Geopolitics of Energy - December 2010

8/6/2019 Geopolitics of Energy - December 2010

1/18GEOPOLITICS OF ENERGY/ DECEMBER 2010 1It is the policy ofGeopolitics of Energyto publish views by different authorities. The articles reflect the opinions of the authors

which are not necessarily those of the Editors-in-Chief, the Editorial Board, nor the Publisher (Canadian Energy Research Institute).

Volume 32, Issue 12December 2010

Editor-in-ChiefJon Rozhon

Editorial CommitteeAlberto Cisneros LavallerNapier Collyns Antoine HalffJulian LeeMichael LynchSulayman al-Qudsi

Editorial BoardPeter AdamPreety BhandariFatih BirolGed Davis

Robert EbelGeorge EynonFereidun FesharakiHerman FranssenPaul HorsnellWenran JiangTatsu KambaraAlex KempWalid KhadduriDavid KnappMichal MooreEdward MorseFrancisco ParraRobert Priddle

John RobertsAdnan Shihab-EldinRobert SkinnerSubrotoPaul TempestR. James WoolseyWu Lei

Geopolitics of Energy was founded by the lateMelvin A. Conant of Washington, DC in 1979. Since 1993,

it has been published under the auspices of theCanadian Energy Research Institute.

Inside Geopolitics of Energy

Geopolitics

ofEnergy

OPEC: Past, Present, and Futureby David Knapp and Vincent Lauerman

On the occasion of OPECs 50th anniversary, Geopolitics of EnergyEditorial Boardmember David Knapp and former GoEEditor-in-Chief, Vincent Lauerman offer a criticareview of the history, recent activities, and potential future roles of this prominentorganization. They note that OPEC never has been a cartel in the truest sense othe term as the organization has seen its degree of market power change over theyears. OPEC functioned in its earliest days as a foil to (choose your term) imperialist/corporate/external power. It then enjoyed a pinnacle of influence during the 1973 OiCrisis, which resulted in Israeli withdrawals from Sinai and the Golan Heights overthe short term and economic effects that were felt throughout the world (includingwithin OPEC member states) over the longer term.

Over the past 25 years, the authors state, OPEC has become a technocraticorganization under the de facto leadership of Saudi Arabia. This was evidenced asrecently as this year, the authors contend, when Saudi price signaling resurrectedoil to the $70 - $80 range and led to the International Energy Forum rubber-stamp[ing] this price range as acceptable to producers and consumers alike

The future holds many possibilities for OPEC, but Knapp and Lauerman believe thathe Organization will l ikely see its market influence wane over the next half centuryNew powers India and China are on the rise in the East, providing an alternativemodel for development to OPEC. Iraqs position is strengthening within theorganization, so a price hawks bloc, led by Iraq, could find itself in conflict with theSaudi-led price doves. Alternative energy development also poses a threat to OPECsmarket power.

The authors close the piece with short notes on the size of OPEC and on itsmembership. Recent machinations by member nations such as Venezuela point tothe possibility of regional blocs developing. How this and other issues play outaffecting the status quo, remains to be seen but even a reduced future role on theworld stage will not fundamentally alter an organization whose member states todayhold 70 percent of the worlds crude oil reserves and account for 57.6 percent ofglobal crude exports.

continued..


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Opening Up The Arctic Frontier (Part 2)An Excerpt from Arctic and Antarctic: Two Poles - Different Scoresby Anis Bajrektarevic

In the September 2010 Geopolitics of Energy, Anis Bajrektarevic introduced readers to thegeopolitics of the polar regions, with special emphasis on the area within the Arctic Circle. Inthe present issue, Professor Bajrektarevic examines the economic potential of the region. Hebegins by discussing shipping as the ice cap shrinks, certain sea lanes could soon beestablished through the Arctic Circle, shortening distances and saving time and money in thetransport of goods across the globe.

The Arctic represents much more than a new transportation frontier, however; it is also richwith hydrocarbons and a variety of mineable ores. It is therefore no surprise that at least fivenorthern nations are laying claim to the area. Let us suggest an international consensus canbe reached eventually on the arctic sovereignty issue. Let us also assume that an earnesteffort at regional development will ensue. Two questions then arise: will it be technologicallyor economically possible to reroute some global shipping through the Arctic? And howfeasible will it be to extract the various mineral treasures locked in the permafrost of the farnorth? Professor Bajrektarevic offers some preliminary answers.

Anis Bajrektarevic wishes to thank the following individuals for their assistance in his researchon the legal, economic, and geopolitical issues of the Arctic:

- Dr. Yuliya DRUZHININA, Moscow based scholar- Mr. Lew MACFARLANE, retired US diplomat- Mr. Stefn SKJALDARSON, Ambassador of Iceland to OSCE, UNOV, and IAEA- Mr. Hugo STERGAARD-ANDERSEN, Ambassador of Denmark to Norway

List of Abbreviation s

ATCM Antarctic Treaty Consultative MeetingsATS Antarctic Treaty SystemCCAMLR Convention for the Conservation of Antarctic Marine Living ResourcesCEP Committee for Environmental ProtectionCLCS Commission on the Limits of the Continental Shelf CRAMRA Convention for the Conservation of Antarctic SealsEEA European Economic AreaEEZ Exclusive Economic ZonenM Nautical MileUN United NationsUNCLOS United Nations Convention on the Law of the Sea


3/18GEOPOLITICS OF ENERGY/ DECEMBER 2010 3

The modern oil market has been shaped by many factors, but few have had the continuaprominence of the Organization of the Oil Exporting Countries. Yet just as the oil market has beensignificantly shaped by OPEC, so has OPEC been shaped by the evolution of global oil markets. Onits 50th Anniversary, the producer group can look back at its turbulent journey with assurance thatimportant lessons have been learned and that the accumulated wisdom of the past will bechallenged over the next 50 years.

