Vauraste’s Article on Investment in the Arctic at The Wilson Quarterly
AEC Chair Tero Vauraste has contributed an article to The Wilson Quarterly’s Arctic Issue. In the article he addresses the need for investment in the Arctic.
For the full The Wilson Quarterly’s Arctic Issue, you can find it here: https://wilsonquarterly.com/quarterly/into-the-arctic/
An Investment Model for the Arctic
The Arctic is vast – a region of panoramic expanses and glittering landscapes that spans the sovereign areas of eight countries. Other than for its four million inhabitants, this region has long been thought of, in both popular conception and practical terms, as remote, inaccessible, and generally off-limits. Make no mistake: As far as economic development and investment go, that era is over.
This fact is largely, although not exclusively, the result of climate change, which most of us consider to be a clear negative. But a fact it is. Increased investment and development in the Arctic is inevitable and it’s already happening. And that is a positive – if it is done the right way.
The Finnish chairmanship of the Arctic Council, the region’s main intergovernmental forum, began last May with a focus on sustainable development. The Arctic Economic Council (AEC) is an organization with members from a wide range of companies and industries hailing from all of the Arctic nations. Its leadership rotated in parallel with the Arctic Council’s and came to Finnish business. The AEC helps facilitate responsible development of the Arctic and its communities, sharing and advocating for best practices, technological solutions, and standards. We are collaborating with the chairmanship, providing advice and a business perspective, to help the Arctic Council define what sustainable development of the region looks like – and then make it happen. Now is the time for this vision to be realized.
A New Economic Frontier
Mapping of the Arctic Sea started during the 15th century, as did efforts to trace various Arctic sea routes. A Finnish-born polar explorer, Adolf Nordenskiold, was first to navigate the Northeast Passage in 1878, successfully sailing from Norway through to the Pacific. The feat (for which Nordenskiold was made a baron) did not, however, mean that the Arctic was readily accessible for travel and development, and livelihoods remained based upon traditional fishing and hunting.
The era of industrial activity in the region only began in earnest in the middle of the 20th century, facilitated by better technology and increasing knowledge of the region’s resources. In Canada and Russia, the extraction of petroleum hydrocarbons in the Arctic reached significant levels in the 1950s. In the U.S. Arctic, construction of the Trans-Alaskan Pipeline began in 1975. The 1970s also saw active offshore drilling. Mining came to the Arctic during these years as well. At mid-century, no one could have predicted the new opportunities just a few decades over the horizon.
Potential, principles, and risks
Today, the warming of the Arctic is the driver of all kinds of change in the region, as well as our changing approach to it. Less ice means more access to resources, but current Arctic development is not just a matter of oil and gas exploration and extraction. Based on the input of a range of business executives and on current realities and expectations for the Arctic, the AEC has identified seven areas of industry to focus on: along with energy and mining, infrastructure, tourism, fishing and aquaculture, investments in human resources, and capacity-building.
The energy sector is still considered to hold the greatest potential, but it’s not just about hydrocarbons. The Arctic holds vast potential in renewables, including wind, hydro, geothermal, and solar. In the European Arctic, around half of the estimated economic potential is in the energy sector, divided 50-50 into hydrocarbons and renewables. Norway, in particular, is actively developing new projects in both of these areas, but it is not alone.
Under the headline of infrastructure development are maritime transportation, aviation, communications, and IT – all essential for sustainable development in the Arctic. In terms of mining, keep an eye on rare earth minerals, which are key to high-tech manufacturing, but are extractable only in small quantities around the world. They exist in the Arctic, and could be one of the region’s many economic drivers in the coming decades.
Just how big are the overall expectations for the Arctic? Guggenheim Partners, a U.S.-based advisory and infrastructure-financing firm, put the region’s potential at around $1 trillion. As the Arctic grows in economic importance, though, there are more risks to be managed, such as concerning the use of resources, the impact on fragile ecosystems, technical limits, operational safety, and the welfare of local communities. But that’s also what sustainable development is all about, with economic, social, and environmental dimensions intertwined. It’s worth noting that Guggenheim Partners’ eye-catching estimate is predicated upon countries and businesses treating the Arctic responsibly. Indeed, that caveat must be built in.
