Tuesday, June 17, 2014

The Age of the Arctic: The Rush Has Just Begun

By Michael A. Moore

The Age of the Arctic has arrived – and one of the world's greatest rushes for oil, gas and mineral riches has begun. The steady retreat of the Arctic's summer sea ice over the last thirty years is opening access to the region's on-and-offshore riches as well as creating new shipping routes from Asia and the Pacific West Coast to Europe.

Commercial activities are expanding in the Arctic in two primary areas: the extraction of oil and natural gas, and the mining of hard minerals. According to a 2008 US Geological Survey (USGS) report, "The extensive Arctic continental shelves may constitute the geographically largest unexplored prospective area for petroleum remaining on Earth." The USGS estimates that 13 percent of the world's undiscovered oil reserves (90 billion barrels) and 30 percent of the undiscovered gas reserves (1,700 trillion cubic feet of natural gas, and 44 billion barrels of natural gas liquids) are in the Arctic.

These estimates are in addition to more than 240 billion barrels of petroleum reserves that have already been discovered. Eighty-four percent of these reserves estimated by USGS are predicted to lie offshore. The report estimates that one-third of the oil is in the circum-Arctic region of Alaska and the Alaska Outer Continental Shelf (OCS). The area is ranked second behind the Gulf of Mexico for volume of resources. The USGS estimates that the Russian Arctic contains far more oil and gas resources, including more than one quadrillion cubic feet of undiscovered natural gas.

Hard mineral extraction is a mature industry in the Russian Arctic and is growing in the US Arctic. Indeed, the US Arctic is home to one of the largest zinc and lead mines in the world, which is located in northwest Alaska. The Government of Norway attributes the following percentages of worldwide mineral production to the Arctic: nickel (11 percent), cobalt (11 percent), tungsten (9 percent), zinc (8 percent), palladium (40 percent), platinum (15 percent), gem-grade diamonds (26 percent), industrial-grade diamonds (24 percent), and apatite (11 percent).

This modern-day quest for Arctic riches is no wild west, north to Alaska-style gold rush, with every country for itself – the exploitation of the vast wealth of the region has been going on for decades with extensive international corporate involvement.

"The Arctic is not the pristine, uninhabited region that many people in lower latitudes like to think it is," said John Higginbotham, a Senior Fellow of the Arctic program at the Centre for International Governance Innovation in Waterloo, Ontario. "There are established communities, people live and work throughout the Arctic, seasonal shipping takes place and mining and petroleum related activities have been going on for decades."

A Wealth of Resources
A World Economic Forum report on the Arctic states that the top of the world has "a population of 4 million people and an annual economy of roughly US$ 230 billion – the region is under the jurisdiction of eight countries (the Russian Federation, Finland, Norway, Sweden, Iceland, Greenland/Denmark, Canada and the US), with few territorial border disputes among them.
"Even offshore in the Arctic Ocean, most coastal waters fall within existing Exclusive Economic Zones, with further seafloor sovereignty extensions pending or likely under Article 76 of UNCLOS. In Canada, Greenland and the US, local control by aboriginal communities and regional business corporations can be substantial. In short, the Arctic is neither an unclaimed, contested region nor a closed military zone; it is governed under similar national structures and international frameworks to those in other areas of the world."

The development of the Arctic and its resources is not an overnight sensation – and the region's wealth of natural resources is not readily available for development, according to the WEF report. Many technological, infrastructural, economic and environmental challenges impede natural resource development in the Arctic. Extracting resources is never a simple operation in polar environments, and resource development will require high levels of investment, including development of specialized technologies and support by governments.

"We have to look ahead 30, 40 and 50 years," said Higginbotham. "A whole new maritime economy could appear in the North American Arctic – fishing, oil, minerals, and tourism. With vision and planning, the region will come to look more like Norway."

The pace and reach of Arctic exploitation and exploration has increased exponentially since 2010, when non-Russian commercial shippers started using Russia's Northern Sea Route with the transit of the M/V Nordic Barents, a modern heavy ice class bulk carrier, from Norway to China.

An even more historic event took place three years later, when the summer sea ice of Canada's fabled Northwest Passage had retreated enough to allow the first ever passage of a large freighter, the Barents' sister ship, the M/V Orion, in September of 2013. The Orion carried 73,500 tons of coal from Vancouver to Finland.

The transit of the Northwest Passage was more symbolic than a sign that the long sought shortcut was finally open to shipping. It may be decades before the Northwest Passage is more than a niche transit route – experts note that it is shallow, its network of islands and inlets make navigation tricky, there is little infrastructure, a lack of proper charts, and the passage remains ice covered longer than other parts of the Arctic.

