rachael gosnell, an officer in the U.S. Navy, is pursuing doctoral studies in International Security and Economic Policy at the University of Maryland, with a focus on maritime security in the Arctic. Views expressed here do not necessarily reflect those of the U.S. government.
Published January 23, 2020
While geopolitical drivers — particularly the re-emergence of great power competition — account for some of the interest, Arctic and non-Arctic states alike are waking up to the economic potential of the region. Natural resources — oil and gas, and rare earth minerals — top the list. The retreat of the permanent ice will also reveal bountiful fisheries even as old ones in warmer water to the south are depleted. Last, but hardly least, it will open the door to drastically shorter maritime shipping routes.
But the economic potential is just that: potential. Even if one ignores the elephant in the room — the environmental consequences, local and global, of Arctic warming — extreme weather, underdeveloped infrastructure, a lack of population centers and high costs of resource extraction will continue to pose daunting challenges to exploitation. Moreover, the burgeoning race for Arctic resources further complicates regional dynamics, threatening to upset political stability in a heretofore stable region as increased militarization and Arctic security issues loom.
Undoubtedly, the Arctic is a complex region that demands greater understanding. Even the meaning of “Arctic” lacks consensus — there are currently more than a dozen competing definitions that delineate the boundaries of the region by geography, tree line, temperature, ice coverage or habitat of indigenous communities. The most common definition, however, is the simplest: everything north of the Arctic Circle (66.5 degrees north), the latitude above which the sun does not rise on winter solstice or set during summer solstice.
Under this definition, the Arctic includes approximately 6 percent of the earth’s surface — some 8.2 million square miles. There are eight Arctic states, meaning countries with territory north of the Arctic Circle: Canada, Denmark (thanks to Greenland), Finland, Iceland, Norway, Russia, Sweden and the United States. The total Arctic population is just shy of four million, with about 10 percent of them belonging to indigenous communities.
Within the huge region — more than twice the size of the entire United States — subregions vary widely in terms of accessibility, ice coverage, weather patterns and infrastructure. The European High North is vastly different from the North American Arctic. This is especially true for population, with the U.S., Canadian and Danish Arctic being sparsely populated, whereas the European/Russian Arctic has established population centers.
Russia accounts for about half the Arctic coastline and the population. The largest communities north of the Arctic Circle are in Russia (Murmansk with a population just under 300,000 and Norilsk with approximately 175,000), Norway (Tromso with 71,000) and Sweden (Kiruna with 17,000). By contrast, the largest North American population center north of the Arctic Circle is Sisimiut, Greenland, with only 6,000 residents. Utqiaġvik (formerly Barrow), Alaska, has just over 4,000 inhabitants.
The total Arctic population has held relatively constant since 2000, with some regional shifts as people migrate toward jobs and an easier life. There remains an Arctic gender imbalance tipped toward females (possibly due to environmental chemicals but more likely a result of social drivers and migration patterns) and a concern for retaining talent in the region, as the young often leave in search of education and economic opportunity. Projections for 2030 suggest the population will reach 4.2 million, a 4 percent increase. The global growth rate projection is nearly 29 percent for the same period, indicating that the harsh climate and limited economic opportunities make life in the Arctic unattractive for most.
There’s little doubt the warming trend driving increased accessibility will continue. The U.S. National Oceanic and Atmospheric Administration released its well-regarded 13th-annual Arctic Report Card in December 2018. The report includes peer-reviewed research from scientists of 12 nations and notes that the Arctic surface air temperatures are warming at twice the rate of the rest of the globe, thanks in part to a vicious circle. As ice melts, the darker land or water surface absorbs more energy, which in turn generates further melting.
Rising sea levels and dilution of salinity due to fresh water ice melt will impact coastal communities and fisheries worldwide. And, as noted earlier, Arctic sea ice is becoming younger and thinner, and covers less area — a trend for the past 12 years. Maximum sea-ice extent in 2018 was the second-lowest measured for the last 39 years (second only to 2017).
