Nations Joust But Arctic Payoff May Be Decades Away

By David J. Lynch

(Bloomberg) — Even as melting Arctic glaciers threaten to swamp shorelines, nations from Russia to the U.S. are betting that warming temperatures also will unlock trillions of dollars in new wealth.

“It is potentially the biggest strategic opportunity in America since the Louisiana Purchase in 1803,” said Scott Borgerson, a former Coast Guard officer and now an adviser at Catalyst Maritime.

President Barack Obama begins a three-day Alaska trip on Monday to underscore the urgency of combating climate change. His visit comes as the Arctic’s potential for oil and gas production and shorter trade routes when the ice melts puts it at the crossroads of economics and geopolitics.

Already, the polar economic dawn includes server farms for companies such as Facebook Inc. and Google Inc., which enjoy lower cooling costs in the north. Possible future rewards include an estimated 90 billion barrels of oil and 1.7 trillion cubic feet of natural gas that await discovery in the Arctic, with the vast majority located offshore, according to a 2008 U.S. Geological Survey report.

Any big financial payoff, however, is probably decades away. Falling commodity prices are discouraging exploration for Arctic oil and gas, while new trade routes across the top of the world are falling short of expectations.

“Arctic development is a lot slower than people thought,” says Malte Humpert, executive director of the Arctic Institute, a Washington-based policy group. “The hype is wearing off. It’ll be many, many years before we see the development people have been talking about.”

Assertive Russia

That hasn’t deterred Russia, which has been the most assertive, and theatrical, in advancing its claims. In 2007, a pair of Russian mini-subs descended more than two miles below the polar icecap to plant a titanium flagpole on the North Pole’s seabed, a purely symbolic gesture.

Russia, which boasts half the Arctic coastline and depends on the region for roughly a fifth of its national economic output, is expanding its Northern Fleet, upgrading regional facilities and staging unannounced military exercises.

“The Arctic’s incredibly important to Russia,” says Heather Conley, a former State Department official now at the Center for Strategic and International Studies in Washington. “They’re basing their future economic development on it.”

Russia’s not alone. Canada and Norway are preparing their militaries to defend territorial claims and forestall a 19th century-style resource grab. The cash-strapped U.S. Navy is concentrating for now on improving its ability to operate in the unforgiving north.

U.S. Preoccupied

Preoccupied by Islamic State and the rise of China, the U.S. has been an Arctic laggard. On April 24, however, the U.S. assumed the rotating two-year chairmanship of the Arctic Council, the eight-nation body responsible for environmental, maritime and emergency preparedness policies.

The council, which operates by consensus, has agreed on procedures for dealing with oil spills and conducting maritime search and rescue despite rising tensions between Russia and other members over Ukraine.

The climatic thaw that’s bringing the Arctic new prominence is unmistakable. Temperatures above the Arctic Circle are rising twice as fast as elsewhere, according to the Arctic Council.

As a young Coast Guard officer in July, 1976, Robert Papp gazed from the town of Kotzebue and saw unbroken ice from the shore to the horizon. When he returned 34 years later as Coast Guard commandant, Admiral Papp scanned the sea again.

“There was no ice to be seen whatsoever,” Papp, who’s retired and now the administration’s special representative for the Arctic, told a Washington audience this month.

No Stampede

Nevertheless, the Arctic gold rush pales alongside the Klondike stampede that drew 100,000 prospectors north between 1896 and 1899.

Oil prices below $50 per barrel– less than half the price a year ago — discourage exploration efforts that incur high costs in the harsh Arctic climate.

One exception is Royal Dutch Shell Plc, which is spending more than $1 billion annually on Arctic exploration. On August 18, the company won U.S. approval to drill in Arctic waters for the first time since 2012 after its efforts were derailed by the grounding of a drilling rig.

“Shell is a bit of an outlier,” James Henderson, senior research fellow at the Oxford Institute of Energy Studies, said in an e-mail. “Other companies have taken a much more cautious approach, for environmental and cost reasons, and this caution will only be further underlined in a low oil-price environment.”

Shipping Shortcut

The increasingly ice-free Arctic seas have opened a shortcut between Europe and Asia for ships bearing cargoes such as diesel fuel and iron ore. The sailing distance from Rotterdam to Yokohama via a northern route that hugs the Russian coastline is almost 40 percent shorter than the one through the Suez Canal, the Indian Ocean and the South China Sea.

Yet only 31 vessels transited that route last year, down from 71 the year before, according to the Northern Sea Route Information Office in Murmansk, Russia. Those dozens are dwarfed by the more than 17,000 ships that passed through Egypt’s Suez Canal in 2014.

“We cannot compare the volumes of cargo transported through the Suez Canal to the volumes transported through the NSR,” said Sergey Balmasov, head of the information office.

A second polar route — the fabled Northwest Passage sought for centuries by mariners such as Henry Hudson — has seen only a handful of vessels. Submerged ice formations that rise from the seabed and complex channels discourage traffic.

Encountering Ice

Despite the thaw, the northern route is still open only four-and-a-half months each year. Even then, the possibility of encountering ice makes it poorly suited for container cargo ships, which require precise scheduling. Shallow waters and a lack of navigational aids further complicate the journey.

While the route makes sense for trade between ports such as Japan’s Yokohama and Rotterdam in the Netherlands, many major export hubs in Vietnam and Indonesia are too far south, says Sverre Bjorn Svenning, research director at ship brokers Fearnleys in Oslo.

“If you go south of Hong Kong or south of Rotterdam, it’s cheaper on the traditional route,” he said.

Much of the activity on the Northern Sea Route involves the export of natural resources or voyages between Russian ports such as Murmansk and Vladivostok, Balmasov said.

Meager Traffic

In June, Russian Prime Minister Dmitri Medvedev conceded that the Arctic route’s traffic to date was “nothing to shout about.”

Still, some analysts say the U.S. hasn’t done enough to position itself for the region’s emerging opportunities. Borgerson, the former Coast Guard officer, says the Obama administration is beginning to recognize the Arctic’s significance but needs to do much more.

The nearest U.S. deepwater port to the Arctic is in Dutch Harbor in the Aleutian Islands, almost 1,000 miles from the Chukchi Sea that separates Alaska and Russia. Two of the Coast Guard’s three polar icebreakers already are beyond their 30-year operational lifespans, even as Russia plans a trio of new nuclear-powered vessels by 2020.

New satellite communication networks, navigation aids, runways and modern maritime charts also are needed.

Territorial Claims

Political infighting in Washington that’s prevented the U.S. from joining the United Nations Convention on the Law of the Sea means the U.S. — unlike every other Arctic nation — is unable to file territorial claims for the region’s contested resources.

Russia submitted a revised claim to 1.2 million square kilometers (463 million square miles) of the Arctic continental shelf on Aug. 4, arguing that the territory is a natural continuation of the Russian continental shelf.

The UN rejected a similar submission in 2002, though Russia says it has conducted extensive research since then to gather supporting data.

Though not an Arctic nation, China also is hedging its bets by cozying up to Iceland. In 2013, the island nation became the first European country to recognize China as a market economy, and the two nations signed a free trade agreement.

–With assistance from Tony Halpin in Moscow and Jonas Bergman in Oslo.

©2015 Bloomberg News

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