Russia's Running Start
Russia's Northern Sea Route (NSR) has seen a steady increase in traffic – the Northern Sea Route Information Office reported 46 transits in 2012 and 71 in 2013, some of those voyages were between ports in the Russian Arctic.

The NSR will probably never become a major container route – it is more suited to project cargo and bulk commodities – the July to November sailing season and Russian icebreaker fees are among the factors that have so far limited the route to specialty cargoes. The feasibility of the NSR for more general cargo may change as the Arctic summer sea ice retreats in the coming years and decades. Some predict that the entire Arctic Ocean will be ice-free in the summer in 40 or 50 years.

The real significance of the NSR is its role in Russia's development of its offshore Arctic oil reserves and Siberian oil, gas and minerals. Russia has been using the NSR since the Soviet era, and the route remained closed to non-Russian vessels until 2009.

Russia has a definite running start for its Arctic exploration and development activities, a fact that is not lost on Alaskans and Canadians.

"Russia has put a tremendous national effort into developing its Arctic infrastructure," said Higginbotham. "It is an Arctic maritime superpower – everything that the US and Canada are not in terms of long term commitment. Canada is introspective and hyper-sensitive on sovereignty issues, while the US looks at everything globally, with limited regard to its Alaskan Arctic interests."

The lack of US and Canadian government interest in the Arctic is underlined in a report authored by Higginbotham, Andrea Charron and James Manicon for the Centre for International Governance Innovation (CIGI).

"As the Arctic Ocean's sea ice continues to melt, developing the North American Arctic's marine, resource and community potential is a clear imperative for both Canada and the United States. Such development will require an intense and focused effort in multi-level domestic and bi-national governance.

At the same time, a dramatic gap in leadership and infrastructure is emerging between North America on one side, and Russia and Scandinavia on the other, in maritime transport facilitation, search and rescue facilities, port infrastructure and resource development priority in the Arctic Ocean. The lack of progress in developing public-private infrastructure in the North American Arctic is the product of a well-intended but complex and incoherent governance structure in the North American Arctic."

That gap in leadership and infrastructure by the North American Arctic countries manifests itself in a number of ways, but the most obvious is the lack of a modern fleet of icebreakers.

Icebreaker Deficit
Coast Guard polar icebreakers perform a variety of missions supporting US interests in polar regions. The Coast Guard's two existing heavy polar icebreakers – Polar Star and Polar Sea – have exceeded their originally intended 30-year service lives. On June 25, 2010, the Coast Guard announced that Polar Sea had suffered an unexpected engine casualty; the ship was unavailable for operation after that. The Coast Guard placed Polar Sea in commissioned, inactive status on October 14, 2011.

Polar Star was placed in caretaker status on July 1, 2006. Congress in FY2009 and FY2010 provided funding to repair it and return it to service for an additional 7 to 10 years; the repair work was completed and the ship was reactivated on December 14, 2012.

The Coast Guard's third polar icebreaker – the cutter Healy – entered service in 2000. Compared to Polar Star and Polar Sea, Healy has less icebreaking capability (it is considered a medium polar icebreaker), but more capability for supporting scientific research. The ship is used primarily for supporting scientific research in the Arctic.

The Coast Guard's mission requirements, including marine environmental protection, dictate that the service maintain heavy icebreaking capability for the foreseeable future. In order to fully fund subsequent phases of this project, the Coast Guard has stated that it believes that a "whole-of-government" approach will be necessary. Obtaining a new, heavy polar icebreaker that meets Coast Guard requirements will depend upon supplementary financing from other agencies whose activities also rely upon the nation possessing a robust, Arctic-capable surface fleet.

The Coast Guard's FY2013 budget initiated a new project for the design and construction of a new polar icebreaker, according to a March, 2014, Congressional Research Service report. The project received $7.609 million in FY2013 and $2.0 million in FY2014. The Coast Guard's proposed FY2015 budget requests $6 million to continue initial acquisition activities for the ship.

The Canadian Coast Guard has a fleet of 18 icebreakers, two of which are classified as heavy, four are medium class, and the rest are multi-tasked vessels ranging from high to low endurance classifications.

Canada is making progress toward a new, world-class icebreaker, the CCGS John G. Diefenbaker. STX Canada Marine and Aker Arctic are expected to finish the design this year. The Diefenbaker is estimated to be capable of carrying fuel and supplies to be self-sufficient for 270 days and be able to make constant progress through 2.5 meters (8 feet) of ice at three knots. It is a replacement for Canada's largest icebreaker, the CCGS Louis S. St-Laurent.