Old ice that survived the annual summer retreat constituted less than 1 percent of the 2018 ice pack, marking a decline of more than 95 percent in the last 33 years. The loss of older, thicker ice results in a more unpredictable ice pack. Young ice is more apt to melt more quickly, or to break free and disrupt shipping lanes. Thawing permafrost — subsurface soils that generally remain below the freezing point of water year-round — presents myriad concerns, from the release of bacteria and toxic gases (including potent greenhouse gases) to collapsing infrastructure as the surface ground softens.
There’s no getting around the myriad problems caused by Arctic warming or exacerbated by it. But this cloud does have a silver lining (albeit a modest one) in the form of increased accessibility. And while governments and enterprises have long coveted the region’s resources, easier access coupled with discoveries of abundant oil and gas has raised the stakes.
The 2008 U.S. Geological Survey Circum-Arctic Resource Appraisal — still the most robust assessment of regional gas and oil reserves — estimates that the Arctic has over 90 billion barrels of oil, 1,669 trillion cubic feet of natural gas and 44 billion barrels of liquid natural gas (think propane and butane). This amounts to approximately one-third of the world’s conventional natural gas supply and 13 percent of global oil reserves. The study explicitly excluded unconventional resources such as oil shale, tar sand and gas hydrate (natural gas trapped in frozen water crystals).
There’s little doubt oil and gas worth hundreds of billions of dollars could be extracted. The USGS examined 33 provinces of the Arctic; 25 of these were given a 10 percent or higher probability of significant resources (more than 50 million barrels of oil).
Judging by the historical record of exploratory drilling and lack of consideration for unconventional resources in the global calculations, these estimates may be on the high side. Yet there’s little doubt oil and gas worth hundreds of billions of dollars delivered to market could be extracted. The USGS examined 33 provinces of the Arctic; 25 of these were given a 10 percent or higher probability of significant resources (more than 50 million barrels of oil or oil equivalent). And more than 70 percent of the expected undiscovered oil resources was estimated to occur in five subregions: Arctic Alaska, Amerasia Basin, East Greenland Rift Basins, East Barents Basins and West Greenland-East Canada. What’s more, more than 70 percent of the undiscovered natural gas was probably concentrated in just three: Arctic Alaska, East Barents Basin and West Siberian Basin.
Consider, though, what might be thought of as a giant asterisk to the numbers: the USGS study estimated that nearly 84 percent of the oil and gas is offshore. And thus far, there has been little effort to find and extract it. That’s the result of a combination of factors, including the challenges of operating in harsh remote locations, low oil prices and Western government sanctions that restrict oil companies with tons of capital and the best technology from partnering with Russian companies.
Though the Russians are lagging on technology, the Chinese may come to their rescue. Indeed, the Chinese drilling rig Nanhai-8, owned by Chinese Oilfield Service Limited, first began drilling at Gazprom’s Leningradskoye license in the Kara Sea west of the Yamal Peninsula in 2017. The area had undergone extensive seismic mapping the two previous years and was Russia’s first offshore Arctic operation since the Norwegian rig West Alpha drilled for ExxonMobil in 2014. That well revealed more than 130 million tons of oil (roughly a billion barrels). But a second drilling scheduled for 2015 was canceled because of sanctions imposed by the West after the invasion of Crimea.
The Nanhai-8 made an April 2018 discovery that may rank the Leningradskoye field as one of Russia’s largest natural gas fields, with estimates of 1.9 trillion cubic meters of gas — equivalent to roughly four years of Russian consumption. It returned for a third drilling season in 2019.
The largest Arctic hydrocarbon discovery remains the Shtokman field in the Barents Sea, which is estimated to have about 3.9 trillion cubic meters of gas. Yet it is notoriously difficult to explore and develop resources there because of the especially trying weather and logistics. For example, the Chinese rig was, of necessity, supported by helicopter services from Cape Kamenny, on the eastern shore of Yamal — approximately 300 miles from the drilling site.
The high costs of Arctic extraction, estimated at more than $100 a barrel, make Arctic oil unviable economically without government subsidies. Indeed, the marginal production cost for Russia is estimated at $120 per barrel for the Arctic waters, compared with only $18 onshore.
