arctic economic potential - eth z · the finnish institute of international affairs 5 northern sea...

Arctic economic potentiAl

Harri mikkola & Juha Käpylä FiiA BrieFinG pAper 127 • April 2013

U L KO P O L I I T T I N EN INS T I T U U T T I

U T R I K E S P O L I T I S K A INS T I T U T E T

THE F I N N I S H I N S T I T U T E OF I N T E R N AT I O N A L AFFA IR S

127

tHe need For A compreHensive And

risK-AwAre understAndinG oF Arctic dynAmics

• ThemeltingoftheArcticisexpectedtoofferprospectsformaritimetransportandhydrocarbonexploitationthatcouldpotentiallycreateanArcticeconomicboom.

• Inprinciple,moreaccessibleArcticsearoutescouldoffersubstantialsavingsinlogisticsbetweenAsian,American andEuropeanmarketswhen compared to the current globalmaritime traderoutesviathePanamaandSuezCanals.

• It is estimated that as much as 13 per cent of undiscovered oil deposits and 30 per cent ofundiscoveredgasdepositsontheglobearelocatedintheArcticarea.ThesehydrocarbonprospectsarefurtherestimatedtomaketheArcticareaamajorglobalenergyhub.

• However,theextentandpaceofoverallArcticdevelopmentisstilldifficulttoforecast.Therearemanyuncertainties and challenges in theArctic environment, infrastructure, technology andglobaleconomythatmayhindertheexpectedtrajectories.

• Whatisneededisaninformed,comprehensiveassessmentoftherisksandgainsrelatedtothedevelopmentoftheArctic.

Arctic economic potentiAl

FiiA Briefing paper 127

April 2013

tHe need For A compreHensive And risK-AwAre understAndinG oF Arctic dynAmics

the Global security research programme

the Finnish institute of international Affairs

U L KO P O L I I T T I N EN INS T I T U U T T I

U T R I K E S P O L I T I S K A INS T I T U T E T

THE F I N N I S H I N S T I T U T E OF I N T E R N AT I O N A L AFFA IR S

Harri mikkola

researcher


Juha Käpylä

researcher


tHe FinnisH institute oF internAtionAl AFFAirs 3

Introduction

DuringtheColdWar,theArcticareawasanimpor-tanttheatreintheUS-Sovietconfrontation,mainlydue to the area’snucleardeterrent relevance forbothsuperpowers.WiththeendoftheColdWar,theArcticlostmostofitsgeopoliticalrelevanceanddropped off the radar.During the last decade orso,theArctichasmadeaflashycomebackandhasbecomehighlytopicalagain.Infact,theareahasre-emergedasacomponentofcontemporaryhighpolitics,highlightedbythepublicationofnumerousnationalandsupranationalstrategicdocumentsontheArctic.1

This“Arctic boom” ismostlybecauseof the eco-nomic opportunities brought about by climatechange,whichismakingthenaturalresourcesintheArctic increasinglyaccessible.Therehasevenbeenspeculationthatthisincreasingeconomicrel-evancemightleadtosomekindofnew“wildwest”scenario,wherecommercialactorsarerushingtoseizeopportunitiesandstatesaretryingtobolstertheirsovereigntyclaims.Themedia,inparticular,havebeen eager to report on theArcticdevelop-mentsinafairlycolourfulway,dubiouslyemphasiz-ingthelucrativeyetconflictualandevenanarchiccharacterofthearea.2

WhilethepublicimageoftheArcticisoverly“sexedup”,itisclearthattheArcticareaischanging.Thatsaid,theArctictrajectoriesremainuncertainanda comprehensive understanding of these changedynamicsisstill inmanyrespects limited.AstheArcticisgoingtobeasignificantareaofstrategic

1 Seee.g.http://www.arctic-council.org/index.php/en/

about/documents/category/12-arctic-strategies.

2 Seee.g.FrankSejersen(2011)“ClimateChangeandtheEmer-

genceofaNewArcticRegion”,inBaltic Rim Economies:

Special Issue on the Future of the Arctic,no.4,30November

2011.http://www.utu.fi/fi/yksikot/tse/yksikot/PEI/BRE/

Documents/BREArctic%2030.11.2011.pdf;KatarzynaZysk

(2011)“TheEvolvingArcticSecurityEnvironment:AnAs-

sessment”,inBlank,StephenJ.(ed.)Russia in the Arctic.

