Lloyd’s of London report examines risks for companies operating in the Arctic

Lloyd’s of London, the British insurance company, and Chatham House, a London-based think tank, have released a report together entitled, “Arctic Opening: Opportunity and Risk in the High North.” The report states that four key industries will be the “biggest drivers and beneficiaries of Arctic economic development.” They are: mineral resources (oil, gas, and mining), fisheries, logistics (including shipping), and Arctic tourism. Thus, governments and corporations are much more likely to profit from growth than the people and wildlife living in the circumpolar region. Yet while governments and corporations stand to gain the most, there are still risks involved. In this blog post, I will focus on the geopolitical risks for companies. They are not likely to materialize, and environmental disasters are much more of a palpable threat. However, they are still interesting to consider given the strategic nature of the Arctic.

Geopolitical Risks

The report encourages the eight Arctic Council member states to take the lead and enact regulations to prevent disasters from occurring up north. Risky situations, however, could arise from the very fact that there are eight countries in the Arctic, all with separate (though sometimes overlapping) interests and strategies. The report notes that “The Arctic is not – nor is it likely to become – a truly single regulatory space, even while the Arctic Council, Arctic states and other interested parties are increasingly forging common approaches to shared challenges” (p. 9). There may be shared challenges, but there is not shared territory. That is why there are geopolitical risks in the Arctic.

Two of the discussed risks seem to be quite unlikely. The first is that terrorists will target Arctic installations with “substantial commercial and environmental risk,” such as a research station in Svalbard or an offshore oil platform. Given the difficult nature of operating in the Arctic for an established company, it would be much more tricky for terrorists to reach a remote installation and successfully carry out an attack. Granted, security in the way of border patrols and customs agents would be minimal, if not non-existent. Yet a significant amount of defense is already provided by the adverse conditions of the Arctic.

The second unlikely geopolitical risk is that military tension between Arctic states could potentially compromise Arctic installations. Since some of countries main interests in the Arctic involve getting companies to successfully operate in the region, it is unlikely that military conflict would break out – and even then, countries would presumably (and hopefully) keep private installations unrelated to the conflict out of the line of fire given the vast expanse that is the Arctic theater.

The two more interesting and slightly more plausible scenarios are as follows:

1. If either the U.S. or Canada were to grant exploration licenses for oil and gas drilling in any of the 21,500 square kilometer disputed area of the Beaufort Sea and companies actually began drilling, political tension could arise. This would undoubtedly have negative consequences for involved companies.. The map below shows the area under contention, but it could actually expand in size depending on the territory Canada claims as its continental shelf. It is due to submit its claims to the U.N. Commission on the Limits of the Continental Shelf by 2013. The U.S. and Canada have actively disputed the area since the 1970s. Essentially, the U.S. draws its maritime boundary based on the equidistance principal, in which a line is drawn out from the coastline so that each point on the line is equidistant from each country’s coast. By contrast, Canada simply extends the straight border between Alaska and Canada into the sea, based on the 1825 Treaty of Saint Petersburg. This treaty, which settled the boundaries between Russia and the UK’s claims in the Pacific Northwest, eventually fell under the domain of the U.S. and Canada once those two countries gained sovereignty over the relevant territories. Today, in the Beaufort Sea, each country’s perspective naturally grants it more area. At some point, the countries will want to develop whatever oil and gas resources lie within the sea, provided that it is still a commercially attractive venture. Then, the U.S. and Canada will finally have to decide how to settle the boundary. One only has to look to Norway and Russia’s actions in the Barents Sea to see that boundary settlement opens the doors to oil and gas development. Companies will probably shy away from exploring disputed parts of the Arctic, especially when there are so many more areas that fall squarely within a country’s sovereign territory waiting to be developed.

   Disputed Area of the Beaufort Sea

2. If Svalbard authorities (or Norway) allowed oil and gas drilling around the archipelago on terms that signatories believed violated the Spitsbergen Treaty of 1920, which governs Svalbard to this day, tensions could arise as well. This would adversely affect companies involved in exploration. Currently, the main dilemma is that Norway views Svalbard as falling within its exclusive economic zone (EEZ), as it constitutes part of its continental shelf. That means the country should have exclusive rights to Svalbard and the seabed around it. Yet Article 3 of the treaty states that the signatories shall have “equal liberty of access and entry for any reason or object whatever to the waters, fjords and ports of the territories” of Svalbard, and that “they shall be admitted under the same conditions of equality to the exercise and practice of all maritime, industrial, mining or commercial enterprises both on land and in the territorial waters.” The fact that all signatories have equal rights to carry out industrial activities on and around Svalbard does not jive with the concept of an “exclusive” economize zone.Already, fishing around the archipelago has been a subject of tension for countries like Russia and Spain with Norway. Were oil and gas drilling to occur, a potentially much more serious conflict could arise. Yet one can hope that if exploration  ever moves forward, countries will cooperate in the way that Norway and Russia are doing. Rosneft and Statoil have just announced that they will partner together to drill in the Barents Sea and the Sea of Okhotsk.

Environmental Risks

The April 20 Trebs oil spill in the Nenets Autonomous District in Russia’s Arctic is one example of the risks of oil drilling up north. 2,000 tons of oil have contaminated some 8,000 square meters of land, and it is possible that they affected another 6,000 square meters as well. As it stands, the situation does not look so bleak: much of the oil spilled onto snow, much of which must be recovered by hand. It is a painstaking process, but once gathered, the snow be melted and burnt for fuel. As of May 5, 1,713 of the 3,000 cubic meters of oil-contaminated snow have been removed. The same is not possible when the oil is a thick slick floating in the Arctic Ocean. Had the oil spill occurred offshore, it could have been much worse. The Lloyds report notes, “Managing risk in the offshore Arctic and insuring it is likely to be costly.” That is because the stakes are so high. Offshore oil spills can eat away at a company’s profits, but it is really the people and ecosystem which will suffer the most. The report advocates ecosystem-based management that looks at the cumulative effects of development, rather than just the effects of a one-off project. This is a smart recommendation, but hard to put in place when budgets in many Arctic regions are touch and go, and projects depend on the whims of capitals down south.

As the Lloyd’s report demonstrates, there are plenty of opportunities in the Arctic, but plenty of risks as well. The risks and rewards are not equally borne: Indigenous peoples and the environment will shoulder more of the former, while companies will win more of the latter. The report states that up to $100 billion stands to be invested in the Arctic, but the risks of everything from oil spills to shipwrecks to geopolitical tensions are much harder to quantify.