The Arctic Between Hype and Reality

By The Arctic Between Hype and Reality

As the climate is warming and the ice is melting, the Arctic has regained a certain interest on the international scene. The opening of sea lanes and increased access to natural resources are two of the main factors contributing to the increased attention for the Arctic region in international politics. The Circumpolar North has been described as a new maritime highway, a new resources frontier and new military theatre. These expectations were first triggered by events such as a completely ice-free Northwest Passage in 2007 and 2008 or the flag planted by Russia on the seabed of the North Pole in 2007 as a reaction to the Arctic ice melt. Other events of importance are:

  • The discovery of an offshore natural gas field in Greenland by the Scottish energy company ‘Cairn Energy’ in 2010
  • The granting of observer status in the Arctic Council to China and India in 2013
  • New records of air temperatures and new lows in ice extent in 2015
  • NATO military training exercises in Arctic conditions led by Norway in 2016

The year 2017 has already witnessed a severity of events related to geopolitical and economic developments in the Arctic including:

  • Discovery of large oil reserves in the Norwegian Arctic by the Swedish energy company ‘Lundin’ in the beginning of 2017
  • The completion of a new Russian military base in the Arctic by April 2017
  • A NATO Parliamentary Assembly held at the Svalbard Archipelago in May 2017
  • The interception of Russian military aircraft in the American and Canadian air identification zone in April and May 2017

This paper will assess whether the events such as described above are truly accompanied by structural trends in the importance of the Arctic in global economics and geopolitics. It will do so by providing a quantitative analysis of how international shipping, military resource allocation and natural resource investments (petroleum and natural gas) have been changing over the last decade. The data collected prompts us into saying that although there is definitely a large new potential for change in the Arctic – ‘the Hype’, currently most of the developments are happening relatively slowly and small scale – ‘the Reality’.

The Hype

In his book ‘the Future History of the Arctic’, Emmerson describes how diminishing sea ice cover will open up international shipping routes, increase access to natural resources and increase biological marine productivity (2010). With these developments, large economic opportunities can be expected.

In 2007 and again in 2008, the Northwest Passage (north of Canada) remained completely ice-free during two weeks. Predictions were made that the Northwest Passage would be totally ice-free by 2013. At the top of Eurasia, the Northern Sea Route (NSR) was already opened to international transit. Two German vessels even managed to travel across the NSR without being accompanied by icebreakers. It was argued that the Northern Sea Route could shorten the travel distance from Northeast Asia to Europe by half (Ebinger and Zambetakis, 2009, p. 1216). In 2010, Norilsk Nickel delivered raw materials from Siberia to Rotterdam, while the Baltica was the first high-tonnage vessel to go from Murmansk to China. One year later, the Sovcomflot Tanker Vladimir Tikhonov travelled north of the New Siberian Archipelago with 120,000 ton of gas condensate in its container. Also in 2011, the Polarcus Alima reached the Bering Strait from Hammersfest in only 9 days and then carried on to New Zealand. Besides shortening international trade distances, Arctic shipping routes would have the additional benefit of avoiding the Malacca Strait, the Suez Canal and the coasts of Somalia. These three trading intersections are a source of security risk (e.g. terrorism and piracy) and are bound to reach their capacity limits in the coming decade.

In terms of resources, the United States Geological Survey stated that “approximately 90 billion barrels of oil, 1,669 trillion cubic feet of natural gas, and 44 billion barrels of natural gas liquids”, or to put it in other terms, 29% of undiscovered gas and 10% of undiscovered oil are to be found in the Arctic. Russia captures most of the Arctic resources’ potential: it is believed that 52% of the Arctic’s oil reserves are within Russia’s borders and exclusive economic zone (EEZ) (USGS 2008). The Russian north is very mineral wealthy as it holds 10% of the world’s proven nickel, 19% of the world’s platinum metal and about 10% of worldwide titanium, gold, zinc and cobalt (Tiainen et al., 2015). About 30% of Canada’s petroleum reserves are to be found in its Arctic region. Norway relies heavily on the Barents Sea for minerals, oil and fisheries (Keil, 2013). Greenland is also prospected to hold large reserves of petroleum and natural gas besides precious minerals among which are zinc, lead, iron ore, platinum, gold, uranium and rare earths (Tiainen et al., 2015, p. 136). Greenland’s Minerals and Energy department has estimated that the Kvanejfeld Mine could produce 20 percent of the worldwide demand in rare earth and a significant supply in uranium (Alexeeva & Lasserre, 2012, p.63).

