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You can't stop the incoming arctic boom!

http://www.nytimes.com/2013/10/02/b...ion.html?partner=rss&emc=rss&pagewanted=print

With oil companies hungry for new undersea reserves, Iceland is opening its waters to exploration. The island nation, which was battered by the financial crisis, is hoping some promising early signs will lead to a big find.

Melting ice is expected to make the Arctic more accessible to drilling, mining and shipping, and Iceland is eager to position itself as a base for some of that activity.

It issued two licenses for oil exploration in January and is finalizing a third, hoping to pave the way for rigs to drill beneath its seas for the first time. Still, any drilling is probably years off, and will happen only if fresh studies confirm the signs that significant amounts of oil may be present under the sea floor.

Geological similarities to oil-rich areas of Norway have raised hopes, said Andy Brogan, oil and gas transactions leader at Ernst & Young in London. A report that was published during the licensing process said analysis of seabed samples had found residues pointing to the presence of oil, offering further encouragement.

“There’s definitely something interesting there,” Mr. Brogan said. If the undersea rocks prove to be as rich in oil as those in Norway, “then there could be some quite big prospects there.”

“It’s one of those high risk, high return options,” he added.

Norway is a major oil producer and has found extensive reserves in the Barents Sea, northeast of Iceland. To the west, Greenland’s waters have attracted the industry’s interest, though early drilling has produced dry holes. A new government in Greenland is now seeking to slow the pace of exploration, responding to concerns about drilling’s impact on the environment and indigenous lifestyles.

But Iceland is moving ahead. It is pinning its hopes on the Dreki region, along the Jan Mayen Ridge, an underwater fragment of continental crust that, before prehistoric shifts, adjoined Norway and Greenland. The area, 200 kilometers, or about 125 miles, north of Iceland, was the subject of a 1981 agreement with Norway giving each country the option to take a 25 percent share of any drilling license its neighbor issues in the region.

Norway has not opened its half of the Jan Mayen area to exploration but has made optimistic assessments of its potential. Oslo is exercising its option on the Icelandic side, with the state-owned oil company Petoro managing its stake.

Iceland first sought to issue licenses for exploration in the area in 2009, but in the midst of its economic crisis, only two companies expressed interest, and both ultimately withdrew their applications.

The 2012 round was more successful. One license went jointly to Faroe Petroleum, based in Scotland and Norway, and Iceland Petroleum. Valiant Petroleum of Britain, since acquired by Ithaca Energy, took the other in partnership with Iceland’s Kolvetni, now merged with Eykon Energy. Petoro holds a 25 percent stake in each license.

The National Energy Authority is preparing to approve a third license, for Eykon, of Iceland, and the China National Offshore Oil Corporation by the end of the year, said Thorarinn S. Arnarson, the authority’s hydrocarbon exploration manager.

The chief executive of Faroe, Graham Stewart, said his company believed there was a high potential for finding oil in the area, because “it’s got all the right ingredients.”

“There’s a reasonably good chance of finding something, and something big,” he said, adding that it would probably be three years before the first exploration well was drilled.

Mr. Arnarson said commercial production, if it happens, would be at least 10 years off. Although the area’s remoteness makes drilling there a challenge, warm currents mean its conditions are milder than is typical for the region, and it is free of sea ice all year, he said.

“It’s manageable, it’s technically feasible now,” thanks to advances in drilling techniques, Mr. Arnarson said. “It wasn’t some years ago.”

The Arctic’s natural riches, including iron ore and rare-earth minerals, are drawing global attention as a warming climate melts the region’s ice. The U.S. Geological Survey estimated in a widely quoted report from 2008 that the Arctic contained 90 billion barrels of potentially recoverable oil, representing 13 percent of its estimate of the world’s untapped yet potentially accessible total.

Many experts say the region will soon become viable as a summertime shipping route, cutting thousands of miles off the journey between Asia and Europe.

That has piqued the interest of China, which would benefit if its cargo ships could avoid long routes through the Strait of Malacca and the Suez Canal.

Iceland would be a useful stop on any new northern route, and could provide an Arctic foothold for extracting the energy and other resources China needs. Beijing is embracing the country as a new partner, signing a free-trade pact with Iceland in April, its first with a European nation. It maintains an enormous embassy in Reykjavik.

For now, China’s interests in the Arctic may be more political than economic, focused on positioning for the future, said Andreas Raspotnik, an analyst based in Cologne for the Arctic Institute research organization.