While offshore exploration remains limited, there is significant onshore exploration — particularly in the Yamal and Gydan Peninsulas of Russia where Gazprom Neft and Novatek, in partnership with Total (the giant French energy company), are developing the Bovanenkovo, Yamal LNG and Arctic LNG projects. The $27 billion Yamal project is a joint venture, with an ownership structure of 50.1 percent by Novatek, 20 percent by Total, 20 percent by the China National Petroleum Company and 9.9 percent by the Chinese Silk Road Fund (the government’s foreign investment initiative).
Despite President Trump signing the 2017 executive order “Implementing an America-First Offshore Energy Strategy” to enable Arctic drilling, there seems to be little interest.
The Yamal project predicts annual production of around 16.5 million tons of liquefied natural gas per year. Yet exporting to markets poses a daunting challenge given the location and weather, not to mention geopolitics. To overcome these obstacles, a new class of 15 ice-breaking LNG carriers was designed by Finnish company Aker Arctic and built in South Korea to exclusively transport LNG through Russia’s Northern Sea Route to Asian and European markets.
It is an entirely different story in the U.S. Arctic, however. Despite optimism displayed by President Trump in signing the April 2017 executive order “Implementing an America-First Offshore Energy Strategy” to enable Arctic drilling, there seems to be little interest.
This can be attributed in large part to the failure of the Shell drilling rig Kuluk back in 2012. The rig ultimately met with both unproductive wells and an accidental grounding on Sitkalidak Island that resulted in millions of dollars of damage to the equipment. The precipitous drop in oil prices provided further disincentive; Shell withdrew in September 2015.
The high cost of production in the offshore American Arctic and availability of cheaper fuel in domestic shale and the Gulf of Mexico are likely to keep investment interest low for the foreseeable future. Further rises in oil prices could reignite interest, but this is unlikely in the near term.
The region is, however, rich in more than just oil and gas. The Arctic holds mineral resources that include iron ore, nickel, zinc, bauxite, copper, platinum, rhodium, cobalt, diamonds and gold as well as rare earth elements with diverse industrial uses. The discovery of minerals in the region is not new; silver and copper have been mined near Trondheim in Norway at least since the 1600s. Alaska witnessed the 1880s discovery of gold in the Klondike and the 1950s discovery of zinc and lead in the Brooks Range. The latter has since been developed into the Red Dog Mine, the world’s second largest zinc mine.
With the exception of Iceland — a geographic outlier — the Arctic states also hold considerable hard-rock mineral resources. There is a renewed focus on developing mines, though resource deposits vary significantly throughout the region and regulatory restrictions are equally varied among the Arctic states. Commercial viability of mineral extraction is thus dependent upon a number of factors beyond the presence of reserves, among them regulation, accessibility and cost-competitiveness.
The Arctic also provides a habitat for numerous fish species. At this time, there exists scant data on the size of fishing stocks across the region, largely because it was nearly inaccessible until quite recently. But we do know that changes in climate — particularly in sea temperature — are causing an influx of fish that migrate away from warmer waters to the south. Unreported, and often illegal, fishing is likely to grow given the vast distances, paucity of enforcement capacity and lack of comprehensive maritime domain awareness in the region.
In 2018, the five Arctic coastal states, a handful of major fishing nations (Iceland, Japan, South Korea and China) and the EU signed the “Agreement to Prevent Unregulated High Seas Fisheries in the Central Arctic Ocean,” instituting a moratorium on commercial fishing for at least 16 years while scientific research is being conducted. Yet enforcing this agreement is sure to be problematic.
The Tempting Great Circle Routes
The region offers more than just natural resources, however. The Arctic Ocean links the Atlantic and Pacific, offering some intriguing options for shipping. The United Nations International Maritime Organization has identified four potential commercial shipping routes in the Arctic: the Northern Sea Route, Northwest Passage, Transpolar Route and the Arctic Bridge. The best evidence suggests that ice-free conditions will soon exist, with the Bering Strait opening for an extended period around 2020, the Northern Sea Route around 2025 and the Trans-polar Route around 2030. The Northwest Passage will open last, with only limited usage during the summer and fall by 2030.
The Arctic maritime routes offer potential time and distance savings to the global shipping fleets. The East Asia to Northern Europe shipping route is 11,200 nautical miles via the Suez Canal, but only 6,500 through the Arctic — a difference that could, in theory, decrease transit time by 12 to 15 days on the Rotterdam to Yokohama route.