The disputes about the economic exclusive zone and the extended continental shelves prompted the media into believing that a so-called competition for Arctic resources will occur (Lasserre, 2010). What fuelled these fears was the behaviour of Russia on the international scene. Moscow’s intervention in 2008 in Georgia, its symbolic action on the Arctic seabed and the outbreak of a crisis in Ukraine were at the roots of these concerns. In 2011, it was announced that a brigade would be stationed in Petsjenga near the Norwegian borders to “balance Norwegian and Canadian activities in the region”. Just before the outbreak of the crisis, Vladimir Putin announced the creation of an independent Arctic unit command “The Northern Fleet-United Strategic Command” headquartered in Murmansk. By 2015, several Arctic Brigades were stationed in Alakurtti near the Finnish border. Directly after the Ukrainian crisis, Russia sent mixed messages about its take on the Arctic. The landing of Dmitri Rogozin, a sanctioned Russian decision maker by both the EU and Norway, on the Svalbard island without permission, was received by Norway as a provocation. Canada reacted by boycotting a Working Group meeting of the Arctic Council in Moscow. Russia, in public venue, reassured its commitment to cooperation in the Arctic (Søby Kristensen and Sakstrup, 2016).

China’s interest in the region has also attracted a lot of attention. A few Chinese officials have described the country as a “Near-Arctic State”. Professor Guo Peiqing of the Ocean University of China has said: “Circumpolar nations have to understand that Arctic affairs are not only regional issues but also international ones.” The Admiral Yin Zhuo goes even further by saying: “Under the provisions of the UN Convention of the Law of the Sea (UNCLOS), the Arctic does not belong to any particular nation and is rather the property of all the world’s people” and that “China must play an indispensable role in Arctic exploration as it has one-fifth of the world’s population.” (Jakobson, 2010; Jakobson and Peng, 2012). The creation of a free-trade agreement between Iceland and China can be seen as a way to advance Beijing’s interests in the region by using its economic powers (Gayazova, 2013, p. 80).

The Reality

Are the Arctic Sea-lanes Shorter?

Hong-Kong is equidistant from every Northern European harbour from both a traditional and an Arctic itinerary. Transiting through the Arctic Sea lanes would only be positive for the Asian ports north of Hong-Kong (Blunden, 2012, p. 120). Harbours situated in Southern Europe and along the Mediterranean are closer to Asian harbours through the Malacca and Suez straits. The numbers show it best (Lasserre, 2010, p452):

  • A ship going from London to Yokohama (Japan) could reduce its travel time by 7359 kilometres (Northeast passage) compared to taking the Suez-Malacca route;
  • A ship going from Rotterdam to Shanghai could reduce its travel time by 3757 kilometres (Northeast passage) compared to taking the Suez-Malacca route;
  • A ship going from Hamburg to Seattle could reduce its travel time by 4340 kilometres (Northeast passage) compared to taking the Panama Canal;
  • A ship going from Shanghai to New York could reduce its travel time by 3050 kilometres (Northwest passage) compared to taking the Panama Canal;

However, travelling through these roads would not guarantee more efficiency. In terms of cost, ice-capable ships are costlier to build and burn more fuel. Moreover, one cannot be sure that a passage that used to be ice-free during one year will be free in the years to come. That uncertainty does not match with “just-in-time” supply chains which depend on predictability. Even if the polar ice would totally disappear in the summer, temperatures could dramatically drop in only a few days and ice could form again and take ships by surprise. Thus, companies cannot be sure that they will be able to ship through these roads easily. Moreover, the price for ice-capable ships is discouraging for companies. The lack of infrastructure linked to maritime traffic management makes Arctic navigation risky; when one travels through these sea-lanes, one must be sure that the ship’s containers will be full since there is no harbour to unload the ships. Furthermore, most crews lack the experience to navigate in the Arctic Ocean. Finally, insurance fees are also higher because of the risks (Ebinger & Zambetakis, 2009, p.1222).

To analyse the reality of the growth in Arctic shipping in recent years, we will assess the transit statistics as described in Table 1. It can be seen that the Arctic boom in commercial shipping has not yet taken place, with the number of transit ships peaking in 2013 before decreasing in the following years. The largest share of the ships is destined for either China, South Korea or Japan. China’s interest in Arctic navigation lays in the will to circumvent the Malacca straits. The Arctic is still not considered as a credible alternative though as only 16 ships going to China went through the NSR (Protection of the Arctic Environment, n.d.).
Arctic
Table 1. Number of ships transited through the Northern Sea Route (Source: Northern Sea Route Information Office, 2016. Transit Statistics.)

The same can be said for the transit through the Northwest Passage1, where the numbers are even lower as can be implied from Table 2.
Arctic Table 2. Number of ships transited through the Northwest Passage (Source: Numbers gathered by Frederic Lasserre, University of Laval).

Table 3 concludes with the partial2 transits through the Northwest Passage.
Arctic Table 3. Number of ships that partly transited through the Northwest Passage (Source: Numbers gathered by Frederic Lasserre, University of Laval).

