Is it possible for the United States to craft a balanced Arctic economic strategy that enjoys the benefits of Arctic economic development while minimizing the “costs of cold”?

Weighing the costs and benefits of any issue of importance is both an objective and a subjective exercise; the same holds true for developing a national Arctic strategy. However, by using a metaphorical scale to weigh the costs and benefits — one scale weighted for the economic bonanza that the region could be; and the other scale, the costs of achieving those economic gains — we can perhaps understand where the Arctic scales rest today and where they may tip in the future.

ECONOMIC BENEFITS

The economic benefits are fairly simple to assess and quantify although Arctic economics are highly susceptible to the fluctuation of global energy and commodity prices. Costs are measured primarily through the infrastructure and capabilities required to support increased economic development. Exact measurements regarding the costs to an increasingly fragile environment and the impact on indigenous populations are much more difficult to determine.

Achieving some degree of balance between these scales — defining a strategy influenced by scientific research to responsibly increase economic development while protecting and preserving an increasingly precarious ecosystem — is the preferred policy course of action if it can be achieved.

Arctic states are attempting to perform this same precarious policy balancing act. Some governments, such as that of Russia, give greater weight to economic development during these uncertain global economic times, while others may be unable to afford costly infrastructure requirements or favor stronger conservation efforts.

In an age of uneven and uncertain global economic growth, the American Arctic presents an attractive new economic opportunity. The Arctic holds an estimated 13% of the world’s undiscovered oil resources (90bn barrels of oil) and 30% of the world’s undiscovered gas resources (1,669 trillion cubic feet of natural gas and 44bn barrels of natural gas liquids) of which approximately 84% of these resources are located in offshore areas. The Alaskan Arctic is considered to be the second most prospective Arctic province (after the West Siberian Basin), containing an estimated 29.9bn barrels of oil, over 221 trillion cubic feet of natural gas, and 5.9bn barrels of natural gas liquids.

Depending on the price of oil (between a low of $65/B and a high of $120/B), the cumulative government revenue generated would range between $193bn and $312bn. For onshore resources, the National Petroleum Reserve – Alaska (NPR-A) could hold undiscovered, technically recoverable resources totaling 896 million barrels of oil and 53 trillion cubic feet of gas.

For natural gas, the estimated mean value of recoverable gas in Alaska is 221 trillion cubic feet, about 13% of the total Arctic gas resources.

Development of these large natural resources has been constrained, however, by the lack of a transportation system to move them to market, particularly for natural gas. These infrastructure costs needed to pipe, liquefy, and export Alaskan gas could cost as much as $65bn, a hefty sum given the low natural gas prices seen in the rest of the United States. Because the emergence of unconventional gas has radically lowered global gas price curves, the delivered cost of Alaskan gas may not be able to compete with shale gas in the rest of the United States.

Therefore, the economic scales will likely tip in economic favor of Arctic mineral resources rather than natural resources in the near term. For example, in 2010 exports of mineral resources in Alaska generated $1.3bn and accounted for 36.8% of Alaska’s foreign export earnings. Alaska is home to the Red Dog mine, which accounts for 5% of the global (and 79% of the US) zinc production and 3% of the global (and 33% of the US) lead production. With over 60mn tons of ore reserves, the operations at Red Dog are estimated to continue until 2031.

Alaska is also home to over 80mn tons of copper resources, estimated reserves of 500,000 ounces of gold, 3.2 trillion tons of hypo- thetical coal resources, and an estimated $1mn pounds of uranium oxide resources.

VS STAGGERING COSTS

Yet again, the costs to gain access to these hydrocarbon and mineral resources and bring them to market are staggering. For example, the construction of a 100-mile road to bring North Slope onshore natural resources to market is estimated to range anywhere between $400 and $600 mn.

The project has prompted significant opposition from North Slope communities and environmental groups which claim that the road would cross caribou migration routes and affect indigenous subsistence hunting. Another study is examining the costs of constructing a 500-mile corridor from the Seward Peninsula to the Fairbanks area to transport mineral resources between $2.3bn and $2.7bn.

Environmental advocates believe the project would “have adverse impacts to water resources, wildlife habitat, and subsistence resources” as well as high risk of acid mine drainage.