StrategicStudiesInstitute,July2011.http://www.strate-

gicstudiesinstitute.army.mil/pubs/display.cfm?pubid=1073;

Antrim,CaitlynL.(2011)“TheRussianArcticintheTwen-

ty-FirstCentury”,inKraska,James(ed.)Arctic Security in

an Age of Climate Change.Cambridge:CambridgeUniversity

Press,p.107.

emphasis, it is important that Arctic visions arebased on a comprehensive evaluation of Arcticdevelopmentbasedon extensive andup-to-dateknowledgeofArcticdynamicsandassociatedrisks.Whilethereishugepotentialforeconomicoppor-tunityintheArctic, it isnotatallclearhow–towhatextentandatwhatpace–thispotentialitywillindeedactualize.

Theaimofthispaperistocriticallyanalyzethekeydriversofthecontemporary“Arcticboom”andtoillustrate existingkey challenges thatneed tobetackledfortheArcticpotentialtomaterialize.ThepaperwillprovideabriefoverviewofthechallengesintwomaineconomicdomainsoftheArctic:mari-timetransportandhydrocarbonextraction.Duetothisfocus,thepaperbracketsoutforthemostpartthepoliticalprocessesanddynamicsrelatedtotheArcticareaanditsdevelopment.3

The Arctic melts, the money flows

TheArctic4 iswarmingup,andasaconsequence,theArcticOceanismeltingatanacceleratedpace.Theextentofthesummericehasbeendecreasingabout8percentperdecadeandthethicknessoftheicehasdecreased40percentoverrecentdecades.5TheextentoftheArcticsummericecapisnow49per cent below the 1979-2000 baseline averageextent(seeFigure1).TheArcticlandareasarenow2degreesCelsiuswarmerthaninthemid-1960s(seeFigure2).6

Scientificresearchshowsthattheclimateischang-ingmorerapidlyintheArcticthananywhereelse

3 Thisexcludes,forinstance,awiderdiscussionoftheUNCLOS

treatyandtherelatedprocesses,thestrategicvisionsofthe

Arcticstates,andtheworkoftheArcticCouncil.

4 TheArctichasvariousdefinitions.ItmayrefertotheArctic

Ocean,theareaabovetheArcticCircle,theareaabove60⁰N

or,mostbroadly,theareawith“Arcticconditions”.Accord-

ingtotheacceptedview,thereareeightArcticstates:the

UnitedStates,Russia,Norway,Canada,Denmark(Green-

land),Sweden,FinlandandIceland.

5 ArcticCouncil(2009)Arctic Marine Shipping Assessment

2009 Report(AMSA).http://www.arctic.gov/publications/

AMSA_2009_Report_2nd_print.pdf

6 Arctic Report Card: Update for 2012.http://www.arctic.

noaa.gov/reportcard/index.html.


ontheglobe.ThecombinationofArcticwarmingandmeltingicecreatestheso-called“albedoeffect”where the Arcticwarms at an ever-acceleratingpacewhenmoreandmoredarksurfaces(ground,ocean) replace thewhite ice and snow coverage.Thesedarksurfacesabsorbmoresunlightduringthesummer,whichmakestheoceanandairwarmer,whichagainresultsinmoreicemelting.Thiseffect,combinedwithotherenvironmentalchanges–suchaschangesincloudandwindpatternsaswellasinmoistureandheatmovements–createsacomplexprocess known as “Arctic amplification”,whichmakestheArcticicemeltdownfasterandfaster.7SomeestimatessuggestthattheentireArcticOceancouldbeice-freeduringlatesummer/earlyautumn

7 The Economist,TheMeltingNorth:SpecialReport,June16th

2012,p.4.http://www.economist.com/node/21556798.

inthenearfuture,mostprobablyby2040butpos-siblyevenassoonas2015.8

ThismeltingoftheArctichastwogenerallyhigh-lightedeconomicconsequences.First, theArctic sea routes are becoming more easily accessible for maritime transport. Inaddition to retreating icecoverage,theamountofmulti-yearice–i.e.thickicethathassurvivedatleastonesummermeltingseason– incentralpartsof theArcticOceanhasalsobeendecliningdramatically.9Thistrendissig-nificantsinceyoungericecannotfullystrengthenitselfduringthewinter,resultinginanever-smallerandthinnericecapduringthesummer,whichisalsoeasierforshipstobreak.Thesechangesinicepatternscouldmeantheemergenceoftrans-Arcticshipping with considerable savings in logisticalexpenses in cargo transport between East-AsiaandNorthernEurope.TheArcticisbecomingmoreaccessibleforhumanactivitiesnotonlyduetocli-matechange,butalsoasaresultoftechnologicalinnovation,includingadvancesinship,communi-cation,satellite,drilling,andnavigationtechnology.