In comparison, the number of ships which transit through the Panama Canal or the Suez Canal on a daily basis is about equal to that on the Arctic shipping routes on a yearly basis. These numbers allow us to say that the Arctic is currently not the maritime highway some were hoping for it to be. Neither the NSR nor the NWP’s numbers compare to the current capacity of international straits like Malacca, Suez or Panama, although a small international interest for the NSR does exist.

A Battle for Resources?

Most of the resources in the Arctic are to be found in countries within territorial seas or exclusive economic zones. Since all the Arctic States have pledged to respect UNCLOS in the Illulissat Declaration, there is very little chance of conflict. The principle of precaution seems to be the reason explaining the disputes about the delimitation of the extended continental shelves, in case something would be found even if it is unlikely. Some feared that a “resources driven conflict” would occur in the Circumpolar North after the outbreak of the Ukrainian Crisis; the phenomenon did not occur. The reason is that for its own development, Moscow needs the region to remain peaceful (Käpylä & Mikkola 2015; Rahbek-Clemmensen 2015). Given Gazprom’s earlier decision to involve the Norwegian StatoilHydro in the development phase of its Arctic Shtokman gas field, it can even be argued that Russia will need to cooperate with its Arctic neighbours to develop its Arctic resources successfully.

Currently, the main producer of petroleum in the Arctic is Russia, where the offshore Prirazlomnoye field in the Pechora Sea is operated by Gazprom Neft. This field, which began commercial production in 2013, had an output of 2.1 million tons of Arctic oil in 2016. In March 2016, the Goliat field in Norway, a joint venture between Eni and Statoil, started production of Arctic oil. This field will produce 100,000 barrels of oil per day. With regards to natural gas, the Snøhvit gas field operated by Statoil represents the first and primary offshore development in the Arctic Barents Sea. The giant Russian natural gas field of Shtokman has dealt with several setbacks mostly from technological challenges, cost overruns and low gas prices. The cooperation agreement with European partners Total and Statoil expired in 2012 and further project development and production start is delayed until further notice. Another major Arctic Russian natural gas field, Yamal, has experienced similar setbacks in development. However, as of April 2014, the field operated by Novatek plans to start producing gas condensate.

In the North American Arctic, increased Arctic natural gas production can become a reality with the proposed investments in the ‘Alaska Pipeline Project’ through a consortium involving ExxonMobil, ConocoPhillips, BP and TransCanada. This major infrastructure project would make it possible to transport the natural gas in Alaska’s large Arctic reserves to markets in Canada and the United States. However, the planned continuation of this high investment project depends for a large part on high oil and gas prices. A prolonged period of low oil and gas prices could lead to a delay of the project which is proposed to begin transporting natural gas by 2025. The largest oil field in the American Arctic, in Prudhoe Bay, already reached peak production more than two decades ago. A second field in the Alaskan Arctic is the ‘Alpine field’, developed by ConocoPhillips and which has produced oil since 2000. The extent to which new production fields are to be developed in the Arctic is to a large extent dependent on a recovery of oil prices and domestic policies making a trade-off between environmental objections and the benefits of domestic resource production. In 2015, Royal Dutch Shell, one of the major players in the American Arctic, decided to abandon its drilling operations in the Arctic amid sustained low oil prices and rising pressure about environmental consequences. In October 2016, a large oil discovery was made in the Alaskan Arctic by Caelus Energy. This project, expected to start producing oil by 2022, could potentially offset some of the production declines from the other Arctic oil fields.

In Greenland, oil and gas development is a potential road towards full independence from the Kingdom of Denmark. To that purpose, a national oil company, Nunaoil, has been established; it has an automatic 12.5 percent stake in new oil exploration projects and an option to become a shareholder in oil projects which move to the development phase. Among the companies which have actively engaged in exploration activities in the Greenlandic Arctic are ExxonMobil, Chevron, Statoil, Husky Energy and Cairn Energy. However, also in Greenland, the drop in the oil price in 2014 has had a large effect on prospective Arctic oil exploration activities. Total petroleum prospecting, exploration and exploitation licences (in force) have decreased from nine in 2014 to three in 2015 and zero in 2016 (Mineral Licence and Safety Authority, 2017). The Scottish energy company Cairns Energy, one of the major players in Greenland’s petroleum exploration, is evaluating its Greenlandic portfolio as no commercial oil players have been found yet. In 2014, Statoil decided not to extend three of its four Greenlandic exploration licences.

Asian emerging powers have expressed their interest in Arctic resources. However, their contribution to Arctic economic development remains modest. China, Japan and South Korea are investing in resources exploration in Greenland (Tonami, 2016). Both China and Japan have expressed their will to cooperate with Russian companies and have also expressed their will to invest in the Yamal’s liquified natural gas exploitation. However, the discussions are advancing at a really slow pace. (Pollmann, 2016; Sorensen and Klimenko, 2017).

