The Arctic Comes In From the Cold

The Arctic Comes In From the Cold
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With the world awash in petroleum, and a barrel of crude selling for less than $50 a barrel, interest in Arctic oil and gas reserves would seem to be as remote as the region itself.

But that is far from the case. The Arctic’s buried oil is vital to America’s future, according to a new report. Additionally, the Arctic’s prominence on the world stage is fast expanding as its shipping lanes open to global commerce, and tourism, mining and fishing industries develop.  

Climate change, technology and geopolitics have brought huge changes -- both good and bad -- to the area and its nearly four million inhabitants. The eight nations with territory in the Arctic, including the United States, should help the Arctic people access the best the 21st century has to offer, but at the same time, respect the rights of indigenous people who prefer the old ways. Private industry, which brings jobs and economic opportunity, plays a key role in determining the region’s future.

A recent report by the prestigious National Petroleum Council concludes that the Arctic’s oil and gas reserves, which represent more than 20 percent of the world’s reserves, will need to be tapped over the next 30 years to meet U.S. domestic demand. Given the glacial pace of licensing and exploration, which take anywhere from 10 to 15 years, the authors state it is never too early to think through how to manage the Arctic reserves.

The report, Arctic Potential, was done at the behest of Secretary of Energy Ernest Moniz, who last year asked the petroleum council to help define prudent development of Arctic oil and gas. 

The report was commissioned to coincide with the start of the United States’ two-year chairmanship of the Arctic Council, an international body with members from Canada, Denmark, Finland, Iceland, Norway, Russia, Sweden, and the United States. The council also includes representatives of the indigenous peoples of the North. All member countries have commercial and national security interests in the region.  Five of the countries own most of the rights to the Arctic’s oil and gas reserves -- Russia leads with 60 percent, followed by the U.S with 20 percent, Greenland (9 percent), Canada (7 percent) and Norway (5 percent). 

Last year, President Obama issued a sweeping outline of U.S. priorities in the Arctic and a plan to implement them. It involves the work of 39 different federal agencies focused on national security, safety of navigation, infrastructure to support public safety, economic security, protection of maritime commerce and conservation of the unique Arctic environment. 

All the members of the Arctic Council, which is called to provide collective environmental stewardship of the development of the region, have now adopted almost identical strategies. All the plans reflect the rapid changes the Arctic is undergoing as the ice cap melts, greatly impacting the regional and global environment, commerce and the indigenous populations. 

Many of the Arctic’s inhabitants treasure the traditional ways of life and embrace subsistence levels of economic development, but many others want to start businesses, contribute to the global development, and have access to the best the 21st century has to offer while staying in their home regions. 

If there is one obvious thing that unites these otherwise diverse populations, it is the high cost of physical remoteness, ice and polar nights.  Looking at its vast Northern Territories, the Canadian Chamber of Commerce in its recent study quotes local entrepreneurs saying that the cost of doing business in the north is five times higher than in the rest of the provinces. Their prime challenges are access to credit when equity loans are hard to come by, access to education and educated employees, cost of transport and communications. 

None of these challenges for the local population can be fully addressed by local resources and transfers through the national budgets. That is not the way politics work anywhere, with the possible exception of Russia, which has inherited, from its Soviet past, vast industrial enterprises in its Arctic areas with established supply chains. Russia, however, was able to do so by relying on convict labor -- not an experience any nation would want to repeat.  

Oil and gas hidden under the Arctic ice, and the infrastructure that private investment in these fields will bring, are a viable solution to the growing development needs of the northern populations. These are local resources that will contribute tremendously to the local economies.  

It is a mistake to think that these economies will always be driven only by oil and gas. Fishing is prospering in the Arctic. Greenland, under the Danish crown and enjoying considerable independence from Brussels, is betting on a tourist boom, as well as mining. Most of Canada’s diamonds come from the region. 

With the advances in maritime technology and continuing melting of Arctic ice expected over the next 20 years, the voyage from Rotterdam to Yokohama via the Northwest Passage over North America and the Northeast Passage over Russia will be reduced by over 40 percent compared to the current Suez Canal route. Similarly, the distance between Seattle and Rotterdam will be cut by almost 25 percent compared to the Panama Canal route. The first commercial vessels are already plying these routes, laying cable between Japan and Europe and moving iron ore from Norway to China, bypassing many unsafe straits and leaving the worries about pirates in less-than-romantic past. 

Similar savings are obtained by the airlines connecting the United States with Asia and demanding better ground infrastructure along the routes. However, as the National Petroleum Council’s report shows, none of these other industries has the experience, scale and investment horizons sufficient to develop safe and efficient infrastructure in the Arctic. 

Without the energy industry, the well-being of local populations will increasingly depend on the presence of the military. With many unresolved maritime boundary issues among all the Arctic Council members, a growing concentration of military will require tremendous vigilance, responsibility and mutual confidence-building measures. Economic development of the global Arctic is a more promising way to reconcile national and local interests of this unique part of the world.  

The National Petroleum Council’s report does not shy away from describing in great detail the many environmental risks of the development in the Arctic. Its main recommendations include more careful research of the ecology, human environment, logistics and spill prevention and response techniques. In tune with the times, it does not forget to call on the Federal Aviation Administration to allow drones for monitoring in the Arctic. 

What’s needed, however, is also a clearer sense that the Arctic is not a charmed, pristine fairyland. It has real people with very real needs. Industry in not totally new in the region: The first wells around the Arctic were drilled in Canada in the 1930s. Over decades, petroleum activities in the Arctic have produced over 25 billion barrels of oil and 550 trillion cubic feet of natural gas.  For more than 80 years, old extraction activities and military installations -- but mostly global winds and currents – have brought black carbon and mercury contamination to the region. The immediate order of business is to clean up the world’s icebox. Private industry will play a big role by providing nations with the economic wherewithal to do so.  

Governments are also on the job. Thanks to the Arctic Council, a number of international programs are under way to remove the pollution. Financed by the Arctic Council and managed by the Helsinki-based Nordic Environmental Finance Corporation, these projects will have a tangible impact on the environmental security of the planet. 

Would they have garnered political will and capital without the promise of energy resources in the not-so-distant future? 

Gary V. Litman is vice president, International Strategic Initiatives, U.S. Chamber of Commerce.

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