Second, themeltingArctic is seen to reveal sub-stantial new sources of hydrocarbons and miner-als.Accordingtothe2008USGeographicalSurvey,asmuchas13percentofundiscoveredoildepositsand30percentofundiscoveredgasdepositsontheglobearelocatedintheArcticarea.1⁰ThisisassumedtomeanthatthenewhydrocarbonprospectswillmaketheArcticareaamajorglobalenergyhubthatwillboosttheArcticeconomysignificantly.

Maritime trade flows in the Arctic

Themelting Arctic Ocean has threemain routesforthepotentially increasingmaritimetransport.The Northeast Passage (NEP), also known as the

8 Seee.g.Polyak,Leonidetal.(2010)“HistoryofSeaIceinthe

Arctic”,Quaternary Science Reviews29:1757-1778;Kerr,

RichardA.(2012)“Ice-FreeArcticSeaMayBeYears,Not

Decades,Away”,Science337(6102):1591.FormoreonArc-

ticicereduction,seeU.S.NationalSnowandIceDataCenter,

http://nsidc.org/arcticseaicenews/.

9 Polyaketal.(2010),1758-1760.

10 USGS(2008a)AssessmentofUndiscoveredOilandGasin

theArctic;seehttp://www.usgs.gov/newsroom/article.

asp?ID=1980&from=rss_home.

Figure 1: the reduction of Arctic ice extent, 1979-2012.

source: Arctic report card, 2012. used with permission of the

us national oceanic and Atmospheric Administration.

Figure 2: the rise of Arctic land area temperature, 1900-2011.

source: Arctic report card, 2012. used with permission of

the us national oceanic and Atmospheric Administration.


Northern Sea Route, which runs along the Rus-sianArcticcoastlinebetweentheBarentsSeaandtheBeringStrait;theNorthwestPassage(NWP)onNorthAmerica’sArcticcoastlinefromtheBeaufortSeatoBaffinBay;andaTranspolarSeaRoute(TSR)that runs straight through theArcticOcean (seeFigure3).

ClimateforecastsindicatethattheroutemostlikelytobeopenforcommercialuseduringsummertimeistheNEP.Infact,ithasactuallybeenmoreorlessopenannuallyduringthelatesummersince2005withsomeyear-roundtraffic,mostnotablybetweentheYamalregionandthecityofMurmanskinRus-sia.TheforecastfortheNWP iscommerciallyless

optimistic.This isbecausetheNWPgoesthroughthe Canadian archipelago, which is significantlymoreice-coveredandmoreclosedalsoduringthesummermonths,at least inthemid-term.AsfortheTSR, although theroutemayhavesignificantpotentialinthefuture(e.g.Chinesetransport)andthemulti-yearicehasbeennotedtobedecreasing,therouteisstilldestinedtohavemoresevereiceconditionsthantheNEP,atleastintheshort-andmid-term.11

11 AMSA(2009),pp.5,84-86,89-90.

northwest passage

northern sea route

transpolar sea route

Arctic Bridge route

Arctic shipping routes

Figure 3: Arctic sea routes.

data from the Arctic institute.


Inprinciple,Arcticsearoutescouldoffersubstantialsavingsin logisticsbetweenAsian,AmericanandEuropeanmarketswhencomparedtothecurrentglobalmaritime trade routesvia thePanamaandSuezCanals.Forexample,thetraveltimebetweenRotterdamandShanghaimaybereducedfromanaverage30daysdownto14days,andthedistanceby roughly 5000 kilometres when compared tothetraditional tradingrouteviatheSuezCanal.12This,inadditiontothepoliticalinstabilityinmanygeographicalareas(e.g.theStraitofHormuz,theHornofAfrica)inthenearvicinityofthetraditionalglobalmaritimeflows,isseentomaketheopeningArcticmaritimeroutesamoreappealingoptionforcommercialoperators.

Although the Arctic routes have witnessed anincreaseintrafficduringthelastfiveyears,easieraccess to the Arctic passages will not inevitablyresultintrans-Arctictradeflowsbecomingamajorcompetitor for the more “traditional” tradingroutes.TherearebigchallengestotacklebeforethemaritimepassagesintheHighNorthbecomeglob-allysignificant.Thisisduetomulti-dimensionallyharshoperatingconditionsintheArcticthatmakeArcticmaritimeoperationschallengingandcostly.

