Change, Uncertainty and Risk in the Arctic

(from Lloyd’s Report 2012: Arctic Opening – Opportunity and Risk in the High North)

The combined effects of global resource depletion, climate change and technological progress mean that the natural resource base of the Arctic in now increasingly significant and commercially viable

Transformational change

The Arctic region is undergoing unprecedented and disruptive change. Its climate is changing more rapidly than anywhere else on earth. Rising temperatures are causing a retreat of sea ice and changes to seasonal length, weather patterns and ecosystems. These changes have prompted a reassessment of economic and development potential in the Arctic and are giving rise to a set of far-reaching political developments.

Although traditional Arctic products – mostly relating to fishing, sealing, whaling and trapping – have long reached global markets and been influenced by global demands, before the 20th century the overall role and scale of the Arctic in the global economy was minimal (i). The population of the Arctic – comprising the Arctic areas of Canada, Denmark (Greenland), Finland, Iceland, Sweden, Norway, Russia and the United States – is approximately one twentieth of one per cent of the world’s total population.

The combined effects of global resource depletion, climate change and technological progress mean that the natural resource base of the Arctic – fisheries, minerals and oil and gas – is now increasingly significant and commercially viable. At the same time, economic value is beginning to be attached to the Arctic natural environment, both for its role in regulating global climate and for its biodiversity. This is giving rise to prospecting for commercially viable biological processes and materials¹ . The wind and hydro-power potential of some parts of the Arctic is being explored. The region is attracting a growing number of tourists. Shipping activity has expanded and intercontinental shipping, though several decades from reaching anything approaching the scale of existing major shipping routes, is a developing commercial reality.

Different regional and global economic scenarios suggest a range of possible future trajectories for Arctic development. Key uncertainties over future environmental conditions and the scale and accessibility of Arctic natural resources are compounded by uncertainty about the pace of technological development, the price of hydrocarbons, the future shape and demands of the global economy, and the political choices of Arctic states. Environmental disaster – whether due to a single event, or as a cumulative result of increased economic activity – could rapidly and significantly change the Arctic’s political and economic dynamics. Still more acutely than elsewhere in the world, economic development and environmental sustainability in the Arctic are co-dependent.

If current patterns continue, however, investment in the Arctic could potentially reach $100bn or more over the next ten years, largely in the development of non-renewable natural resources, and in infrastructure construction and renewal (ii). For some, this prospect represents a substantial business opportunity. But it also brings a unique and complex set of risks, and raises significant policy dilemmas.

One Arctic, many Arctics

The Arctic can be defined in different ways. Often, the term is taken to refer to the Arctic Ocean alone or, as in the definition of the International Maritime Organisation, a part of it. Sometimes, it denotes both land and sea north of the Arctic Circle (66°N), though Arctic countries themselves often define Arctic areas as being north of 60°. Other delimitations of the Arctic include those determined by temperature or the extent of vegetation. ‘Arctic conditions’, notably the presence of sea ice and icebergs, can occur in strictly sub-Arctic areas, such as off Sakhalin, in Russia’s Far East, or in the Baltic Sea, or off the coast of Newfoundland.

All of these definitions cover a different area of the Northern Hemisphere. This report uses a broad definition of the Arctic, corresponding most closely to that used by the Arctic states themselves. This encompasses land and sea areas north of 60° for the United States, Canada, Russia, Norway, Sweden and Finland, and the whole of Greenland and Iceland.

In the end, however, there is not one Arctic, but many. Environmental conditions, geological prospectivity, physical accessibility, population levels, economic development and political salience all vary. The balance of risk and opportunity for major Arctic development projects depends on a range of further factors:

• For oil and gas developments, there is a key distinction between onshore and offshore developments, between shallow water offshore and deep water offshore, and between developments close to existing pipelines and transport infrastructure and those that would require the construction of entirely new pipelines and infrastructure.

• For Arctic shipping, the widely varying quality of seabed mapping in different parts of the Arctic, and disparities in port infrastructure, surveillance and search and rescue capability, create an uneven matrix of risk and opportunity.

• 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 (iii).

End of the frontier?

The Arctic has long been considered a frontier. However, in some places, and for some projects, that is no longer the case. Oil has been produced continuously onshore in the Arctic for several decades. Offshore drilling first took place in the Arctic in the 1970s. Many of the technologies necessary for wider Arctic development are already used in other parts of the world with similar conditions. However, cumulatively, the large-scale development of the Arctic represents a unique and rapidly evolving set of risks. The management of these risks will determine how – and whether – the opportunities of Arctic development are realised.

Comprehensive and rigorous risk management is essential for companies seeking to invest in the Arctic. Those companies that can manage their own risks, using technologies and services most adapted to Arctic conditions, are most likely to be commercially successful. A long-term and comprehensive regulatory approach – incorporating national governments, bodies such as the Arctic Council, and industry bodies – is necessary for effective risk management, mandating cross-Arctic best practices and defining public policy priorities on what constitutes appropriate development.

This current report has three main parts. The first assesses Arctic environmental change, and its immediate prospects and consequences. The second looks at the economic potential of the Arctic, the politics of the Arctic, and critical uncertainties underlying different possible Arctic futures. The third outlines the full range of risks – from both a corporate and a public policy perspective – and assesses a number of potential responses.

Footnotes:

(i) Although its mineral wealth was well known, the Arctic only became a significant factor in oil production in the second half of the 20th century, with the development of the Prudhoe Bay field in northern Alaska.

(ii) Projections of investment in the Arctic are highly speculative. This figure is based on a conservative assessment of a range of projections and statements from companies, consultancies and the authors’ best estimate of likely and unlikely developments. The figure should provide an indication of scale, rather than a definite prediction.

(iii) The Arctic Council is a consultative body comprising the eight Arctic states, a number of non-voting permanent participants (notably, organisations representing the Arctic’s indigenous populations), and both permanent and ad hoc observers.

Charles Emmerson, Glada Lahn, 2012, Change, Uncertainty and Risk in the Arctic, Lloyd’s.©