Iceland, meanwhile, hopes to capitalize on what it sees as the coming Arctic boom.

Beyond the direct benefits of jobs and revenue, building an offshore oil industry could also help the country establish itself as a service center for activity in the far north, said Heidar Gudjonsson, the chairman of Eykon Energy.

“In Iceland, you have good infrastructure, you have a good network of harbors, ice-free the whole year round, international airports, a good health care system, a whole network,” he said. “This is a rarity in remote places such as the Arctic.”

“Shipments, freight, cargo should flow through here,” he said. “If we can be the place that harvests many of these opportunities, I think the living standards here will increase.”

That would be welcome to a country just getting back on its feet after its devastating economic crisis, though the oil licensing effort had been in the works for years and the authorities said it was not prompted by recent woes.

Environmentalists fear that mining and drilling would irreparably damage one of the world’s most pristine regions. And pumping more oil would only speed dangerous climate change, they argue.

Despite oil companies’ relentless search for new finds, and the technological sophistication that has brought once-inaccessible reservoirs within reach, some analysts question predictions of a rush to the Arctic.

Working in remote areas like the Dreki is expensive. And experts say the recent jump in shale oil production, particularly in the United States, could keep oil prices low enough to undermine the profitability of Arctic exploration.

“I’m not so sure that the companies are so eager to enter into this,” said Dag Harald Claes, an oil and gas expert at the University of Oslo. “If you’re going to do very, very large infrastructure investments, you need to be sure you’ll get a very, very high oil price for a long time to come, and I’m not sure we will see that.”

Mr. Brogan, of Ernst & Young, said the enthusiasm with which oil companies pushed forward in Iceland would probably depend on what other options they have.

“People are taking it seriously, but they’ve got a whole raft of places where they can put their money, and there’s quite a few of those which are less speculative,” he said.

“What you may well see is it’s one of the smaller companies that pushes it, rather than one of the big guys,” he continued, “because the big guys have got their books full of stuff in better-known” areas like Brazil and West Africa.

 

[Strax]

"Many experts say the region will soon become viable as a summertime shipping route, cutting thousands of miles off the journey between Asia and Europe."


It won't



http://www.usni.org/magazines/proceedings/2013-07/cold-hard-realities-arctic-shipping

Maritime pundits believe a shrinking ice cap translates to a frenzy of traffic as shippers rush to exploit shorter sea routes. They’re wrong.
On 16 September 2012 the Arctic reached the point at which ice stops receding and begins to form anew with the approach of winter. Last year that ice minimum set a record at 1.32 million square miles—300,000 square miles less than the previous record minimum. 1 With that news comes the predictable flood of reports about the pending increase in Arctic shipping, how woefully unprepared the United States is to deal with that onslaught of traffic, and the need for large-scale investment in Arctic capabilities. 2

Worries about the implications of a thawing Arctic have been around for some time. Conferences and seminars about the Arctic seem to have superseded even piracy as a source of income for the conference-for-profit crowd. There is no doubt that the Arctic is in fact thawing, and there naturally will be increased activity up there. But to formulate appropriate strategy and make intelligent investments it is important to get past the hype and:

• Understand what type of activity is likely to occur

• Determine the time frame in which it is likely to happen

• Recognize that, at least for commercial interests, economics trumps all

As the Russians found out with the failed Shtokman gas field—a €15 billion (roughly $20 billion) Arctic investment killed due to cheap U.S. shale gas—the Arctic is not melting in isolation from events in the rest of the world. 3 It is the global system, of which the Arctic is just one part, that matters; changes across that system, including in the Arctic, interact in ways that can be unpredictable at best. It is very unlikely, then, that the Northern Sea Route across the top of Russia will become a major pathway for the global flow of commerce, and it is virtually certain the Northwest Passage across the top of Canada will never be useful for international trade.


There are two types of shipping that must be considered when thinking about commercial traffic through the Arctic: destination shipping and transit shipping. Destination shipping is that which occurs to support some activity in the Arctic—oil moving from the Barents Sea across the Northern Sea Route to Asia, for example. That type of activity happens now and indeed will increase in volume. There are large amounts of natural resources in the Arctic, and while the economic viability of all of those discoveries is doubtful—as noted with Shtokman—many will be. Bulk shipping activity necessary to exploit those resources will increase. In addition, the Northern Sea Route offers the Chinese at least a partial solution to their “Malacca Problem,” providing a source of oil and gas from the Barents Sea that cannot be interdicted, unlike that obtained from the Persian Gulf.