The firm was represented on the World Economic Forum’s Global Agenda Council on the Arctic, which released its Arctic Investment Protocol in December 2015. The document put forward a set of principles for sustainable investment in the region: build resilient societies through economic development; respect and include local communities and indigenous peoples; pursue measures to protect the environment; practice responsible and transparent business methods; consult and integrate science and traditional ecological knowledge; and strengthen pan-Arctic collaboration and sharing of best practices. We hope that countries and private enterprise will commit to playing by the rules, even as the Arctic Investment Protocol is not legally binding or enforced.
For our part, the AEC has endorsed the ideas of the protocol. As an organization with members ranging from mining and shipping companies to reindeer herders, we have always advocated a balanced and holistic approach to future Arctic investment and will continue to do so. Indeed, there is ongoing discussion among AEC members about developing a Code of Arctic Business Ethics, which would certainly contain much that parallels the principles mentioned above.
All of these efforts anticipate the real question of the day: How do we strengthen, encourage, and help realize the application of good investment principles on the ground? Working together with the Arctic Council, the AEC helps to establish strong market connections between the Arctic states; promotes stable and predictable regulatory frameworks; encourages public-private partnerships for infrastructure investments; facilitates knowledge and data exchange between industry and academia; and focuses on traditional, indigenous knowledge, stewardship, and small businesses.
Make no mistake: this latter focus is certainly not least. Working in the North requires northern knowledge – which is best among the indigenous peoples. It is best preserved by respecting the indigenous peoples, which means caring for the environment, making sure their voices are being heard, and integrating their input into development, decision-making, and regulation. It is also of paramount importance to link the value chains of indigenous and international businesses. That is how the social and environmental dimensions of sustainability will be fostered, alongside the economic dimension.
Sustainable Arctic Shipping
An obvious area for setting a sustainability precedent today is in shipping, as maritime activity in the Arctic will undoubtedly continue to increase. Due to climate change, which is causing temperatures in the region to rise at more than twice the global average, new sea routes will continue to be developed (and seaways are usually considered the most economical means of transport). The three main routes in question are the Northern Sea Route, which is critical to the Russian economy and in which China has taken a major interest; the Northwest Passage, which connects the Atlantic and Pacific via the U.S. and Canadian Arctic; and, in the next decades, a direct route above the North Pole can also become viable.
In previous decades, these routes have been used only marginally, bearing only a few million tons of cargo. During the next 10 to 20 years, that figure is expected to jump into the tens of millions of tons, mainly due to increased industrial activity in the Russian Arctic. Seizing this economic opportunity truly calls for sustainable means, particularly since the increased shipping will impact Arctic ecosystems. How, then, can we ensure safe Arctic shipping, while bearing in mind the need for major investment in infrastructure at a time when many countries and companies are tightening their belts?
Each Arctic country has areas of particular know-how, and we must take better advantage of that. The need for an “Arctic-to-Arctic” approach was highlighted especially during Canada’s chairmanship of the Arctic Council. The idea is that wherever there is some specialized knowledge, product, service, or best practice put into use, it should also be used in other areas of the Arctic, wherever needed.
In Finland, we have icebreaking services and ice-management expertise in shipbuilding and maritime operations. This specialty has helped keep the country’s ports open for transportation during icy winters for more than a century. Our latest icebreaker, Polaris, can use both liquefied natural gas (LNG) and low-sulphur diesel oil as fuel. The use of LNG – a world-first for this type of vessel – significantly reduces carbon emissions, making Polaris the most environmentally friendly diesel-electric icebreaker in the world. The ship also has a built-in oil-recovery system, which operates even in harsh weather and ice conditions. In addition, Polaris can perform oil spill response operations, emergency towing, and rescue operations. Imagine this unique ship hammering through the ice to assist merchant vessels to and from Baltic Sea ports in wintertime. This is what the future of a sustainable Arctic looks like.
Uber in the Arctic?