At the 2011 (Russian-sponsored) Arctic Forum, Vladimir Putin, then the prime minister, gushed that the Northern Sea Route skirting Russia “will rival traditional trade lanes in service fees, security and quality.” China has also expressed keen interest, highlighting the potential of a maritime Polar Silk Road as part of its One Belt One Road initiative for projecting economic and geopolitical power. Global shipping companies are also paying close attention; Maersk conducted a test run through the Northern Sea Route in September 2018.
It’s worth noting that the region has generally enjoyed cooperation because of the inhospitable climate and the inaccessibility of the resources with great market value.
This optimism isn’t shared universally. Major commercial shippers have expressed lukewarm interest in the polar routes despite the significantly shorter transit time from Asia to Europe, assuming the icebreakers perform to expectations. But the region will continue to have unpredictable weather and ice conditions that would hinder shipping companies from employing the “just in time” model that relies on precise schedules to maximize efficiencies and profits.
What’s more, the trend toward using larger vessels to achieve economies of scale raises the issue of navigable drafts along both the Northern Sea Route and the Northwest Passage. Only the Transpolar Route (as yet, inaccessible) permits unlimited drafts. To operate in the Arctic, cargo ships will probably be limited to a capacity of about 3,000 Twenty-Foot Equivalent Unit (TEU) containers. That will result in a higher cost per TEU than in a Suez Canal transit, where ships routinely carry more than 18,000 TEUs — and where in 2019 the 23,756-TEU MSC Gulsun, the world’s largest container ship, transited.
Operating in the Arctic is also expensive on a per-mile basis, offsetting the distance and transit-time advantages. Icebreaker escorts, provided by Russia’s Rosatomflot fleet of atomic-powered icebreakers, are costly. And insurance premiums, which of course reflect the heightened risks associated with operating in the High North, can be double those of a Suez Canal route.
Inferior infrastructure further compounds transit risks. While improvements are being made, the region’s lack of suitable ports, combined with poor communications and satellite coverage, are major liabilities. Vessels must contend with communications glitches caused by atmospheric phenomena and latitude challenges. Hydrographic surveys, channel markers, deep-water ports and emergency response units are being improved. But they aren’t as reliable as routing aids on the traditional sea lanes.
All that said, toes are being dipped in some very cold (but warming) waters. After the Venta Maersk’s trial transit in September 2018, Maersk (the largest container ship operator in the world) cautioned that was a “one-off trial voyage.” But the company has since reportedly discussed ongoing service with Rosatomflot icebreaker service. And though China’s Polar Silk Route will take years to materialize, the Chinese shipping company Cosco has already experimented with sending ships along the route.
China’s second icebreaker was built in a Chinese shipyard and the 2018 Arctic White paper makes clear that China aspires to a presence in the region befitting its self-declared “near Arctic state” status. Cosco has confirmed plans to make 11 crossings on the Northern Sea Route during the 2019 transit season — an increase from just three in 2018.
Shipping activities in the Arctic will vary significantly, depending on the particular part of the Arctic and the type of shipping. Destination shipping, the movement of bulk resources such as oil, gas or minerals from origin to market, will continue to expand as Russia and other countries find and develop resources in the High North.
At this year’s Arctic Forum, Putin again hammered away at his objective of making the Northern Sea Route “attractive both in terms of quality and price.” To this end, his administration recently proposed subsidies to offset the NSR’s higher costs. Yet it is unlikely that the Arctic will become a truly viable alternative for global trade anytime soon. And for the moment, the NSR is an insignificant competitor to the Suez Canal. Last year, only 26 vessels and 491,000 tons of cargo transited the NSR, compared with 18,174 vessels and 1.14 billion tons of cargo that transited the Suez Canal.
Why Aren’t There Any Penguins?
Another emerging economic opportunity in the Arctic is tourism. While tourism in the region dates to the 1800s, the number of travelers has been very low, primarily consisting of adventurers. In 1990, just under 8,000 cruise passengers passed through Iceland. But what a difference a couple of decades can make: in 2016 the comparable figure was a quarter of a million.