Inadditiontothecoldclimateandphysicalobstaclesgeneratedbyice,Arcticwatersarealsoconsiderablyshallowduetobroadcontinentalshelves.Forexam-ple,thedepthoftheNEPvariesbetween10and100metres,which is considerably less than in othermajor transport routes.13 This geographical factaloneputslimitationsonthesizeofvesselscapableofoperatinginArcticroutes.Smallervesselsmeansmaller cargo-carrying capability,which in turnmeans sub-optimal economies of scale and highlogisticunitcosts.ThecoldArcticclimatealsoputsextrastressonaship’smachineryandoperability14,

12 Hahl,Martti(2013)“What’sNextintheArctic?”,inBaltic

Rim Economies: Special Issue on the Future of the Arctic,

no.2,27March2013,p.3.http://www.utu.fi/fi/yksikot/tse/

yksikot/PEI/BRE/Documents/2013/BRE%202-2013%20web.

pdf.

13 Seee.g.AMSA(2009),p.23.

14 Foraninformativediscussionofthechallengesfacingsur-

facewarshipsoperatingathighlatitudes,seee.g.Kraska,

James(2011)“TheNewArcticGeographyandU.S.Strategy”,

inKraska,James(ed.)Arctic Security in an Age of Climate

Change.Cambridge:CambridgeUniversityPress,pp.263-64.

andlimitstheproductssuitableforcontainershiptransportationinthefirstplace.

Inaddition,meltingicewillresultinalargeramountof drifting ice,making the operating conditionsdangerous.ThisisespeciallyhazardousduringthedarkArcticwinter nightswhichprevail half theyear.Moreover,theArcticareaisstillan“unknownfrontier”inmanyrespects.Currenthydrographiccharts, for example, remain insufficient for safemaritimeactivity.15

Thishazardousenvironmentmeansthatshipsoper-atingintheArcticwatersmustbeadequatelyrein-forcedtobeabletooperatesafelyinthesewaters,makingthemmoreexpensivetobuildandalsoeco-nomicallylessbeneficialtooperateinotherwatersbesides the Arctic Ocean, due to heavier vesselweight,forexample.AsignificantincreaseinArctictrafficwouldrequireacorrespondinglysignificantincrease in ice-strengthenedPolarClass16 carriervesselsor,alternatively,Arcticvesselswouldneedtocountonice-breakersfornavigationalandice-managementassistance,evenduringthesummerseason.ThiswouldputlimitationsontheuseoftheArcticpassagesbecauseofthescarceice-breakingcapabilities and relatively high ice-managementfees.Forinstance,theice-breakerescortcostattheNEPcanamountto$150,000perday.Onemustalsonotethatbuildingamodernice-breakerishighlyexpensive(upto$1bn)andtime-consuming(upto10years).17

Importantly,eventhoughtheArcticOceanmightbe reasonably ice-free during a few summermonths, theArcticwinter ice isnot expected todisappear–at leastnotduringthiscentury.Thismeans that Arctic shipping, even at theNEP, isnot going to be possible around the year otherthanwithice-strengthenedPolarClassshipsand/

15 AMSA(2009),p.16.

16 OnthePolarClassrequirementsbytheInternationalAssoci-

ationofClassificationSocieties,seehttp://www.iacs.org.uk/

document/public/Publications/Unified_requirements/PDF/

UR_I_pdf410.pdf.

17 Lloyd’s(2012)Arctic Opening: Opportunity and Risk in

the High North.London:ChathamHouse,p.29.http://

www.lloyds.com/~/media/Files/News%20and%20In-

sight/360%20Risk%20Insight/Arctic_Risk_Re-

port_20120412.pdf.


orwith ice-breakerassistance.18Thismeans thatyear-roundtransportintheprevailingconditionsis not economically feasible andArcticmaritimeactivitieswill remain highly seasonal.Moreover,it’sextremelydifficulttopredictwhenthepassageswillactuallybeopensincetheicecoveragevariesfromyeartoyear.19Importantly,theunpredictablenatureoftheArcticoperationalenvironmentmeansthat theArctic routesmaynotbe suitable for so-called“just-in-timelogistics”–acommonfeatureoftoday’sglobalsupplychains.Instead,theArcticrouteshavethebiggestpotentialinthetransporta-tionofbulkcargo(resources)asopposedtocontain-ersthatrequirepunctualityindelivery.2⁰

TheArctic also has severe gaps in the infrastruc-turenecessaryforsafepassage.TheArcticroutescontinue to lack search and rescue capabilities,ice-managementcapabilities,salvagepoints,har-bours, communication infrastructure and evenexperiencedstafftooperateinicywaters.21Arctic-specificinsuranceisalso limitedbytherelativelylowamountoftraffic,andinsurancepremiumsmayremainhighduetodifficultoperatingconditionsand levels of riskmanagement by shipping com-panies.22WhatthismeansisthatwhiletheArcticroutesareshorterindistanceandmoreandmorefrequentlyused,theirfeasibilityandlucrativenessremainsuncertain,atleastfortheforeseeablefuture.Insomecases,theymightbeslowerduetounex-pectediceconditions,orentaillargerfuelcostsduetotheneedforgreaterpropulsionpower.23Inshort,thepotentialintheArctictransportroutesmightbedifficulttorealizeinfull.