OPECs 50-year run as the mouthpiece for the developing worlds key oil producers hasseen its ups and downs and a few earlier occurrences of the current sideways markets. Theproducer group has on occasion had major influences on oil markets and oil prices, but moreoften the influences have gone the other way, and OPEC has had to adapt its approach to oilmarket conditions.

OPEC is not now nor has it ever been a true economic cartel, explaining why itsmarket power has ebbed and flowed. Although OPEC members account for a significant portion ofglobal oil supplies, there are no internal controls, such as an OPEC marketing authority that almembers would be mandated to sell into and which would control the release of oil to the marketand hence prices with buffer stocks (see Size Matters, below). The longstanding De Beersdiamond cartel is perhaps a unique example.

Since its founding in Baghdad in September 1960 by Iran, Iraq, Kuwait, Saudi Arabia, andVenezuela, OPECs role has evolved. It was at first a champion of the interests of new oil producersthat saw themselves as victims of international oil companies; national treasures were beingsucked out of the ground for a pittance in return. Several oil nationalizations later, OPEC took upthe mantel of the third world against the mostly northern developed economies in the North-South conflict of the 1970s again with the strong undercurrent of unequal economic andpolitical power victimizing the less advantaged developing countries.

OPEC remains a highly political organization, with an unmistakably Islamic flavor. A numbeof its members have flexed their collective oil market muscles, most notably through the Arab OiEmbargo in 1973. Under the umbrella of the Organization of Arab Petroleum Exporting Countries

(OAPEC), they responded potently to the then current installment of the ongoing Arab-Israelconflict. Of the 14 current and past members, nine are predominantly Islamic states and Nigeriahas a significant and often politically dominant Moslem minority. Of the four non-Islamic currenand former members, only Venezuela has any real clout as departed Gabon and re-entrant Ecuadoare too small to matter much and Angola is a relative newcomer to the fray (see Membership)

In an economic if not a political sense, OPEC provides a cover for Saudi Arabias uniquerole in global oil markets, especially since it vanquished the oil price hawks led by Iran in the mid-1980s. Saudi Arabia on its own would be much less of a force than it has been as an orchestratoof OPEC action and a quiet unofficial manipulator of day-to-day oil flows. The Saudis do sowithin the parameters of their own internal production needs for associated natural gas as muchas for revenues to manage the cumbersome patronage system that supports an unwritten sociacontract between the ruling House of Saud and the Saudi people.

The lower end of that limit was tested in 1985-86 when the Saudi role as swing producerduring the global demand slide and non-OPEC supply rise in the aftermath of the two price spikesof the 1970s pushed oil output below 3 million barrels per day. This left inadequate associated

OPEC: Past, Present , and Futureby David Knapp and Vincent Lauerman*

Past and Present

*David Knapp is Chief Economist and Senior Editor for Global Oil Market Analysis at Energy IntelligenceGroup and has over 40 years experience in oil market analysis in the government and financial sectorsincluding editing the IEA's monthly Oil Market Report during the 1990s. Mr. Knapp is also a member othe Editorial Board ofGeopolitics of Energy. Vincent Lauerman is Senior Oil Markets Editor with EnergyIntelligence Group and the former editor of Geopolitics of Energy. They can be reached [email protected] and [email protected], respectively.



gas to run power plants and desalination facilities. When Saudi attempts to enlist assistance fromthe rest of OPEC in mid-1985 failed, the Kingdom took the most severe action to date within theproducer group. Guaranteed return netback deals with refineries at ever declining prices causedSaudi production volumes to soar over the next year or so making up for a halving in oil prices thatinflicted considerable pain on its volume constrained fellow members. This Draconian measureadministered the final nail in the price hawks coffin, catapulted the Kingdom to pre-eminencewithin OPEC, and served as a quiet reminder of Saudi potency within the producer group.

Over the past 25 years, under the leadership of Saudi Arabia, OPEC has become anincreasingly technocratic organization. From 1986 to 1997, with moderate growth in demand for

OPEC oil and high levels of spare OPEC capacity, the group tended to adhere to a mid-pricestrategy with the exception of the 1990-91 spike following Iraqs invasion of fellow memberKuwait. As spare OPEC capacity evaporated in the first half of the 2000s, the group gradually lostcontrol of oil prices, culminating in Nymex light sweet crude prices peaking at $147 per barrel inJuly 2008.

After crude prices crashed back to earth in the second half of that year, the combinationof OPEC production cuts and price signaling by Saudi Arabia resurrected oil to the $70 to $80range. This is where prices have remained for the past 16 months. In a sign of OPECs increasinglytechnocratic style, the International Energy Forum rubber-stamped this price range as acceptableto producers and consumers alike at its Cancun meeting in March.