Arctic Militarisation?

If we analysed the numbers provided by the Stockholm International Peace Research Institute (Wezeman, October 16), we can see that Russia is leading in terms of air and sea capacities, while Canada has the strongest land capabilities but strongly lacks specific Arctic capacities such as icebreakers.
Arctic
It is interesting to draw a comparison between the current military activities and the Cold War to get some more insight about what happens today in the Arctic. The numbers gathered by Lassi Heininen, Alexander Sergunin and Gleb Yarovoy:
Arctic
Arctic
If one observes the data closely, one can draw the following conclusion:

  1. USSR’s presence in the 80s outnumbers the current Russian presence. The same can be said for the US.
  2. NATO has more submarines, lager ships and aircraft that are Arctic capable than Russia. The mention “Arctic capable” is important; these forces can be elsewhere and are not permanently stationed in the region. Russia, thus, remains the strongest Arctic power.

Although there is a military presence, we cannot speak about a military theatre like the region has witnessed during the Cold War. The reason behind the Russian military presence in the region is threefold: 1) to assert Moscow’s sovereignty over the region 2) to protect the Russian companies operating in the region and 3) to show the entire world that Russia is still an Arctic power. Thus, the Russian military presence in the region is tied to prestige, economics and energy security. Unlike, the Cold War, the logic is not grounded in a bloc-to-bloc conflicts and deterrence (Heininen et al., 2014).

A few scholars have used the expression “Arctic exceptionalism” to speak about the lack of conflict in the Arctic. According to them, the Arctic’s current stability is explained by the lack of resources in contested areas or in the high seas3 and the capacity of regional fora, such as the Arctic Council, to defuse tension4 (Käpylä and Mikkola, 2016).

Conclusion

Indeed, something is happening in the Arctic, but the transformation into a new ‘El Dorado’ has not yet crystallised. The region did not become the maritime highway, resource arena or military theatre that some were fantasising about. There are different reasons to the current development. On economic matters such as shipping and resource exploitation, geophysical conditions remain harsh. There is still a large gap between the potential of shorter sea lanes for commercial shipping and the real volumes transiting these routes. Uncertainty plays a large role as climate variability needs to be incorporated as a risk factor in competing with well-established supply chains following southern shipping routes. Moreover, it will take time before supply chains will be adjusted towards new shipping routes and a knowledge base will have to be created about Arctic environments and shipping. There are, however, factors which could increase this transition. These factors include more rapid warming of the Arctic and/or the increase of security risks on other major shipping routes such as the Suez Canal and the Strait of Malacca.

With regards to the development of petroleum and natural gas resources, the fall in the price of oil in 2014 has had a large impact on new and existing projects in the Arctic. Large projects in both Russia and Alaska have been delayed as the business case of these projects has difficulty justifying the large investments needed to realise them. The main issue of Arctic resource development is the large investment needed in infrastructure and technology. Most likely, Russia and China will have the most geopolitical incentive to continue large projects in the Arctic.

On militarisation, the Arctic States have indeed developed an armed presence in the region, but it is not as important as it was back in the Cold War period. Institutionalisation of cooperation between the different powers has created understanding about the interests of one another and these interests seem to be more secured by peace and stability than by confrontation. Once again, the cost of equipment able to operate in the region also plays a role.


Notes
1 A full Northwest Passage transit is considered as being a transit between the Baffin Bay and the Beaufort Sea
2 A partial transit westwards will be as considered as far west as Cambridge Bay and a partial transit eastwards will be considered as far east as Resolute Bay
3 Areas which are neither territorial waters nor economic exclusive zones according to UNCLOS.
4 Another factor contributing to stability according to Käpylä nad Mikkola is the geo-economic competition. In our point of view, it is too soon to speak of a geo-economic competition. Moreover, it is uncertain whether such a competition will be a contributor to stability.

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Henry Bartelet is the Founder and Commercial Director of DynaMundo, a Seattle-based think tank that applies systems thinking and mathematical simulation models to complex problems. He is involved in a variety of projects around the world on economic policy, energy markets and sustainable development.

Kenty Dubois is a Fellow at DynaMundo where he works on a set of policy-oriented research dealing with the Arctic Region. He recently got his Master’s degree in International Relations, Diplomacy and Conflict Resolution from Université Catholique de Louvain (UCL), analysing in his thesis Arctic security and the possible impact that Asian Observer States could have on Arctic regional stability through securitisation theory. He did an internship at the Arctic Centre, University of Lapland, where he was involved in a consultancy project for the European Commission and the European External Action Service, and has recently obtained a position as Intern/Political Analyst at the Embassy of Belgium in Helsinki.

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