Traditionally,theArctichasseenacertainamountofmaritimeactivity.Theseactivities,however,havebeenmostlyregionalandrelatedtothere-supplyof

18 Russiacurrentlyrequiresice-breakerescortsformaritime

transportintheNEP.

19 AMSA(2009),pp.160,24-25.

20 Brigham,LawsonW.(2011)“TheChallengesandSecurity

IssuesofArcticMarineTransport”,inKraska,James(ed.)

Arctic Security in an Age of Climate Change.Cambridge:

CambridgeUniversityPress,p.29.

21 Ibid.,p.27.

22 Lloyd’s(2012),pp.49-51.

23 However,thetravelspeedinice-freeconditionsinArc-

ticpassagesistypicallyslowerthaninotherseasduetogeo-

graphicalreasons,afactthatmightactuallysaveonfuelcosts.

communitiesinthescarcelypopulatedArcticareaandtheexploitationandexportofrawgoods(oil,gas,minerals,fish)outoftheArctic.Themajorityoftheseintra-Arctictransportactivitieshavetakenplacealong theNorwegiancoast,around Iceland,GreenlandandtheFaroeIslands,intheBeringandtheBarentsSea,thelatterhavingthelargestcon-centrationofArcticmaritimetraffic.24Theseactivi-tieshavetakenplacealmostentirelyinareaswhicharealreadyice-free,eitherseasonallyoryearround.

Despiteoptimisticstrategicvisions25aswellassomenotable commercial trans-Arctic passages since200926,thereisnoguaranteethattrans-Arcticship-pingactivitywillboominthenearfuture.Thatsaid,Arcticmaritime activities will increasewith theriseineconomicactivitiesintheregion,primarilyrelatedtoenergyexport,mining,tourismandthefishingindustry.TheNEP,orpartsofit,alongtheRussian coasthas the greatest potential for com-mercialandthereforeoperationalactivityaswell.

Withtheworld’smostpowerfulice-breakingfleetandlonghistoricalexperienceinArcticconditions,RussiawouldgainfromthesuggestedincreaseinNEPuse.Russiahasstateditsvisiontocomprehen-sivelydevelopitsArcticcapabilitiesandinfrastruc-ture,especiallyinordertosecureitsenergyexports:amajorpartofRussianexportincomecomesfromhydrocarbons.TheArcticareaplaysanimportantrole in this since itgeneratesaround20percentofthecounty’sgrossdomesticproduct(GDP)andtwenty-fivepercentofthenation’stotalexports.27ThismakestheArcticastrategicimperativeforRus-sia.Inthisrespect,theNEPisaviablealternativefor

24 AMSA(2009),pp.73-74.

25 Seee.g.‘ChinaStartsCommercialUseofNorthernSea

Route’,Barents Observer,March14,2013.

26 Seee.g.Brigham,LawsonW.(2013)“ArcticMarineTrans-

portDrivenbyNaturalResourceDevelopment”,inBaltic

Rim Economies: Special Issue on the Future of the Arctic,no.

2,27March2013,p.14.

27 Zysk,Katarzyna(2011)“MilitaryAspectsofRussia’sArctic

Policy:HardPowerandNaturalResources”,inKraska,James

(ed.)Arctic Security in an Age of Climate Change.Cam-

bridge:CambridgeUniversityPress,p.95;Järvenpää,Pau-

li&Ries,Tomas(2011)“TheRiseoftheArcticontheGlobal

Stage”,inKraska,James(ed.)Arctic Security in an Age of

Climate Change.Cambridge:CambridgeUniversityPress,p.

138.


transportingliquefiednaturalgas(LNG)andotherresourcestoEurope,andmaybealsotoAsiainthefuture.

Toconclude,itwilltakeaconsiderableamountofinvestment in Arctic capabilities and infrastruc-tureaswellasmajorchanges inthesecurityandeconomic rationale of “traditional” global tradedynamicsfortheArcticmaritimeroutestobecomeasignificantoptionforglobalmaritimetradeflows.However, it is likely that increasing economicactivities in the High Northwill increase Arcticmaritimeflows,buttoalargeextentonlyincertainkeyregionsintheforeseeablefuture.Trans-Arctictransportismoreofapossibilityfortomorrowthanarealityoftoday.