External oil market conditions are the dominant factor in OPECs behavior, but internal

organization dynamics can be significant as well. Two OPEC members, Iran and Iraq, who typicallyhad been seated beside each other at meetings in the traditional alphabetic arrangement, foughtan eight year war in the 1980s, while Iraq subsequently invaded fellow member Kuwait in August1990. Iran continues to meddle in Iraqs affairs in the southern part of the country, especiallysince the 2003 Iraq war. The Sunni-Shia rift between Saudi Arabia and Iran never simmers farbelow the surface, and even on its own side of the Mideast Gulf, Saudi Arabia has had borderdisputes with Kuwait and the UAE. A palpable animosity between Saudi Arabia and Venezuela hasflared a number of times over the years. Externally, the sometimes real sometimes perceivedspecial relationship between Saudi Arabia and the US complicates and limits Saudi oil policyactions both within OPEC and in playing to its conservative, Islamic often anti-Western domesticaudience.

As OPEC moves into its second half-century, history suggests its role will continue toevolve, shaped by market conditions, internal dynamics, and the broader external context. Basedon its impressive survival instincts and the amount of economic rent at stake, OPEC is likely tocontinue to adapt to external and internal challenges for the foreseeable future, although theorganization probably will lose some of its pricing power over time.

OPECs outreach to non-OPEC producers has been sporadic and largely ineffective;attempts to expand the group have only garnered one new member, Angola, and returned oneother, Ecuador, while losing Gabon and Indonesia. Enticing major current or potential oil exporterssuch as Kazakhstan or Brazil to join is highly unlikely, and membership of mid-tier producers likeOman, Malaysia, Egypt, or Brunei would probably complicate the internal dynamics without gainingmuch additional market power for OPEC.

The reintegration of Iraq into the organizations production targeting agreement posesOPECs greatest challenge over the medium term. The Iraqi government has signed contractswith foreign oil companies to increase the countrys productive capacity from around 2.5 millionbarrels per day to 12 million b/d by 2017. Although little credence is given to the ambitioustargets, especially within this time frame, the fact that Baghdad is targeting a level similar toSaudi Arabias current capacity suggests that it will seek a quota closer to the Kingdoms thanIrans in the more distant future.

Saudi Arabia has been the primary beneficiary of Iraqs three decades of wars andsanctions, and its fellow OPEC members will likely expect the Kingdom to bear the brunt of cuts tomake room for Baghdads reintegration assuming such cuts are required. This, in turn, will

The Future



depend upon the call on OPEC oil in the future, which will be determined by the strength of theglobal economy, the energy and environmental policies of major consuming countries, and thecourse of non-OPEC supply.

Although its likely to survive and prosper, OPEC seems unlikely to have the same politicacachet among developing countries or the same degree of pricing power as in the past. In itsearly years OPEC was popular among fellow developing countries because its members stood upto the arrogant West. The rise of industrial powers in the East, notably China and India, hasprovided developing nations with an alternative model for development, one that is accessible toa far larger number of countries. OPEC itself already sees these Asian powerhouses as its main

source of market growth in a major shift in the organizations worldview.

In addition, the rise of Iraq could see OPEC again break into two camps, with SaudArabia leading the price doves and financially-constrained Iraq leading the hawks this time around.This could bring OPEC into conflict with major oil consuming countries advanced and developingones alike.

In terms of market clout, the primary reason that OPEC has been able to charge asubstantial premium for oil compared to other primary fuels is oils long-running monopoly ovethe transportation sector. In the longer term, biofuels, natural gas, onboard and plug-in electricpower, and hydrogen-powered fuel cells seem bound to dent this monopoly, especially in the faceof relatively high oil prices and growing environmental and energy security concerns amongmajor consuming countries.

One scenario would see OPEC remain a central and possibly stronger force within agradually growing oil market, but with its global influence reduced by oils declining share withinthe energy mix and the rise of new industrial powers.

From the beginning, OPECs role in global oil markets has derived from its large share ofoil production, reserves, and resources. Even with the large production cuts of January 2009,OPEC accounted for 41 percent of global crude oil production that year, according to EnergyIntelligences Oil Market Intelligence, and an even more dominant 57.6 percent of global crudeexports based on the universe covered by Energy Intelligence Research & Advisorys InternationaCrude Oil Handbook, 2010.

In terms of proved reserves, OPEC members accounted for 70.2 percent of global crudeoil and 48.2 percent of world natural gas as of the end of 2009, based on the BP Statistical Reviewof World Energy.

OPECs membership has been relatively stable for a number of years after the initiadoubling from five members to ten over the course of the 1960s. Nigeria (1971) and Ecuador andGabon (1973) joined before the 1973-74 Arab Oil Embargo. But since 1992there have only beenfive changes in the composition of OPEC membership. Latecomers Ecuador and Gabon left in1992 and 1994, respectively, over what they considered to be OPECs unfair dues structure, andIndonesia dropped out at the end of 2008 after turning into a net importer, but Ecuador rejoinedon Dec. 5, 2007 hot on the heels of the ascension of Angola at the beginning of that year.

Ecuador was clearly cajoled into rejoining OPEC. Fellow South American member

Venezuela reportedly even offered to pay Ecuadors membership dues. Venezuelan PresidentHugo Chavez has also made overtures to newcomer Brazil and fellow socialist leader Evo Moralesof minor producer Bolivia about creating a regional oil bloc within OPEC. Under a different set ofpolitics, rapidly recovering Colombia might have also been a candidate.