This type of destination shipping by definition means that such traffic will call at ports in at least one of just five countries having an Arctic coast (the United States, Canada, Russia, Denmark–via Greendland–and Norway). Using Port State Control (PSC), those littoral countries have considerable leeway and authority outside the painfully slow International Maritime Organization (IMO) process to implement the regulatory regime necessary to protect the environment and control shipping activity to an appreciable extent. Should all five of those states, perhaps through a sub-group of the Arctic Council, join to implement a coordinated PSC regime for access to Arctic ports, the bulk of commercial traffic there is de facto regulated.

Such shipping by its nature is also amenable to some of the challenges Arctic shipping presents. In particular those ships do not operate in networks, are not sensitive to variation in schedule, and have less sensitivity to adverse economies of scale. They also do not represent the volume of shipping a global pathway of commerce—a northern version of the Suez Canal, say—would represent. That sort of transit shipping, using the Arctic as a shortcut between Rotterdam and Yokohama for example, is far more uncertain.


In predicting increased traffic through the Arctic it is often noted that routes across the top are up to 40 percent shorter than the more traditional routes between Asia and Europe (via the Suez Canal) or the East Coast of the United States (via the Panama Canal). 4 The assumption is that shorter equals faster and cheaper. But in the Arctic, the shortest distance is normally neither faster nor cheaper for the type of transit shipping usually associated with global commerce, particularly that involving containerships.

Container shipping is considerably different from bulk shipping, making the economics of the Arctic as a transit route unappealing. There are many things, such as construction standards, outfitting, and crew training for example, that make Arctic-capable ships more expensive to build and operate. In addition, those more expensive construction features are useful only during the short ice season but represent a cost the ship carries throughout the year. Other issues also make the Arctic a much more expensive place to operate, such as the need for icebreakers, lack of support infrastructure, and pending IMO requirements on fuel. 5 But to keep the discussion at a manageable level it is important to focus on a few key issues.

First, speed alone is no longer the major consideration, as fuel costs have made slow-steaming the standard of operation. Where once 24 knots was routine for a containership, it is now 13 knots or less. What is far more important than speed is reliability. Unlike the bulk shipping discussed earlier, schedule integrity is a key service-attribute for containerships. The Arctic will always suffer from periods of poor visibility and the potential for wind-driven ice, both of which can make routes with a comparatively low average transit time have a large variability around that average. More than half of all container cargo is now component-level goods—materials destined for factories for use in production processes operating on a just-in-time-type inventory-management system. That makes consistency, reliability, and schedule integrity of paramount importance. The key goal of container shipping is 99 percent on-time delivery. If this is attainable at all, it will be extraordinarily expensive using Arctic transit routes. Thus the variability in transit time that may be tolerable in bulk shipping is unacceptable for container shipping.


Containerships operate in networks with “strings” (routes) of many ports serviced by multiple ships on a steady schedule. For example, a U.S. East Coast to Southwest Asia route of 42 days round trip serviced by six ships means regular weekly service out of the ports on that route. Routes frequently intersect at key transshipment ports such as Singapore or Algeciras, Spain. Network economics are a considerable part of the overall cost-efficiency picture in a container service. Transit across the Arctic, while shorter for certain port pairs, may not be shorter for a network that services a number of ports on both sides or call at a major transshipment hub. A requirement to call at Singapore for example, means the Northern Sea Route would not be shorter. Were the service to be restricted to just those ports where the distance is shorter, then all the economic advantages of network economics are lost. At the very most, the Arctic is serviceable just three to four months a year, and no one is predicting an ice-diminished Arctic in the winter. Developing routes that would increase the attractiveness of Arctic paths from a network perspective is not economically feasible as long as they are useful only a third of the year or less.

Perhaps the biggest issue making Arctic shipping unacceptable from a container-shipping perspective is economies of scale. While conventional wisdom would focus on total voyage cost, it is actually the cost per container that matters. Because both the Northern Sea Route and the Northwest Passage are draft-constrained (41-foot and 33-foot controlling drafts, respectively) the largest ship likely to be able to use the Northern Sea route would be one with a cargo capacity of just 2,500 TEU—and even smaller for the Northwest passage. TEU, or twenty-foot equivalent unit, is a measure of containership carrying capacity based on a standard 20-foot container length. A 40-foot container would be 2 TEU, for example. The Northern Sea Route also has a beam restriction of 30 meters, as transiting ships cannot be wider than the icebreakers employed to support them. For the Asia-to-Europe trade on the other hand, containerships can be as large as 15,000 TEU with a beam exceeding 164 feet; 6,000 to 8,000 TEU ships are common.