Resource exploitation in the Arctic

The Arctic area is rich in natural resources.ThegrowingpotentialforanArcticeconomicboomisnotsomuchdependentonthepossiblyincreasingtrans-Arctic transport, but more related to the

globaldemandforArcticnaturalresources,includ-ingnaturalgasandoil.28

Theexploitationofnon-renewableenergysourcesintheArcticisbynomeansanewphenomenon,asactivitiesinAlaskaandintheRussianArctichavebeengoingonfordecades.TheseactivitiesaresettomultiplywhentheArcticbecomesmoreaccessibleandwhen the technologies forenergyextractionimprove, making development projects increas-inglyfeasibleandfinanciallyattractiveforeconomicoperators.The2008U.S.GeologicalSurveyshowsthatthepotentialforArcticenergysourceexploi-tationishuge.Accordingto2009figures,over60largeoilandnaturalgasfieldshavebeendiscoveredintheArctic,andthenumberhasbeengrowing(seeFigure4).29

TheInternationalEnergyAgencyhasestimatedthatroughly75percentofworldenergyconsumption

28 TheArcticalsohasasignificantamountofminingactivity,

butwehaveomittedthisfromourdiscussion.

29 Ernst&Young(2013)Arctic Oil and Gas,p.2.http://www.

ey.com/Publication/vwLUAssets/Arctic_oil_and_gas/$FILE/

Arctic_oil_and_gas.pdf.

Figure 4: main oil and gas prospects in the Arctic. data from the u.s. energy information Administration.

East Greenland Rift Basins

West Greenland - East Canada

West Siberian Basin

East Barents Basin

Amerasia Basin

Arctic Alaska


will still be reliant on fossil fuels in 2035.3⁰Thisfact,combinedwiththesecurityofenergysupplyconsiderations (related primarily to the Middle-East region), has increased the political interestin Arctic energy reserves. While still somewhatuncertain,thegeneralassumptionisthatmostofthenewArcticenergyprospectsaretobefoundonthecontinentalshelvesclosetotheshorelinesoftheArcticcoastalstates.Russia’scoastisexpectedtobemoregas-prone,withtheNorwegianandAmericanArcticcoastbeingmoreoil-prone.31

Butaswasthecasewithmaritimetransport, thepotentialforArcticenergyexploitationisnoteasytocashinon.Conductingoilandgasdevelopmentprojects in theArctic is complex. To beginwith,their feasibilitydepends to a large extent on theglobalsupplyanddemanddynamics,namelyontheenergypriceandsecurityofsupplyconsiderations.

AnenlighteningexampleofthecontingencyofArc-ticenergyexploitationisthecaseoftheShtokmangasfieldproject.SituatedintheBarentsSea,about550kilometresoffshore,thisRussian-ledgas-fieldmegaprojectwasinitiallydesignedtosupplylique-fiednaturalgas(LNG)totheUSmarket.However,the project has been delayed, and perhaps evenjeopardized,byvariouscontingentfactors,rangingfromriftingicebergsandtaxationissuesinRussiatorecenttechnologicalbreakthroughsinshalegasextraction technology.32 The increase in North-AmericanshalegasexploitationhassaturatedtheUS gasmarkets– there is even talkofUS energy

30 InternationalEnergyAgency(2012)World Energy Outlook

2012,p.51.http://www.worldenergyoutlook.org/publica-

tions/weo-2012/.

31 USGS(2008b)“Circum-ArcticResourceAppraisal:

EstimatesofUndiscoveredOilandGasNorthoftheArctic

Circle”.http://pubs.usgs.gov/fs/2008/3049/fs2008-3049.

pdf.

32 Seee.g.‘GazpromPostponesDevelopmentofShtokman

Field’,Wall Street Journal,August30,2012.http://on-

line.wsj.com/article/SB100008723963904449149045776207

33220528246.html;‘RoadmapforShtokmandevelopment’,

Barents Observer,April3,2013.http://barentsobserv-

er.com/en/energy/2013/04/roadmap-shtokman-develop-

ment-03-04.

independenceby2020–andconsequentlyblockedtheexportofShtokmanLNGtotheUS.33

Fromaneconomicperspective,thebasicprincipleisthatthesellingpricemustexceedacertainrelativelyhighthresholdforArcticoilandgasextractiontobeprofitable.Oneestimatesuggeststhatthecostof producing a barrel of Arctic oil is somewherebetween$35and$100,whilethecostofproducingabarrelofMiddle-Easternoilcouldbeaslowas$5.34Theoilpriceintheglobalmarkethasbeen–andisexpectedtostay–ataratherhighlevel(currently$94.53(WTI)perbarrel35),whichmakesArcticoildevelopmentpossible,despitethehighproductioncosts.