The idea of linked regional blocs within OPEC for Latin America, West Africa, and Asiawas floated in the 1980s but has not gained much traction. Among the bigger candidatecountries, Mexico has attended OPEC meetings and was the only non-OPEC participant in aproduction control agreement of the early 2000s to show any meaningful discipline. But itsproximity to the US, by far its dominant trade partner, effectively precludes any consideration ofOPEC membership. Although Egypt was and is an active participant in OAPEC, it is well past its

Size Matters

Membership



oil production peak and there are three other non-OPEC OAPEC members that are largely inthe same boat. Several of the prospective West African members like Equatorial Guinea, Congo

(Brazzaville) and Chad, along with ex-members Gabon and Cameroon eitherhave or are in the process of reachingproduction peaks, and like the coremembers in the Mideast Gulf, most arebeginning to have to fight growingdomestic demand for their oil production.

Table 1

Crude Oil Natural Gas

Reserves Reserve Reserves Production Rese rve

Country End-'09 * 2 009 Life (yrs) End-'09** 2009** Life (yrs)

Saudi Arabia 262.4 8,185 88 263.5 2.75 96

Venezuela 99.4 2,651 103 176.0 0.99 178

Iran 137.6 3,557 106 1,045.7 4.66 225

Iraq 115.0 2,421 130 111.9 0.52 214

Kuwait 104.0 2,261 126 63.5 0.44 143Qatar 25.4 733 95 899.3 3.17 284

Libya 44.3 1,474 82 54.4 0.54 100

Indonesia -- -- -- -- -- --

UAE 97.8 2,238 120 214.4 1.73 124

Algeria 12.2 1,219 27 159.0 2.89 55

Nigeria 37.2 1,733 59 185.3 0.88 210

Ecuador 6.5 465 38 0.3 0.044 6

Gabon -- -- -- -- -- --

Angola 9.5 1,771 15 9.6 0.355 27

Total 951.3 28 ,709 91 3,182.8 18.98 16 8World 1,354.2 70 ,013 53 6,609.3 106.04 62

OPEC share 70.2% 41.0% 48.2% 17.9%

*Billion bbl.In 000 b/d.**Trillion cubic feet.

Source: Reserves, gas production from 2010 BP Statistical Review, Oil production from EIG, OilMarket Intelligence.

Table 2

OPEC Membership

Country Joined Left Rejoined

Saudi Arabia 1960 -- --

Venezuela 1960 -- --

Iran 1960 -- --

Iraq 1960 -- --

Kuwait 1960 -- --

Qatar 1961 -- --

Libya 1962 -- --Indonesia 1962 2008 --

Abu Dhabi 1967 -- --

Algeria 1969 -- --

Nigeria 1971 -- --

Ecuador 1973 1992 2007

Gabon 1973 1994 --

Angola 2007 -- --

Includes equal Neutral Zone shares.Rest of UAE by inclusion.



The earths poles are caught in limbo between environmental hazards triggered by globawarming, rising economic opportunity, and contested geopolitical aspirations all in the absenceof precise and long-range legal regimes. While climate change warns and cautions, legal regimesconstrain and oblige, and economic opportunities (funded or assumed) open and invite. Is it any

wonder, then, that the dynamics of Arctic economic potential are being discussed so animatedlyamong governments, corporations, and other organizations?

The Arctic and Antarctica are the last remaining spots of the planet to fall under anynational jurisdiction. The precise demarcations of the EEZ and claims for the extension of thecontinental shelf are the operative tools to achieve this. Elsewhere on the planet, the resourcesdeposits (including hydrocarbons and marine biota) are consumed under accelerated speed andwill be exhausted to the point of irreversible depletion far faster than anticipated. In the nearfuture, the possession of natural resources (including control over fresh water reserves) will addeven more power to states than it does today.

Clearly, the economic infrastructure in the North is growing, be it related to fishery,energy resources, shipping, or tourism. Economic opportunities in Antarctica are still behind, as

about 98 percent of the southern continent is covered by a perennial ice sheet and the remaining2 percent is unfruitful rock. The harsh climate additionally discourages sustained economic activitiesthe Southern Pole is the coldest, windiest and driest continent. Compared with an Arctic that iswithin close proximity of several leading industrialized nations, Antarctica is detached even fromthe few states in the same geographic vicinity (Chile, Argentina, South Africa, New Zealand, andAustralia) and any local or transcontinental commercial activity and shipping routes.

With the rapid melting of the north polar icecap, the prospects of shortened transportwaterways in the ice-free summers are an attractive future economic aspect of the Arctic regionThere are basically three possible routes, each of significance:

the Northwest Passage, connecting the American Continent and Far East Asia; the Northern Sea Route, offering a shorter way from Europe to Asia along the Russian

Arctic coastline; and the Arctic Bridge, connecting Canada and Russia (see Figure 1).

Though there is high potential to slash international shipping distances by opening shorteroutes in the north, the high risks on these alternative routes are still keeping most traffic runningover the classic transport routes like the Suez and Panama Canals. However, the Arctic Bridge isalready used in summer months for shipping from Murmansk in Russia to the Canadian port oChurchill (service operated by the Denver-based rail company OmniTRAX) (Cooper, 2008).

Northwest PassageThe Northwest Passage connects the Atlantic and Pacific along the northern coast of

North America through the Arctic waters from the Davis straits and Baffin Bay all the way to theBering Sea (first time crossed by the Norwegian Roald Amundsen, 190306). This shipping routeshortens the distance between Far East Asia and the American East coast (via Panama) byapproximately 7,000 kilometres.