As a back-of-the-envelope example, consider a voyage from Yokohama to Rotterdam, the common benchmark. By the traditional route it is 11,300 nautical miles (nm) with a transit time of 36 days. The Northern Sea Route is 7,600 nm and takes 26 days (relying on the rather large assumption that the voyage is unhindered by ice or visibility issues). The ship making the Arctic transit would reasonably be carrying 2,000 containers; the ship on the traditional route would be carrying 6,500. Factoring in all expenses such as fuel and daily ship-operation, the cost of the traditional route would be $3.5 million, while the Arctic route would be $2.5 million.

That is as far as most analyses normally go, showing that the Arctic route is considerably cheaper. But as noted earlier, what matters is not total cost but cost-per-container—and when put in those terms it breaks down to $538 for the traditional route, but $1,250 on the Arctic route. So in fact, the Arctic route is more than twice as expensive as the traditional route, and the Arctic route looks worse when a comparison with larger ships on the traditional route is made. The Maersk Line, for example, will deploy Triple E–class ships with a nominal capacity of 18,000 TEU on the Asia-Europe trade route in the near future. It should be noted as well that the Northern Sea Route is actually a series of seas—Barents, Kara, and Laptev—connected by narrow straits and it is claimed by the Russians as an internal waterway. Fees to transit the Northern Sea Route are on par with the Suez Canal, and the Russians also impose a considerable and very formal administrative process in order to transit the route.


Lastly, it is important to remember, as noted at the outset, that changes in the Arctic are not occurring in isolation from the rest of the world—it is but part of a system, and the entire system is changing. When making ice projections out to 2040, then, it should be remembered that in a similar time span (roughly three decades) the advent of the container and advances in information technology completely revolutionized shipping—allowing the development of disaggregated supply chains that are the hallmark of this age of globalization, and propelling China from a third-world backwater to global economic powerhouse.

Clearly, a great deal can happen in 30 or 40 years, so it is a mistake to try to overlay a melting Arctic on today’s geo-economic situation. It is the state of the world at that future point interacting with a melted Arctic that matters. Already, changes in the patterns of global trade have had significant implications for the utility of Arctic routes. Increasingly expensive labor in China, for example, is pushing Chinese manufacturing to be outsourced to countries in Southeast Asia where costs are lower but Arctic routes offer no advantage. A shift to near-shoring—moving manufacturing closer to markets—is increasing, too. Even advances such as additive manufacturing—3-D printing, for example—have large implications as local on-demand manufacturing becomes a reality. Advances in that type of disruptive technology could have a major impact on the fundamental nature of trade within the time projections of changing ice conditions in the Arctic.

There is no question that the Arctic is becoming more ice-free. There will be an attendant increase in commercial presence in the Arctic that should not be ignored. But a proper understanding of what type of activity there will be, and a realistic assessment of the volume of that activity are necessary to ensure proper policy and investments are made. For commercial shipping, and particularly the types that drive globalization today, Arctic routes do not now offer an attractive alternative to the more traditional maritime avenues, and are highly unlikely to do so in the future.


1. “Arctic Sea Ice Hits Smallest Extent in Satellite Era,” NASA, 16 September 2012, www.nasa.gov/topics/earth/features/2012-seaicemin.html .

2. See for example James Holmes, “The Arctic is the Mediterranean of the 21st Century” Foreign Policy , 29 October 2012, www.foreignpolicy.com/articles/2012/10/29/open_seas .

3. Terry Macalister, “Plug pulled on Russia’s flagship Shtokman energy project,” The Guardian , 29 August 2012, www.guardian.co.uk/world/2012/aug/29/shtokman-russia-arctic-gas-shale .

4. Missing from the discussion is the fact that the Panama Canal actually is not the most popular route from Asia to the U.S. East Coast. It is preferable to offload on the West Coast and move cargo east by rail.

5. For ships sailing south of 60 degrees south, the IMO requires that no heavy fuel be on board, let alone burned. There is a similar rule pending for the Arctic.

Mr. Carmel, senior vice president with Maersk Line, Limited, is an experienced merchant-ship master and a PhD candidate at Virginia’s Old Dominion University, where his dissertation is on the global trade implications of viable Arctic transit routes. In addition to Arctic regional issues, his research interests include trade and conflict.