After the Ice Melts: A New Economic Region With a Far-Reaching Impact

Few in the history of mankind have successfully braved the vast expanses of the Arctic. Its icy waters and rugged landscape have claimed several explorers’ lives and for a long time the mysterious allure of the Arctic was just that—a mystery.

The past few decades have brought with them advances in technology that give mankind the opportunity to engage with the Arctic as never before. In that time, however, the sea ice has started to recede at an alarming rate with equally worrying consequences. That said, the retreating ice opens up new avenues for innovation, business and diplomacy that has the potential to be felt across the globe.

CURRENT SITUATION

Since 1979, when satellite imaging of the Arctic began, the ice cap has shrunk by around 40 percent, almost twice as fast as most climate scientists predicted. This means that in a matter of decades, the top of the planet will be ice-free during the summers. According to the Intergovernmental Panel on Climate Change (IPCC), a UN panel, “a nearly ice-free Arctic Ocean in September before mid-century is likely.” Scientists concur, adding that by the end of the century at the latest, summer sea ice will be of a bygone era.

The current projections, combined with technology and ever-rising demand for resources, have not gone unnoticed by neighbouring nations. The receding ice caps give nations and businesses unprecedented access to what lies below the surface, including natural gas, minerals, and fish. Therefore, as demoralizing as the situation may be, the barren tundra and ocean of the Arctic has become the latest economic region ripe for investment and future development.

NATURAL RESOURCES

According to the US Geological Survey, the Arctic is home to 90 billion barrels of oil, 1700 cubic feet of gas, and 44 million barrels of natural gas liquid, 84 percent of which is offshore. The melting of the ice caps opens up access to 13 percent of the Earth’s oil supply and 30 percent of natural gas supplies. It is no surprise then that the private sector has already started to move in. Norwegian authorities are predicting that companies such as Lundin Petroleum AB and OMV AG will drill a record number of fifteen wells this year in the Barents Sea, north of Norway.

Despite the global slump in oil prices, Norway is hopeful that the untapped oil reserves of the Barents Sea will boost its oil industry. This comes after a reduction of crude production by 50 percent since the turn of the century. In fact, the Norwegian Petroleum Directorate is estimating that the region could offer over 17 million barrels of oil and gas. In other words, 65 percent of Norway’s natural resources are yet to be discovered.

Russia offers similar hope in an abundance of untapped natural resources . For some years now, state-owned Gazprom and Rosneft have been working to develop Russian Arctic operations. As recently as May, Russia announced its plans to build an unarmed nuclear submarine with the capacity to find minerals up to four hundred meters below the surface. It’s part of the state’s “Iceberg” operation to create underwater crafts capable of finding the billions of barrels of hydrocarbons waiting off Russia’s coast.

MODEL DIPLOMACY

With much of the Middle East in turmoil, the relative stability of the Arctic region is attractive for businesses. Perhaps with the exception of Russia, all Arctic nations have a predictable set of legal systems, relatively healthy fiscal balance sheets , and democratic values that embrace peaceful relations.

In 2007, Russia was keen to stake a claim in the region and decided to plant its flag on the seafloor at the North Pole. Other Arctic states, careful not to miss out on the future yields of the region, started putting on their own displays of power. Soon, most nations had ramped up their naval patrols and come out with far-fetched claims to patches of ocean. What followed, however, came as a surprise to many. Since then, instead of descending into conflict, the states have recognised the potential shared profits and all disputes have been navigated through international law, such as the 1982 UN Convention on the Law of the Sea. In 2008, Denmark, Norway, the USA, and Russia issued the Ilssiat Declaration, where they pledged to resolve any conflicts in an orderly manner and respect both UNCLOS and the Arctic Council.

In 2010, Norway and Russia were able to resolve a long-time feud over a maritime boundary near the Svalbard Islands. In 2011, the nations cosigned a search and rescue agreement negotiated through the Arctic Council and since then they’ve entered into talks about commercial fishing regulation and joint responses to oil spills. This, combined with the fact that both the North American and Nordic nations sit comfortably in the top twenty-five of the World Bank’s Ease of Doing Business Index, means they should have no trouble attracting foreign investment into the region.

BUSINESS POTENTIAL

The drawing in of businesses can do enormous good for those who live in the Arctic, both through job provision and infrastructure investment. The expanded oil operations combined with new, shorter shipping routes that bypass the Suez or Panama canals (brought about by thinning ice) means that cities such as Reykjavik and Anchorage have the potential to become regional shipping and financial hubs with clout rivaling that of Dubai or Rotterdam.

With longer summers, mineral firms will now also have longer to extract and export minerals while lumber companies will have extended access to eight percent of the planet’s wood reserves. Moreover, fishing corporations will have more time to cast their nets in a region in which  10 percent of the total number of fish are already caught.

TRADE AND SHIPPING

The possibility of the Arctic Ocean becoming a widely used shipping route is now becoming more of a reality. Just like flights over the Arctic can save a company and customer in fuel costs and time, the same applies for shipping firms. The route—called the Northern Sea Route (NSR)—can reduce a voyage by thousands of nautical miles. The impacts of this new route could be far-reaching. Eurasia and North America will be connected in a whole new way and as a result, Japan—which imports all of its oil—will have closer access to the market. This will also permit China to continue their growth and better address food shortages.

The ever-increasing access to the NSR is resulting in a steady overhaul in global shipping routes that allows ships to avoid traditional routes such as the Panama and Suez canals. In 2010 the first four ships sailed from Europe to North East Asia via the route, and by 2012 the figure was at forty-six. Only in 2017 did the first ship sail the passage without the aid or capacity of an icebreaker. In the future, one study by the Centre for Economic Policy Research predicts “remarkable shifts in trade flows between Asia and Europe, diversion of trade within Europe, heavy shipping traffic in the Arctic and a substantial drop in Suez traffic.” Infrastructure being built along the NSR includes shipping permits, navigation aids, and weather monitoring stations. Currently this falls under the command of the Russians because the route sits in Russia’s Exclusive Economic Zone. A study by the Copenhagen Business School found that mass-scale Arctic shipping will become economically viable by 2040.

WHAT’S NEXT

The Arctic region has real potential to become an economic powerhouse and source of regional development, the effects of which could be felt as far as the southern hemisphere. However, this doesn’t come without risks and important questions.

The situation is laden with irony. Namely, while the ice melt is caused by global warming, we are using that tragedy to look for more oil and gas which will, in turn, cause further global warming. Moreover, the ecosystem of the region is fragile enough as it is. The thawing tundra has uprooted migration patterns, so increased human activity could very well create a further imbalance. That argument is strong before the prospect of an oil spill in the region is mentioned. That would be an unforgivable error. Ultimately, in the Arctic, cooperation is essential, so let this be an example to the world in responsible diplomacy.