Aker Arctic is also currently designing a polar research icebreaker for the Chinese Polar Research Institute as well as the next generation icebreaker for the government of Finland.

Public/Private Solution
One possible solution to the future need for modern icebreaking vessels is the development of a mix of federal ships operated by the Coast Guard and commercial icebreakers.

"The replacement of America's polar icebreakers (the two polar class ships, Polar Star and Polar Sea) has been a long-standing issue. However, this requirement for federal polar icebreaking capacity in only large, high powered ships, masks a plausible need for shallower-draft, but ice capable (smaller) Coast Guard cutters for operations in the coastal areas of northwest Alaska and the Beaufort Sea." stated Dr. Lawson W. Bigham in a speech to Stanford University's Hoover Institute. Dr. Bigham is a Distinguished Professor of Geography & Arctic Policy at the University of Alaska, Fairbanks, and a Senior Fellow at the Institute of the North in Anchorage. He was a career US Coast Guard officer serving from 1970 to 1995 and retired with the rank of Captain. He served at sea in command of four Coast Guard cutters, including the polar icebreaker Polar Sea sailing in Alaskan, Arctic & Antarctic waters.

"Within the territorial sea and exclusive economic zone around Alaska, and around the entire Arctic Ocean, the Coast Guard's polar icebreakers provide a credible, sovereign presence and a platform for law enforcement, SAR, emergency response, scientific research, and any special maritime operation required in ice-covered waters," he said. " The domain of Coast Guard polar icebreakers should be unconstrained, and thus should be a capability used in all Arctic and Antarctic waters where the US has important national interests.

The role of future commercial ship escort by icebreakers in US waters requires examination in light of advances in Arctic marine technology and new operational strategies, said Bigham.
Most of today's Arctic commercial carriers (bulk carriers, tankers, and LNG carriers) are designed as icebreaking ships capable of independent operations (without icebreaker escort). Most of the Arctic commercial carriers operating in the Canadian and Russian Arctic regions do not require icebreaker escort during a three- to four-month navigation season. The availability of capable commercial icebreakers must also be taken into account when determining the requirements for a federal icebreaking capacity.

The use of privately-owned icebreakers in the US maritime Arctic in support of offshore exploration and, potentially, the escort of commercial shipping to a US Arctic port is a compelling opportunity for the US maritime industry. US federal agencies and Congress should be supportive of this commercial opportunity and not compete with industry by using a fleet of solely government-owned icebreakers.

Foss Maritime is one of those private companies that are moving to stay ahead of the future need for private vessels capable of working in ice conditions, as Alaska's economy shifts into high gear with the opening of the Arctic.

"Foss is currently constructing Arctic-class ocean tugs with 7,000 horsepower engines to support ocean towing opportunities in the north," said Gary Faber, President, Global Services for Foss. "As bigger and more capable ships call into the northern ports and sea lanes, we will respond with bigger and more capable tugs. We have plans for icebreakers and other ice-capable support vessels as they become needed."

Poorly Positioned
Another area where Bigham sees a need for federal action is deep-water ports. A recent joint federal-state study conducted by the US Army Corps of Engineers and the Alaska State Department of Transportation and Public Facilities, the Alaska Deep-Draft Arctic Port System Study, underscored the long-term need for a US Arctic port that would be linked to natural resource export in an new era of demand for Arctic resources by global markets.

Future scenarios looking fifty years ahead were created with two key driving forces emerging that were defined as Arctic resource development and collaborative investment (a combination of public and private financing), he said. Natural resource development as a fundamental driver is consistent with the state of Alaska's long-term strategy of increased development of Arctic oil and gas and northern minerals.

Included are calls for public-private partnerships to finance the construction of an Arctic port and associated infrastructure, increased funding to NOAA for hydrographic and bathymetric surveys, and needs for navigational tools to support Arctic infrastructure developments.

Such a port would also support a range of federal agencies, especially the Coast Guard, and strategically place emergency response capacities within the US maritime Arctic. Feasibility studies of appropriate port sites in Nome and Port Clarence are ongoing.

"The US is not well positioned to take advantage of the opportunities that are presenting themselves with the opening of the Arctic," said Nils Andreassen, Executive Director of the Institute of the North. The Institute was founded by former Alaska governor and US Secretary of the Interior, Walter J. Hickel, whose vision was that "we must understand the reality, the richness and the responsibility of the North." He championed "the commons" and how to care for Alaska's commonly-owned lands and resources.

