The scramble for the Arctic

published 20 August 2007

What is the ice race'?

The frozen Arctic is rapidly becoming one of the most hotly contested landmasses on the planet. Although not strictly controlled by any one state, this month famed Russian explorer, 68-year-old Artur Chilingarov, took a submarine 13,980 feet below the North Pole, successfully planted a titanium flag on the seabed, and declared, "The Arctic is Russian". Canada immediately denounced the move, likening it to a 15th-century land grab, and responded by outlining a plan to build two military bases in the region. Meanwhile, the US state department signalled that Washington would not allow the Russian move to go unchallenged, while the Danes announced that a group of their own scientists are being sent to prove that the north pole belongs to Denmark.

Two reasons untapped reserves of oil and gas, and shipping access. In 2000, the US Geological Survey estimated that up to 25% of the world's remaining oil reserves could lie beneath the Arctic icecap (though this is disputed - see box). That would put the area on a par with Russia and Saudi Arabia. The other reason why the area is coveted is the existence of a long sought after shipping lane called the Northwest Passage, which many hope will eventually be open year-round to routine maritime traffic. This route through the Arctic would link the Atlantic and Pacific oceans, slashing shipping times by shortening the distance between Europe and Asia by up to 2,000 nautical miles compared with the traditional route through the Panama Canal.

The big barrier to exploiting the Arctic, either as a mineral reserve or shipping route, has always been the thickness of the icecap. Temperatures regularly dip below 40C, making drilling operations very tough and limiting shipping access outside the summer months to special icebreaking vessels and military submarines. But according to the Arctic Climate Impact Assessment, global warming will melt the summer icecap in the latter half of this century and some experts predict that, by 2050, year-round access to the Northwest Passage for standard container ships will be possible. At the same time, rapidly evolving extraction technologies mean it's getting easier to access and drill the seabed. Although in the past reaching the oil and gas reserves in the area has been dismissed as unfeasibly expensive, a rising oil price makes exploration and drilling more appealing.

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There is a 1982 UN convention on the law of the sea, under which (according to article 76) the five states of Russia, Canada, Norway, Denmark and the US which all border the Arctic ocean agreed to limit their exploitation to a zone that falls within 200 miles of their own coastlines. However, this seemingly clear arrangement, overseen by the rather obscure Commission on the Limits of the Continental Shelf, is complicated by the fact that a zone can be extended if a country can prove that the rock shelves emanating from its coastline go further than 200 miles out to sea.

The two Russian submarines, Mir-1 and Mir-2, which completed the latest foray, took samples from the seabed as part of an ongoing mission, driven by Moscow, to establish that the Arctic and Russia's Siberia are linked by a continental shelf 1,240 miles long, known as the Lomonosov Ridge. This, the Russians believe, would give them a valid claim that a polar territory roughly twice the size of France is part of Russia, giving them rights over all its natural mineral reserves.

It's important symbolically - the Arctic and Antarctic Institute claim "it's like putting a flag on the moon". But in practical terms, it amounts to little more than a show of technical ability. Similar research findings were submitted by Russia to the UN in 2001 and rejected. It's also questionable whether the sediment samples prove anything. As the Norwegian Polar Institute put it, "the Appalachians and the Scottish mountains are the same geological formation, but Scotland cannot claim the US is part of its territory because of that." Russia is also up against counter claims from four others: the US; Canada, which says it owns the Lomonosov Ridge; Norway; and Denmark, which also claims rights over the ridge, stemming from its sovereignty over Greenland. A further problem is Washington's historic reluctance to submit to UN authority. The US has yet to ratify the 1982 convention, which throws doubt on its own claims over Arctic territory and possibly over the enforceability of the whole convention.

Cynics view Russia's Arctic move as pure political theatre designed to embarrass the West, rather than a statement of intent. A November 2006 study by brokers Wood Mackenzie suggested Arctic oil reserves could actually be as low as 3% of the global total. Extraction would be costly around $100 a barrel. At that level, alternative sources such as Canada's tar sands or oil shale would also be viable. And the Russians already have the right to an estimated 90 billion barrels of reserves in the South Kara Yamal region without breaching international agreements. As such this latest Arctic posturing by various world states may turn out, as far as oil is concerned at least, to be something of a storm in a tea cup.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.