The summer of 2007 was the first season in modern times that the Northwest Passagewas fully ice-free. The latest data for the Arctic are suggesting that the route will be crossable fonon ice-breaker cargo ships by the summer of 2013.

Opening Up The Arctic Frontier (Part 2)An Excerpt from Arctic and Antarctic: Two Po les - Different Scores

by Anis Bajrektarevic*

*Professor Anis H. Bajrektarevic is the Chairman of International Law and Global Political Studies at IMCUniversity of Applied Sciences, Krems, Austria. He can be reached at [email protected]

EconomicDevelopment

Shipping Routes


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40 percent in comparison to the traditional, warm seas transport routes via the Suez or PanamaCanal. Driven by geoeconomic and geopolitical reasons, Russian authorities forced settlementwithin the polar circle commencing in the early part of the twentieth century and continuing at arapid pace during the Soviet era. The impressive infrastructure, urbanisation with many harboursalong the Arctic coastline, and lively economic activity has been in place since the end of WWIIUntil 1987, the Northern Sea route was practically sealed off for any foreign flag, as this wasessentially the only life line connecting the Soviet Baltic republics and the Pacific fleet. The actuausage of the passage remains mostly intra-Russian (between the Russian Arctic ports). It is rarefor any commercial vessels to make a complete crossing, since the waters are regarded asexceptionally dangerous (some parts of the passage are not deep enough to allow the traffic of

heavy container ships) and unpredictable (limited weather warning systems and iceberg monitoringfacilities). The cross-route passage for foreign flags is allowed only after a submitted payment foguidance by a Russian ice breaker.

The Russian Federation plans to invest bill ions in the northern port of Murmansk (withthe aim to double its capacity by 2015) as well as in further development and modernization of itsArctic coastline. Since rapid deglaciation is turning the unhindered passage from distant possibilityto viable probability, Russia wants to competitively answer the EU, Japanese and Americantransportation needs and commercial considerations.

Arctic BridgeThe Arctic Bridge is a seasonal route which shortens the connection between the North

American and European continents via the Arctic Ocean. The Bridge concept was offered to

Russia by Canada in the 1990s, but the first regular shipping started only in 2004. Currently, foaround four summer months, it is used for shipping grain and fertilizers from Canada to Europe(via Canadas principal northern port of Churchill in Hudson Bay to the Russian port of Murmanskboth well connected by railroad with the rest of their respective continents). Russia is keen onfurther developing the concept of the Arctic bridge, and already positions the Murmansk port as atransit hub for the future cross-continental shipping between North America, Northwest Europeand Pacific Asia.

Challenges of Shipping in the ArcticAlthough the Arctic may offer shorter transhipping distances, the time and transport

costs, at present, are not automatically lowered. Navigation in the high northern latitudes requiresspecial (or additionally equipped) vessels, long and specific crew training, extreme caution, andrelatively low speed (even when paths are broken by ice-breakers); the natural hazards are fahigher and less predictable compared to those in the traditional warm-seas routes. Icebergspresent a major barrier to Arctic transport, with unpredictable courses exacerbated by roughwinds and oceanic currents whose direction, severity and frequency are far from explored andscientifically documented. Clearly, the danger for the crew, cargo, and environment is very high(Since most of the traditional cargo ships are not built for the polar climate, it is safe to assumethat Arctic traffic will be dominated by the reinforced, rugged ships that carry hydrocarbonscrude and liquefied natural gas carriers, which pose environmental risk in the event of spills andaccidents.)

Even if, in forthcoming summers, the channels ice-sheets are fully melted, it is not clearwhether or not the old ice-sheets (heaver, denser, and more compact) would expand. If thisoccurs, gaps could be filled in temporarily freed pathways, blocking the narrow straits. So far, the

polar circle has very few oceanic observation stations, surveillance and warning systems (groundedor in geostationary satellites). In the absence of those systems, a near absence of disaster reliecapability, and with high environmental hazard, Arctic shipping is, at present, mostly consideredas a no-go zone for the international insurance and RE companies. Summed up, the variousincreased costs associated with Arctic shipping could very well neutralize any gains realized byshortening the routes.

Clearly, rapid deglaciation offers shipping opportunity in the far north. However, capitalizingon that opportunity requires much work in terms of improved navigation procedure and installationof safety-related infrastructure. It took centuries for seafarers to master high seas navigation onthe warm oceans; the cold oceans will not be ruled easily either.



Several recent studies conducted in the wide Northern Pole theatre are substantiating anearly finding of the US Geological Survey, which claimed that as much as 25 percent of the worldsoil and gas reserves are lying beneath the Arctic (estimated at as much as 90 billion barrels of oiland 1,670 trillion cubic feet of technically recoverable natural gas). About 70 percent of theundiscovered natural gas is estimated to be centred in three areas, namely the West SiberianBasin, the East Barents Basins and Arctic Alaska (US Geological Survey, 2008), see Figure 2 andFigure 3.

Figure 2: Undiscovered Gas Deposits in the Arctic

Source: American Association of Petroleum Geologists, 2008.

To this end, Norwegian company StatoilHydro is already extracting in the so-called SnowWhite Field (some 145 kilometres above the Norwegian northern coast). Russias leading gasproducer Gazprom is also undertaking developments in the Shtokman field in the Barents Sea,which is already the world largest offshore gas field.

In additional to the exploitation of hydrocarbons, the Arctic holds mineral resources suchas diamonds, gold, copper, nickel, and chrome (Omestad, 2008). Canada has already becomeone of the top three producers of diamonds due to its resources in the Northern Polar province ofNunavut.

