Monday, July 30, 2007

Things Heat Up In Canada


Global Market Brief: Canada’s Arctic Potential
Following up on part of a major campaign promise, Canadian Prime Minister Stephen Harper on July 9 announced formal plans to construct up to eight Polar Class 5 Arctic Offshore Patrol Ships -- armed icebreakers -- and establish a deepwater port from which they will operate in the Far North. His speech was rife with words such as "sovereignty" and "national identity," and emphasized Canada's territorial claims in the Arctic. Not only are higher energy prices making more extreme forms of oil and natural gas extraction in the Arctic more attractive, but the receding summer ice pack also is opening up a world of possibilities -- literally.
Global warming has begun changing the geography of the Canadian North. And given Ottawa's current status in terms of the U.N. Convention on the Law of the Sea (UNCLOS) and the slew of Canadian islands extending far into the Arctic, there is little doubt that Canada will reap substantial benefits from the increasing accessibility of the North. Under UNCLOS, countries have full rights to the minerals within their exclusive economic zones of 200 nautical miles. Special considerations for long continental shelves can extend those rights even farther. In the Arctic, these shelves extend for hundreds of miles, which means that, with the exception of a small disputed area on the U.S. border, the vast bulk of the resources under the Arctic in the Western Hemisphere belong to Canada.
Energy

Long-disputed claims in the Arctic are beginning to take on new relevance. The dispute between Denmark and Canada over Hans Island -- a hunk of rocks smaller than New York's Central Park -- began to heat up (in a Canadian/Danish kind of way -- flags were planted and pastry imports were threatened) in 2004, and the U.S.-Canadian spat over a sliver of a wedge of floor in the Beaufort Sea has continued. Though the area of the latter is small by Alaskan standards, it could hold huge oil and natural gas deposits.
But the renewed interest in the Arctic runs deeper than revived territorial disputes. As the ice pack slowly recedes northward, more of Canada's North -- and beyond -- becomes accessible, altering how energy is not only developed, but also delivered to market.
The $7 billion, 750-mile-long Mackenzie Valley natural gas pipeline project, which would ship natural gas southward from the Far North, has already run into a four-year delay, and costs have more than doubled. But if the northern coasts of the Yukon and the Northwest Territories become accessible by water year-round for big liquefied natural gas ships, the pipeline (and its royalties to governments and First Nations) will become completely unnecessary.
Furthermore, as the ice pack continues to recede each year, it opens up more and more potential deposits to year-round offshore drilling without the need for massively costly hardened ice-proof rigs like those in the water off Sakhalin Island.
Given the resources already being exploited at the extreme edge of the ice pack -- the experience of Prudhoe Bay and the promise of Sakhalin -- one can only guess what might lie farther north. But rest assured, there are companies that will find out. And the stage will be set for even more hotly contested battles over the ownership of the North Pole itself.
Shipping
Oil and natural gas promise huge payoffs (and despite some current small-scale disputes and the potential for larger ones, Canada will no doubt see its share of the wealth), but a more significant shift is possible: a true opening of the fabled Northwest Passage that could greatly change the face of business. But resource rights along the seafloor and territorial waters on the surface of the sea are governed differently under UNCLOS -- though, in Canada's case, they will be equally contested. While Canada might push the argument that the potential shipping lane (should it open) is within its territorial waters (using the straight baseline method outlined in UNCLOS, which in this case gives the most favorable outcome for Canada), the United States and others will make strong cases that it is an international strait connecting the Pacific and Atlantic -- the trump card in the treaty that would qualify the strait as international waters.
Whatever the ultimate legal status of the Northwest Passage, Canada will have effective control either way. Even before Ottawa's eventual acquisition of as many as eight armed icebreakers -- which will be far and away the largest fleet of such ships in the world -- it will be Canadian icebreakers patrolling the waters of the North. And a more direct route over the North Pole will only open up if the ice of the Arctic Ocean gets close to melting completely.
This is all, of course, 20 years down the road. Today, there are only the first indications -- a receding ice pack, rising energy prices, and massive amounts of global maritime shipping. A small window each summer for crude carriers and container ships to make one headlong rush through the Arctic Ocean will hardly be worth the risk, much less worth altering the patterns of global shipping.
But if these trends continue unabated, exploration will certainly expand in the North. Spearheaded in all likelihood by energy interests, explorers will begin to chart and mark the most significant channels, expanding the navigability of the passage. If a reasonable assurance of safety can be made and shipping companies push hard enough, insurers could begin to take their bets. If those early bets pay off, the 21st century will experience one of those true rarities of history: a meaningful shift in global geography.
This will come at a cost -- any meaningful channel will mature amid treaties and compromises. Bad weather, poor visibility for much of the year, and ice flow will all inject a certain amount of risk into the equation. But the prospect of cutting as much as 5,000 miles from transoceanic crossings from Europe to the U.S. West Coast is compelling and would fundamentally shift the center of balance of global shipping. The result -- pulling massive amounts of shipping traffic from Panama (and, to a lesser extent, the Suez Canal) -- could free the maritime world from the minor tyranny of the beam and draft restrictions, respectively, of Panamax and Suezmax shipbuilding standards. (Of course, exploration could reveal a new maritime design constraint -- a Canadamax tyranny. If anything, higher standards are needed for shipping hulls that are more likely to encounter ice.)
All that can be certain for now is a wealth of possibility -- and that the Canadian Coast Guard might soon have something to guard.

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