greenland, 33 percent of those of Iceland, approximately 6 percent of Norway’s and less than 1 percent of the export earnings of the United States and Russia.
In 2011, exports of Norwegian cod amounted to $1.8 billion, and exports of salmon from aquaculture some $4.8 billion. Meanwhile, individual Arctic communities are almost wholly reliant on fisheries and fish processing for their economic survival. Fishing communities are highly sensitive to marine pollution, they are often politically powerful in proportion to their size and their interests may sometimes be at odds with other economic activities, including shipping and oil and gas development.
In some places fishing activity has boomed in recent years. There were 30 fishing ship voyages in the Canadian Arctic in 2005, and 221 in 2010, by far the largest component of all ship voyages in the Canadian Arctic. The Greenlandic shrimp catch has grown by half again over the last decade.
Maritime traffic
As shipping seasons extend, Arctic shipping costs are reduced and point-to-point demand increases, traffic is expected to increase in future years.
Already, each Arctic shipping season is marked by a new development. In 2011, the Sovcomflot-owned Vladimir Tikhonov became the first supertanker (Suezmax) to sail the Northern Sea Route, with a cargo of 120,000 tonnes of gas condensate.
Later that summer, the largest ever bulk carrier crossed the Northern Sea Route when the Japanese-owned Sanko Odyssey, carrying 66,000 tonnes of iron ore concentrate, completed a voyage from the Russian Kola Peninsula to Jingtang in China.
In the summer of 2012, the Korean-built and Norwegian-owned Ribera del Duero Knutsen was to become the first LNG carrier to transit the Northern Sea Route, from Norway to Japan.
Each of these voyages has had to take on expensive icebreaker support, with ships capable of breaking through several metres of ice, despite relatively little ice being encountered in 2010 and 2011. The largest and most powerful icebreakers can cost up to $1 billion and take 8-10 years to build. Hiring charges vary, but the average cost for escort through the Northern Sea route is around $200,000.
However, carrier ships able to travel through ice of up to 1.5 metres without icebreaker support have been developed by the company Aker Arctic in Finland.
Canadian vs. Russian route
A comparison of two often-cited Arctic shipping routes — the Northwest Passage through Canada’s Arctic and the Northern Sea Route across the northern coast of Russia — suggests that the Northern Sea Route is more likely to be subject to large-scale development over the next 10-20 years because of political support, projected ice conditions and the development of onshore and offshore mineral resources in the Russian Arctic.
The Northern Sea Route may ultimately become a major global energy corridor between Russia and East Asia. While trans-Arctic shipping volumes along the Northern Sea Route are insignificant compared with overall global shipping volumes, total cargo has increased by a factor of 10 in recent years (though from a historically low level following the collapse of the Soviet Union).
Looking to the future, by the middle of the coming century, Arctic conditions may have changed so much that a shipping route across the North Pole, bypassing the Northern Sea Route and the Northwest Passage, becomes commercially viable.
Geopolitics of Arctic energy
In the U.S., the opening of further areas of the U.S. Arctic to exploration and, ultimately, development has strong support within Alaska, but limited support elsewhere. In Canada, Arctic energy and mining projects play into complex federal politics and the domestic politics of indigenous peoples across the north. In Greenland, exploration for offshore hydrocarbons is widely accepted as a pathway to greater economic prosperity and a guarantee of self-government. In Norway, government and public support for development is contingent on strong environmental regulation.
There is a key geopolitical dimension to Arctic oil and gas developments, involving states’ power, stability and influence. This is particularly true of Russia, where hydrocarbons represent 40 percent of export earnings and the state budget depends on taxes and royalties from hydrocarbon production. Russia’s gas exports are a major feature of its geopolitical role in Europe, while expanding oil and gas exports to China has become an important policy objective for the Russian government.
Nonetheless, development of the Russian oil and gas sector in the Arctic — particularly offshore –– depends to some extent on the participation of Western oil and gas firms with the technology and management skills to develop them. The development of Norwegian gas production, and the potential for export via existing pipeline networks to which the United Kingdom is connected, may reduce European dependence on other sources of gas. In November 2011, British company Centrica signed a 10-year, £13-billion ($20-billion) supply deal for natural gas from Norway, following a wider UK-Norway memorandum of understanding on energy.
Increased oil and gas production in Arctic North America is often presented as a way of improving U.S. ‘energy security’, though export prospects to Asia may ultimately trump home markets. Investments across the Arctic are increasingly international — with interest from Indian, Chinese and South Korean companies.
Liability
Whether the liability for damage to human health and economic losses should be limited or unlimited is an ongoing debate in Canada and the U.S. General “unlimited liability” is often thought to create a risk too great for investors, although some may accept it for specific aspects such as the loss of current and future fishing harvest revenues. Apart from the damage to local economies, ecosystem damage and degradation are notoriously difficult to put a value on and are not currently accounted for under national regimes.
Some upper liability limits apply to companies operating facilities in offshore Alaska and Canada’s eastern Arctic. The U.S. Oil Pollution Act specifies a limit of $74 million for economic damages, and the Canada Oil and Gas Operations Act of 1985 specifies $40 million for loss or damage, remediation and restoration. However, neither applies in cases of fault or gross negligence, where liabilities are unlimited.
Norway, Greenland and Russia do not set upper limits for companies. Even though much greater claims can be pursued through the courts where fault can be established, some NGOs are arguing that the liabilities cap and extent of financial responsibility a company must demonstrate to win a lease put the public purse under enormous risk. In allowing investors without sufficient funds to pay for the clean-up and reparations for a large-scale environmental disaster, the cap is essentially a transfer of risk to the public sector to encourage investment.
In the U.S., a company must demonstrate financial capability of up to $148 million. This is a fraction of the estimated $40 billion clean-up and compensation costs for the Macondo disaster. A smaller company than BP, for example, might have had to declare bankruptcy, leaving the state to foot the bill.