Regions of Alaska, Polar Canada, and Polar Russia are already experiencing a mining

rush and lively economic activity. However, sustained exploration and exploitation as well astransport remain big obstacles, along with the nearly unbearable climatic conditions, for thecrews that work in these inhospitable areas.

The Arctic is rich with marine biota too fishery is the traditional activity for natives.Rising ocean temperatures have caused fish stocks migration to the colder northern waters,further compromising the ecological balance.

Natural Resources



With climate change seriously affecting the entire planet, the line between naturaoccurrences and human-induced catastrophes will be further blurred. An increase in the severityand frequency of these occurrences is becoming practically incalculable for the scientific andinsurance community, but also for the traditionally well-informed national intelligence. Consequentlythe additional stress will be placed on the overall equilibrium of all our systems be they eco-systems, political systems, or socio-economic systems. Further climatic deterioration may bring

not only contraction of available resources and habitable territories, but also dispersion (e.g.deeper into the Arctic theatre). The constancy and predictability of states behaviours is theessential prerequisite for any viable system of international relations.

On the northern side of the coin, with an absence of specific legal frameworks and cleardemarcation/border lines, the defrosting of the Arctic may heat up the political struggle driven bythe geoeconomic and geopolitical considerations. It is not far from reality to suggest that the stiffdismissive stance of the Arctic Five towards any external aspirant may trigger differentconfrontations, including military clashes. Even if successfully keeping others from access to theterritory, from passage through the area, or from its natural resources, any lasting balance wouldneed a solid inner cohesion among the Five. Such cohesion has never existed.

Currently, the moves of the Arctic Five are symbolic and concrete, and both assertive

(towards the Arctic) and dismissive (towards the external aspirants) at the same time. Among thesymbolic are the overt, sharp statements of political rhetoric, like the Arctic is ours and weshould manifest our presence, statement made by the Kremlins special representative for theArctic, Artur Nikolayevich Chilingarov. Canadian Prime Minister Stephen Harper in 2008: Canadahas a choice when it comes to defending our sovereignty in the Arctic; either we use it or we loseit. (McArdle, 2008). Also symbolic is the statement of Admiral James G. Stavridis, NATOs SupremeAllied Commander for Europe: This [Arctic issue] is something we are starting to spend moretime looking at. I look at the high north and I think it could either be a zone of conflict, I hope not,a zone of competition, probably. It could also be co-operative . . . and as an alliance we shouldmake this as co-operative as we possibly can(NATO 2009).

Figure 3: Undiscovered Oil Deposits in the Arctic

Source: American Associated of Petroleum Geologists, 2008.

Security Challenge



A seemingly conciliatory point of view on the subject came from Admiral Giampaolo diPaola, chairman of the NATO Military Committee, who suggested that the alliance should notoverly focus on the Arctic issue, and that possible NATORussia confrontation could be avoided bybringing in not only Russia, but also other nations (non-NATO members) who express interest inthe Arctic like China2 or Japan (NATO 2009). Offering a share to states which are not a part of thede facto Arctic Five, but are on the Eastern and Southern flank of Russia, must trigger concernwithin the Kremlin. Containment and encirclement is the last thing the Russian Federation wouldlike to see in its quest for the polar share. Taken from the NATO perspective, Russia appearspowerful and best positioned in the Arctic quest; the Alliance wants to deter Russias aspirationsby bringing in external players.

More concrete and less symbolic moves are: frequent Russian patrols on and over theArctic seas, and NATO alerts of interceptors to observe the flights of Russian bombers (equippedwith the long-range missiles). Since the first Putin presidency, the Russian Federation has openeda new defence budget line devoted to modernization of the polar/sub-polar airborne and navalforces. Less dramatic but equally steady, Canada and Norway also allocated funds for the Arcticmilitary and general patrolling presence. Besides the collective security arrangement of NATO,other forms of cooperation are in place or plausible: a possible alliance could be struck betweenCanada and the US to secure their Arctic borders and also North Americas energy supply. The USand Denmark already cooperate militarily, as the US has an important Air Force base in Thule,Greenland. Finally in Europe, at different foras, Sweden, Finland, and Iceland have repeatedlyexpressed their willingness to increase cooperation with Norway and Denmark on Arctic securityissues.

Jimmy Carters presidency is usually portrayed as one of the weakest in modern Americanhistory. The Iranian revolution and the debacle over the hostage crisis are the most quoted in thelong list of miscalculations ascribed to this presidency. Still, President Carter was the first USleader in modern history to formulate and promulgate a non-territorial claim on the world sceneof geopolitics.

As is known, the Cold war was a mega confrontation between two superpowers and theblocs organized around them. This confrontation, both ideological and territorial, was the logicaloutcome of the Monroe doctrine vs. the Brezhnev doctrine. Permanent overextension ofsuperpowers and constant calls of Europeans for a dtente had finally forced the US and theSoviet Union to the negotiation table in the early 1970s. Prefacing the Helsinki accord was theoverarching theme of territorial gain: the Soviets were interested in mutual recognition of bordersin Europe (drawn pretty much by their own hand in Potsdam), and the US finally appeared readyto relax the tensions in Europe by accepting those borders. The Soviets also wished to accesswestern technologies, and the US and its European allies were keen to undertake joint militaryinspection in the East.