It should not be forgotten, though, that operating in the Arctic poses particular concerns for both safety and environmental protection. The March 2019 incident on the cruise ship Viking Sky, in which engine failure led to the tense evacuation of 1,000-plus passengers off the Norwegian coast in high seas — highlights the dangers of Arctic travel and the limits on regional rescue resources for these floating behemoths.
Too Many Eyes on the Prizes
Whether it’s a good idea or not, the economic development of the Arctic is in the cards. The resource base is just too tempting a prize to ignore indefinitely. But with the costs of extraction high and the demand for the resources in an era of rapid technological and environmental change uncertain, Western multinationals are not apt to jump into the deep end of the pool anytime soon. The prime movers will almost certainly be Chinese and Russian — or third-country manufacturers of specialized equipment who manage to offload the risk on China and Russia.
Similarly, the pioneers in opening Arctic shipping routes will largely be driven by geopolitical goals rather than visions of first-mover profits. As the ice recedes and the passages stay open more months each year, the trade routes will become increasingly viable. But it is hard to imagine the day when it will truly be cheaper for shippers in competitive markets to take an Arctic route instead of the Suez Canal route.
Goodbye To Cooperation?
A host of factors point toward the need for regional cooperation if the consequences of receding ice are to be managed well. And, it’s worth noting that the region has generally enjoyed such cooperation because of the inhospitable climate and the inaccessibility of the resources with great market value that left economic interests with little to fight about.
After the demilitarization at the end of the Cold War, the 1996 Ottawa Declaration founded the Arctic Council. Membership includes the eight Arctic nations as well as six international organizations representing indigenous peoples. Thirteen non-Arctic states have been approved as observers, including China, South Korea, Singapore, Japan, France, Germany and Britain. Thus far, the council has proved to be an effective coordinating mechanism, though its mandate specifically excludes security issues. Territorial disputes in the region have nearly all been resolved peacefully — the remaining Hans Island dispute between Canada and Denmark and the Beaufort Sea/Arctic Ocean boundaries dispute between the U.S. and Canada are both unlikely to spark tension.
Indeed, even new offshore resource discoveries are unlikely to cause disputes, as an overwhelming majority of Arctic natural resources are believed to fall within sovereign territory or exclusive economic zones of individual Arctic states. The dispute over the Lomonosov Ridge — claimed by Russia, Denmark and Canada — has thus far adhered to the United Nations Convention on the Law of the Sea (UNCLOS), and states have submitted their claims to the Commission on the Limits of the Continental Shelf for verification. Stakeholders have repeatedly committed to peaceful settlement of any disputes, and all Arctic states, with the exception of the United States, are signatories of the UNCLOS.
Yet given the economic potential of the region, there is reason to believe that the adage “High North, low tension” is in danger of becoming obsolete.
But great power politics are driving the Arctic toward greater militarization. Russia has taken an aggressive approach to Arctic security, with a new Arctic command, 14 new airfields and 16 deep-water ports in the region. It has invested heavily in infrastructure and has more than 40 icebreakers — nearly a dozen of which are nuclear powered and thus able to operate longer without refueling and to clear ice that is far thicker.
The newest, Ivan Papanin, was recently unveiled as a multipurpose armed vessel that could serve as a tug, icebreaker or patrol vessel. Armed with versatile Kalibr cruise missiles, the icebreaker poses a formidable challenge to regional security.
Though Russia has insisted that it desires only to protect its Arctic territory, the militarization raises questions of whether the instabilities inherent in the presence of potently armed ships will spiral into an arms race of sorts. With other Arctic and non-Arctic states assessing Arctic-capable forces, it will be critical to ensure regional transparency, adherence to international norms and the use of existing cooperative mechanisms to ensure the region prospers economically rather than sparking confrontation.
In short, analyses of the future economy of the Arctic are full of imponderables. Will the scramble for resources further damage the fragile regional ecology — and, more ominous yet, trigger an acceleration of global warming? Will the mechanisms that worked pretty well for settling disputes survive the growing realization that there’s real money, not to mention geopolitical power, at stake?
The era of largely benign neglect of the Arctic is ending. No one really knows what’s coming next.