Incontrasttooil,naturalgashastraditionallybeensourced and priced regionally. For instance, thepriceofnaturalgasinJapanisseveraltimeshigherthanintheUS.36However,newdevelopments inArctic-relatedLNGtankertechnology–forinstance,double-hulledPolarclassvesselscapableofbreak-ingicesternfirstwherenecessary37–willmakethetransportofArcticnaturalgasmoreindependentoftheexistingpipelines,moreflexible,andmoreglobal.

Arcticoilandnaturalgasextractioninvolvesserioustechnicalproblemsandrequireshugeinvestments,especiallyrelatedtotheoffshoreprojects.Perhapsmostimportantly,actorsintheenergysectorhavetomitigatetheriskofenvironmentalaccidents.TheArcticenvironmentisfragileandhardtorestoreintheeventofaccidents.OilspillmanagementintheicyenvironmentoftheArcticistechnologicallydif-ficult,ifnotnighonimpossible.Theliabilityissues

33 SeeVihma,Antto(2013)“TheShaleGasBoom:TheGlob-

alImplicationsoftheRiseofUnconventionalFossilEnergy”.

FIIABriefingPaper122.http://www.fiia.fi/en/publica-

tion/319/the_shale_gas_boom/.

34 Lloyd’s(2012),p.23.

35 Theabove-mentionedoilpriceisthatofApril4,2013.See

http://www.bloomberg.com/energy/.

36 IEA(2012),p.2.Onnaturalgaspricingmoregenerally,see

e.g.Melling,AnthonyJ.(2010)Natural Gas Pricing and its

Future: Europe as the Battleground.Washington:Carnegie

Endowment.http://www.carnegieendowment.org/files/

gas_pricing_europe.pdf.

37 Onthese“double-acting”ships,seehttp://www.akerarctic.

fi/publications/pdf/Poac01XNewDAS.pdf.


related to a potential environmental catastropheposemajor obstacles to resource extraction andhinderthedevelopmentofpotentialprojects.Brit-ishPetroleum,forexample,agreedto$4.5bninfinesandotherpenaltiesrelatedtoadeep-wateroilspillintheGulfofMexicoin2010.Thetotalcostsoftherecoverywillexceedthissignificantly.38

Arcticdevelopmentprojectsalsotendtohavelongleadtimes,namelythetimebetweentheinitialdis-coveryandtheactualproductionphasemightbeadecade(ormore)long.Thisleadtimemightincludeunpredictableglobalorregionaldevelopments,suchaschangesinenergysupplyanddemandandenvi-ronmental accidents,whichmighthavenegativeeffectsontheplannedprojects,eitherpostponingorevencancellingthemaltogether.Assuch,com-mittingtotheselong-termdevelopmentprojectsisdifficultbecauseofthegreatuncertaintysurround-ingtheArcticareadevelopment.

Economically speaking, there is a big differencebetween the economic viability of onshore andoffshoredrilling, and theproximityof thedevel-opment projects to the existing infrastructure(harbours,pipelines) is a significant factorwhenpondering the economic viability of a project.Onshoreorclose-to-shoredrillingneartheexist-ing infrastructure might be highly viable, butoffshoreprojectsrequirehighglobalenergypricesinordertobelucrativebecauseofthehighproduc-tionandinvestmentcosts.39Moreover,itisworthnoting thatwhen the temperature rises and theArctic permafrost melts, maintaining the exist-inginfrastructureoncebuiltonthepermafrostofthecoastalareasmayalsoneedadditional invest-mentsastheinfrastructure’s“bedrock”crumbles.In addition, reduced ice coverage bringswith itstrongeroceanwaveswhich,inturn,posedifficul-tiesnotonlytomaritimetraffic,butalsotocoastalinfrastructure by increasing coastal erosion.4⁰

38 ‘BPWillPleadGuiltyandPayOver$4Billion’,New York

Times,November15,2012.http://www.nytimes.com/

2012/11/16/business/global/16iht-bp16.

html?pagewanted=all.

39 Lloyd’s(2012),p.9.

40 Lloyd’s(2012),pp.16-17.

Conclusion: Economic hope and Arctic tragedy?