However, in the wake of Helsinki, the newly-elected Carter urged something non-militaryand non-territorial: upholding the civil liberties provisions in the accord. This lended to the Americansa certain human quality that the Soviets appeared to lack. The Soviets, and to some extent theother European nations, felt at the time that the accord was their grand victory a legitimisationof Soviet territorial claims over eastern Europe. But history has shown that the US was the finalwinner. Their non-territorial quest (i.e. a full respect of human rights, and freedom of speech andmedia) opened doorways for the adaptation of their free market system in formerly sceptical

areas of the world; democratic values have not always followed free markets, but they havelargely domesticated world capitalism in a form that best fits US corporate interests. This eventuallyand ultimately increased American geopolitical presence throughout the world. The Soviets, onthe other hand, could not maintain their firm grip on their satellite republics and eventually sawtheir empire collapse.

The Soviet collapse and the subsequent end of the Cold War meant a decisive victory ofthe non-territorial principle. Even post-Yeltsin Russia has turned to its strategic neighbourhood(and beyond) with non-territoriality as its major quest. The only exception is in the Caucasusregion, but present Russian relations with Ukraine, Central Asia, the Baltic states, and EasternEurope are now based on the principle of non-territoriality. It appears, therefore, that future

Conclusion



contests will be predominantly driven by non-territorial claims. However, the two big exceptionsare at the poles, where the Arctic and Antarctica are the last remaining territories on earth to beconquered and divided.

As noted in Septembers Geopolitics of Energy, the two poles are global climate stabilizersholding by far the richest marine biota and biggest fresh water reserves. Climate change andglobal warming will cause many uncertainties in years and decades to come. Forthcoming climaticvariations and environmental deterioration will inevitably stress the habitable territories,3 accessibleresources (including hydrocarbons and precious metals, but not excluding fresh water). Viableuniversal, and comprehensive international systems and treaties require, maintain and aim at the

constancy and behavioural predictability of their subjects. Climate change, therefore, seriouslychallenges and compromises collective security mechanisms and may redesign the national securitypriorities of many states. Eventual loss of lands and resources within national territories may turninto national assertions in the larger theatre of melted Arctic and Antarctica.

The successful promulgation of non-territoriality presupposes clearly defined landparameters, constancy of domestic administration, and legal enforcement sufficient to maintainbasic economic activity. Each and every one of these elements is completely absent in the Arcticand Antarctica, meaning that a solution based on territoriality appears to be the only logicascenario for the two poles.

However, due to fundamentally asymmetrical legal situations, the two Polar Regions arefacing differing consequences. In the Antarctic, the participatory parties agreed to set up a firm

legal framework (comprehensive security, economic, and environmental arrangements); they putin place a treaty system to protect the unique environment of the most southern continent, restrictingnational interests and military activities, and finally focusing on the preservation and scientificexploration of the South Pole. Respective territorial claims were not settled but frozen. ThereforeAntarcticas legal position (though unresolved) could be regarded as well-defined a treatysystem that leaves little to no space for conflicting territorial claims at least for the time being while the treaty is still in force.

The Arctic, on the contrary, is not a subject to any specific legal provisions. The onlyexception is the island of Svalbard which has a clearly defined, restraining legal framework.4 TheFive littoral, circumpolar states have a desire and legal opportunity to lodge territorial claims overthe Arctic. That is something that none of the Five would like to see changed for a new restraininginternational instrument whose scope would be negotiated by a large number of states beyondthe polar parameter.

Out of the twelve original parties to the Antarctica treaty, three are among the Arctic Five(Norway, Russia/USSR, and the US). Out of the Arctic Five, we can consider only three as reapolar states. Irrespective of its size, might and degree of technological advancement, no countrycan close a specific polar-knowledge gap within a few decades. It took Denmark, Norway, andRussia several centuries to master the ice.

Although the US portraits itself as a fish of the high seas a supreme ruler of the worldoceans, it is primarily a fish of warm seas. The US suffers from territorial discontinuity withinAlaska proper. After all, Alaska represents a relatively modest geographical share of the Arctictheatre. The main Arctic concern for the US is to deter Russia. Finally, by not ratifying the

UNCLOS, the US cannot lodge any territorial claim, but also (equally, if not more importantly)cannot decide on claims of others.

Canada is neither a typical polar state nor considerable naval power. Its Arctic border sofar is more of a burden than an advantage for the government in Ottawa. Canada is one of theworlds most disproportionate states: it includes a huge territory with a modest population centredat the far south of the country. Long green and blue borders as well as a lack of substantive Arcticexpertise will keep the US close to Canada in their security and geoeconomic considerations, butnot without frictions.



If the US is a fish of warm seas then Denmark and Norway are the fish of the coldseas and Russia is a polar bear of permafrost. Russia clearly has a very strong position as itowns not only the longest Arctic coastline, but it also holds a long history of Arctic presence.Traditionally, the High North has been a constant geopolitical imperative since the time of Peterthe Great. A parallel and well-established geoeconomic drive is receiving new vigour within thePutin and Medvedev administrations. The bold Russian Arctic policy is another signal that theFederation is not going to disappear into the second row of global politics and economy but willinstead increase its non territorial leverage and geopolitical projection as a major energy supplierof the world throughout the 21st century. It is difficult to imagine any relevant Arctic issue to beresolved (even discussed) without explicit Russian consent.