Within the last few years, Uber, Airbnb, and other companies have brought the concept of shared services and use of assets squarely into public view. Could this thinking be utilized the Arctic as well?
Consider the case of icebreakers. There are currently about 140 icebreakers in the world, two-thirds of which were designed and built in Finland. These ships, with an average age of more than 25 years, are insufficient to fulfill the current and expected market needs. While some 20 countries possess icebreakers or strengthened vessels capable of breaking ice, the only countries with a commercial service model are Latvia, Estonia, Sweden, Finland, and Russia. In Canada and the United States, there is a semi-commercial model only in the Great Lakes area that is, in practice, subsidized by governmental bodies. A standardized way of providing services for merchant fleets is absolutely necessary to enable increased transportation and commerce.
Now consider the idea of “Uber Icebreakers.” The current utilization of the global icebreaking fleet is actually very low. In the Baltic Sea area, it as low as about 30 percent, and more than 30 icebreakers could be used elsewhere from April to December every year. In short, there is a lot of opportunity here to fulfill the acute need for additional Arctic icebreaking capacity in the U.S., Canada, and Russia. A collaboration model should, and can, be established under the auspices of the Arctic Council.
Arctia Ltd., Finland’s polar vessel company, has helped to build the foundation for such a model through our Arctic 100 Expedition, a crossing of the Northwest Passage this July on our Nordica icebreaker (which also set the record for the earliest trip through the Passage). The vessel’s crew and the experts on board observed ice conditions and sea mammals while developing international ties between maritime business and academia.
The trip also demonstrated the idea of employing all of the world’s icebreakers for research purposes, instead of relying on the limited number of national polar-research vessels. Study of both the Arctic and Antarctic Oceans is essential for understanding climate change and many other challenges facing the globe today, and yet many countries and research organizations do not have the logistical means to access these areas. In addition to taking researchers onboard for transit voyages, icebreaker-operators could, in future, charter vessels for joint ventures of multiple research institutes in a flexible way. Let’s make the pooling and sharing of Arctic assets the new way to operate.
Towards Free Trade
In Finland, the national debt has more than doubled in just a few years. The EU, as a whole, takes on more and more debt annually. The U.S. has hit its national debt ceiling on multiple occasions. New ways of funding national investments are needed in order to keep budgets under control, which makes trans-Atlantic and trans-Pacific trade relations increasingly important within today’s globalized value chains.
Unfortunately, new signs of protectionism have emerged of late, foremost among them the U.S. decision to put the Trans-Atlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP) on varying degrees of ice. For the Arctic’s trillion-dollar potential to be realized, international financial value chains are a must. The cash is not going to come from Arctic taxpayers’ pockets.
Several years ago, the Arctic Council Task Force to Facilitate the Circumpolar Business Forum planted the seed that is now the AEC, and envisioned a “Pan-Arctic Free Trade Zone.” Indeed, establishing strong market connections and ensuring market access within the region is one of the AEC’s primary aims. As the international community works on outlining a model for Arctic development, this is timelier than ever; protectionism endangers sustainable development of the Arctic by inhibiting the free exchange of the best-available technologies and services. Free trade is not a threat to sovereignty, but the lack of it is a threat to sustainability. Fortunately, there is one great exception to the trend – the forthcoming EU-Canada Comprehensive Economic and Trade Agreement (CETA) – which will be a boon for Arctic businesses and sustainable practices.
Public-private partnership is also an excellent method of financing new Arctic initiatives. This model enables all stakeholders to find ways of saving taxpayers’ money. Instead of requiring an enormous amount of funds all at once to make an investment, such as purchasing an icebreaker or constructing a deep-water port facility, the financing may be taken totally or partly from commercial funds and the annual cost can be fixed based on a long-term service contract. Such partnerships can help make possible the investments that are critically needed today to keep Arctic shipping safe.
Business is multinational. Let’s make it pan-Arctic. And as the Arctic economy begins to flourish, let’s make the most important long-term investment – an investment in sustainability.
This article was first published in The Wilson Quarterly, and is published here with The Wilson Quarterly’s permission.