TheArcticisnotanew“wildwest”.Whileitpro-vides strategic assets over which economic andpoliticalcompetitionexists,theArcticremainsoneofthemostpeacefulareasontheglobe,character-izedtodatebybilateralnegotiations(e.g.RussiaandNorway),multilateralco-operationandgovernance(e.g.UNCLOS,theArcticCouncil)andpublic-pri-vatejointventures(e.g.inhydrocarbonextraction).

IndicativeoftheArcticeconomicpotential,recentandrelativelycautiousestimatessuggestthattheArcticareacouldwitnessinvestmentsrangingfrom$100bn41 up to €225bn42 during thenext decade,mostlyrelatedtotheexploitationofnon-renewableenergysourcesandrelatedinfrastructureconstruc-tion. Although significant challenges remain inorder for the trans-Arctic transport routes toberealized, Arctic maritime transport is going toincrease due to the increasing hydrocarbon andmining activities, primarily regionally but eventrans-continentallyovertime.Thisprobablyofferssubstantialcommercialpossibilitiesfortheenergyindustry,shipandinfrastructurebuildersandice-managementserviceproviders.

However, the potential and overall Arctic devel-opmentisstilldifficulttoforecast.TheArctichasmanypotentialtrajectoriesanduncertainties.Theseinclude at least the following: changes in futurehydrocarbon demand and price; developmentsinglobaltradedynamics;thefutureoftraditionalmaritimeroutes;potentialenvironmentalcatastro-phes;globaleffectsofclimatechange;technologicaldevelopment;domesticpoliticaldynamics(e.g.inRussia);thefutureofArcticmultilateralgovernance;thereductionofknowledgegaps(e.g.hydrographicmapping,weatherforecasts);futureinfrastructuredevelopment; trade-offs between different eco-nomicactivities(e.g.fishing,tourism,oil,gas);anddevelopmentinoperationalandenvironmentalriskmitigation.

41 Lloyd’s(2012),p.6.

42 Synberg,Kari(2013)“RussiaandtheArctic”,inBaltic Rim

Economies: Special Issue on the Future of the Arctic,no.

2,27March2013,p.5.http://www.utu.fi/fi/yksikot/tse/

yksikot/PEI/BRE/Documents/2013/BRE%202-2013%20web.

pdf.


ItisvitaltonotethateveniftheArcticprospectswere not fully realized, therewould still be sub-stantialinvestments.Nevertheless,becauseoftheabove-mentioned–andstillother–uncertainties,whatisneededisacomprehensiveandrisk-awareassessment of the Arctic dynamics as a basis forfutureinvestmentdecisions.Inotherwords,whatis needed is a “de-hyped” evaluation of Arcticpotentiality.

WhiletheArcticeconomicpotentialmightbeoverly“sexedup”and“hyped”,thereisperhapsoneevenmoreunnervingandoftenoverlookedelementintheArcticeconomicdiscourse.Thisistheneglectofthemagnitudeoftheeffectsofglobalclimatechangethatamounts toade facto acceptanceofclimatechangeasthefateofhumankind.ThismeansthatthepotentialeconomicopportunitiesoftheArcticnot only stem from, butwhen realized alsocon-tribute to,changesinglobalclimate,andtheyarehard–ifnotimpossible–toreconcilewiththegoalofsustainableglobalsocio-economicdevelopment.

ItiscertainlytruethattheArcticareaoffersshort-termeconomicpotentialintheformofhydrocar-bons (and relatedmaritime transport). It is alsotrue that there exist some mid-term prospectsintheArctic forrenewableenergy inthe formofhydro,solarandwindpower.Yet,allofthesepaleincomparisontothecomplex,shortandlong-termenvironmentalthreatsofoilandnaturalgasexploi-tation(andmaritimeactivity).Inshort,themoreweeconomicallyexploit theArctic, themorewecontributetothedeteriorationoftheglobeandtheArcticitself.

Theglobalgoalshouldbetolowertheemissionofgreenhousegases,nottoexploitandstaydependentonthefossilfuelsthatadvanceglobalwarming.ThisgoalisinsharpcontrastwiththeeconomicvisionandtherationaleoftheArcticboom.Iftheeconomicbenefits of the Arcticwere to be exploited fully,climatechangewouldhavemostlikelyreachedthe“pointofnoreturn”.Theworst-casescenariocouldinvolve,butnotbelimitedto,substantialsea-levelincreaseandfloodingofpopulatedcoastalareasduetothemeltingofGreenlandaswellasthereleaseofmethane–asupergreenhousegas–fromthemelt-ingArcticpermafrost.Ifthisisthecase,thetragedyoftheArcticseemstobethatitseconomicpotentialwillmaterializeonlyinthecontextofadeteriorat-ingglobe,orinfactassumingit.


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