Norway, the small state with the large pool of historical knowledge and advancedtechnologies, is a loner in the political environment, a nation in between the EU and the RussianFederation, and the key northern flank NATO member. It takes a friendly but firm position ininternational relations and Arctic matters. Close proximity coupled with unresolved Arctic territorialdisputes and lucrative economic prospects of joint ventures will keep Russia and Norway out ofopen confrontation.

Canadas neighbour Greenland connects the EU to the Arctic. The worlds largest islandand its tiny population will be confronted with environmental, economic, and political challengesin the coming decades. Greenlands road-map moves toward gradual but decisive independence,less home grown than Danish-induced. However, at the moment Greenland is still highly dependenton Danish subsidies, including diplomatic support. It is still the Danish signature that holds the

biggest NATO Arctic base on Greenlands soil.

Clearly, no instrument comparable to the Antarctic Treaty System will be established inthe Arctic, even if there are several advocates demanding it. By the Ilulissat Declaration, thelittoral states have unanimously reaffirmed the UNCLOS as the only applicable framework for theArctic territorial matters. This declaration of the Five clearly demonstrates their dismissive stancetowards the larger international community, assertiveness towards the Arctic, and conciliatoryposture towards one another. The sporadic calls by which one or the other of the Five invitesdifferent fora (like NATO, the EU, the Arctic Council, the Nordic Battle Group, and the like) orparticular states (like China or Japan) to enter the Arctic stakes are tactical moves to combatother players within the Five; they should not be mistaken as calls for outsiders to take a substantiveshare in decision making. Each and every one of the Arctic Five will continue to keep any externalparty far away from substantive participation in the polar matters. However, frictionless relationsamong the Five are a pipedream: the North Pole was the most militarized region of the world atthe peak of the Cold War (and still holds a huge military arsenal), while at the same time theSouth Pole was (and still is) the only demilitarized continent on the planet.

In the Antarctic, a sudden change of the current legal regime is very unlikely. The year2048 might constitute a landmark, as it will depend on the parties to the treaty to undertake eitheran extension of the ATS system or a new treaty entirely. Further on, the South Pole is far from theprime geopolitical centres of the world. Even powerful economic upcomers like India, China, andBrazil that may largely influence world systems and events, will remain nearly irrelevant playersin Arctic (and Antarctic) matters.

The Polar Regions, although inhabitable, of harsh and hostile weather conditions, and

distant from any prominent centre of human activity, will certainly have a major influence onclimatic, environmental, political, economic, and overall security matters throughout the 21st century,and therefore require closer consideration and constant observation.



Canada Russia Denmark Norway USA

UNCLOS

Rati f ication

2003 1997 2004 1996 Has notratified;approved byPresident Bushand SenateForeignRelationsCommittee

UNCLOS

Submission

By 2013 December2001

By 2014 2006 No submission

Territorial

Claim

Submissionpending; willbe roughly1.75 m illionsquarekilometres

Largest Arcticclaim: includesNorth Pole,extensions intothe CentralArctic Ocean,the BeringSea, theBarents Seaand the Sea of

OkhotskUN call formore data

Submissionpending

Extensions inthree parts ofthe Arctic andnortheastAtlantic: theLoop Hole inthe BarentsSea; theWesternNansen Basin

in the ArcticOcean; andthe BananaHole in theNorwegianSea.Furthersubmissions tobe made

No officialUNCLOS claim

Existing

disputes

Hans Island,Lincoln Sea(withDenmark)Beaufort Sea

(with US)NorthwestPassage (withintlcommunity)LomonosovRidge (withRussia,Denmark)

LomonosovRidge andMendeleevRidge (withCanada,

Denmark)Svalbard EEZ(with Norway)Barents Sea(with Norway)

LomonosovRidge andMendeleevRidge (withCanada,

Russia)Hans Islands(with Canada)

Svalbard EEZ(with Russia)Barents Seaclaim (withRussia)

Beaufort Sea(with Canada)NorthwestPassage (withCanada)

Annex 1:Arctic Sovereignty Claims Among the Five Litoral States



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Publicati on Date: December 21, 2010

Submit manuscripts and Letters to the Editor to Jon Rozhon, Editor-in-Chief,Geopolitics of Energy, in-care-of theaddress below or via email at [email protected]. Manuscripts dealing with energy and geopolitics, generally between2,000 and 4,000 words in length, will be considered for publication. Unsolicited manuscripts will undergo peer reviewby members of the editorial board.

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Reproduction w ithout permission is prohibited.

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Endnotes1 The Arctic Water Pollution Act states that the Canadian authorities have the right to

arrest ships within 100 km of the coast line if these ships do not comply with strict environmentalprotection standards.

2 Indeed, China has already applied for observer status in the Arctic Council and is repeatedlypronouncing its bolder naval presence, including the development of ice breakers these plansare still far from concretization, but are causing additional tension in the warm Asian seas and thecold north.

3 As most of the scientific community agrees, any large scale defrosting of the sub-polarand polar permafrost of Canada, Alaska and Russia would further accelerate global warming methane, trapped for centuries beneath the ice, would be released into the atmosphere in giganticportions dramatically adding to the present, nearly irreversible greenhouse effect.

4 Svalbard treaty is another case of virtue out of necessity. This treaty of Paris wasbrokered in 1920 with the major European powers de facto helping Norway to deter the Russianpenetration deeper into Europe from the outer northern side. It was signed at the time whenRussia was very weak (over the pre-modern and modern times, geopolitically the weakest Russiawas an early Bolshevik and Jeltsin Russia).

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