"The federal government is starting to direct more dollars towards its ability to respond to and manage risk as well as conduct more research in the region," said Andreassen. "But little is directed toward economic development in the region. It could be that much of the opportunity will pass us by, whether it's shipping or offshore development, if we can't address the infrastructure gap and regulatory uncertainty."

The federal government may not be currently making a priority of taking advantage of the economic opportunities the opening of the Arctic presents, but the State of Alaska and its tight-knit business community are.

The state lowered taxes on the oil companies last year that had been previously raised by then-governor Sarah Palin – the result has been a notable increase in exploration activity on the North Slope.

One barometer of that increased activity is the number of truck drivers needed for the North Slope winter runs.

"The typical demand is for 200 drivers over the winter," said Grace Greene, Alaska General Manager for Totem Ocean Trailer Express. "This last winter they needed 500 drivers. That's a good indicator that the new oil tax reduction has resulted in more business."

Totem Ocean is a subsidiary of Saltchuk, a Seattle-based holding company whose Alaska portfolio includes Carlile Transportation, Delta Western, Northern Air Cargo and Foss Maritime.
"The Saltchuk companies in Alaska have an Alaska project cargo team," said Greene. "We look for opportunities with resource development companies to provide them with an understanding of our integrated logistics and transportation services. Think of it as a "one stop shop" for companies looking to leverage the over 40 years of experience the Saltchuk group has successfully and safely operated in Alaska."

Support for ANWR Oil
One of the challenges the Alaska business community is currently looking to overcome is the resistance to lifting the drilling ban in the Alaska National Wildlife Refuge (ANWR).

A vast majority of Alaskans support opening ANWR to oil and gas exploration. More than 78 percent of Alaskans support exploration and production on the coastal plain of ANWR, according to a poll conducted in December 2009 by the Dittman Research Corporation.

Dittman's poll questioning Alaskans on various topics of interest has been conducted regularly over the years and includes the basic question, "The Arctic National Wildlife Refuge, usually referred to as ANWR, is located on the northern edge of Alaska between Prudhoe Bay and the Canadian border. Do you feel oil and gas exploration should or should not be allowed in that area?"

The response was 78% in favor of exploration and 21% opposed. The results over the past 10 years indicate a very steady response with only minor fluctuation.

"Based on a poll we did last year, the two priorities in the Arctic for Alaskans are to protect the environment and promote economic development – Alaskans believe in that balance," said Nils Andreassen.

Many Alaskans believe that most non-Alaskans don't really understand where the Arctic National Wildlife Refuge is located and the relatively tiny amount of space within ANWR, (the Coastal Plain), that's been set aside for potential oil and gas development.

ANWR lies in the top northeast corner of Alaska. The entire 19.6 million acre refuge lies north of the Arctic Circle and 1,300 miles south of the North Pole.

Despite its name ANWR is NOT entirely "refuge". The southern part of ANWR taking 9.16 million acres is classified as officially "Refuge". The central 8 million acres of ANWR is classified as "Wilderness".

At the top of ANWR, there is a special area of 1.5 million acres on the Arctic Coastal Plain called the "10-02" Area. The 10-02 Area takes its name from the section of the Congressional bill, the Alaska National Interest Lands Conservation Act (ANILCA) that expanded ANWR in 1980. In Section 10-02 Congress set aside 1.5 million acres of the Arctic Coastal Plain specifically for "oil and gas exploration".

This 10-02 Area is classified legally neither as "refuge" nor as "wilderness", rather defined and separated by Congress for oil and gas exploration due to its well-known geological evidence of potential large hydrocarbon deposits. The 10-02 area is bordered on the north by the Beaufort Sea, on the east by ANWR "wilderness" area and the US Canadian border, and on the west by the Canning River and ANWR outer border. It is completely flat and barren with no trees, hills, or mountains. Nine months of the year is covered with snow and ice and practically void of life. Three of those months are in total 24-hour darkness. In the 6 weeks of summer the coastal plain is dotted with thousands of lakes and is covered by boggy tundra on permafrost (permanently frozen ground).

The 10-02 Area is a further anomaly within ANWR's border in that it contains 92,000 acres of private land owned by the Kaktovik Inupiat Corporation (KIC) of Kaktovik, ANWR's only settlement and population. The subsurface rights of these 92,000 acres are owned by the Inupiat native organization the Arctic Slope Regional Corporation (ASRC).

To say or suggest then that "the Refuge" (meaning ANWR's entire area) would be opened for oil and gas exploration is completely false, according to ANWR proponents. The Congressional definitions of "refuge" and "wilderness", which comprises over 92% of the ANWR area, forbids any development of any kind.