Notwithstanding new infrastructure construction, Alaska’s existing road transportation infrastructure is vulnerable to thawing permafrost miles of highway susceptible to permafrost melt that will require relocation or rehabilitation as their foundations weaken. However, road infrastructure costs pale in comparison to the infrastructure costs related to sea and air.

The United Sates will need to make significant and long-term investments in its Arctic infrastructure, including deep water ports, icebreaking capabilities and support vessels, ice-hardened transit vessels, improved satellites, aviation assets, as well as maintenance of airstrips, roads and pipelines. One icebreaker could cost $1 bn. A deep water Arctic port is currently being assessed. An expansion of helicopter hangars and aviation refueling is also being considered.

Just as the scales seem to weigh heavily on infrastructure related costs, one cannot dismiss three growing areas of economic benefit: commercial fisheries, shipping, and tourism. For fisheries, more than 50% of all commercially captured U.S. seafood is harvested from Alaska, and Alaska leads all states in both catch volume (5.4 billion pounds) and catch value ($1.9 bn). Alaska’s fishing industry is also a critical employer for the state, accounting for over 50% of basic private-sector employment in coastal communities.

NORTHERN SEA ROUTE

With shipping, traffic along the Northern Sea Route in 2012 consisted of forty-six vessels transporting over 1.26mn tons of cargo, representing a 53% increase from the previous year, when thirty-four vessels carried 820,000 tons of cargo, and a more than tenfold increase from 2010, when the route was only used by four vessels carrying 111,000 tons of cargo.

The US Coast Guard estimates that traffic through the Bering
Strait has nearly doubled from 245 vessels in 2008 to over 400 vessels in 2011. Finally, with tourism, the number of cruise ships venturing in Arctic water has more than doubled over the past eight years. More than 65,000 passengers departed from Svalbard, Norway, and Greenland in 2010, according to the Greenland tourism bureau.

A few thousand additional visitors depart from Canada and Russia each year. The tourism industry for the entire state of Alaska generates $2bn annually in direct visitor spending and is the third largest private-sector industry, with more than half of Alaska’s annual visitors arriving on cruise ships.Unfortunately, these benefits are not cost-free either.

Fearing depletion of fish stocks or adverse impacts on the fragile Arctic ecosystem, the North Pacific Fishery Management Council decided in 2009 to ban all commercial fishing in a 200,000-square-mile area extending from the Bering Strait to the disputed US-Canadian maritime border, an area including the Chukchi and Beaufort seas. According to the National Oceanographic and Atmospheric Administration, fishing stocks have been moving northward for the past 40 years to increase their chances of survival. As a reshifting of fish stocks takes place, some fish populations are nearly disappearing from US waters. According to the International Maritime Organization (IMO), there are currently no mandatory requirements to address safety concerns for ships operating in Arctic waters. Therefore, there are no comprehensive rules for the design, construction, and equipment of vessels, nor are there clearly defined procedures regarding operational, training, search and rescue, and environmental protection matters.

It is reasonable to conclude that, for the moment, the American Arctic scales tip slightly toward the side of environmental protection and stewardship, although not due to a formal governmental decision. It is tipped toward protection today principally due to the lack of a long-range, national Arctic infrastructure investment plan.

Although the state of Alaska is very interested in fully exploring Arctic economic opportunities and eagerly seeks to formulate such an economic development strategy, such a plan would require national financial mobilization due to the extraordinary budgetary resources involved, an understanding of the markets of destination for Arctic economic resources (eg, the United States for domestic energy consumption or for export to Asia), and an equally robust and mutually reinforcing public–private sector relationship. All three conditions are not present today and will unlikely materialize in the near future.

Although one can approximately tabulate the costs and benefits of Arctic economics, the ultimate cost of an oil spill that destroys the fragile Arctic environment or a catastrophic incident at sea that could cost hundreds of lives cannot be determined. If a disaster took place, America’s Arctic scales would likely never achieve balance. This unquantifiable factor tips the American scales toward Arctic environmental protection for the foreseeable future.

*Heather A Conley is director and senior fellow of the Europe Program at the Washington-based Center for Strategic and International Studies (CSIS).

David L Pumphrey is a senior fellow and codirector of the CSIS Energy and National Security Program.

Mihaela David is a fellow at The Arctic Institute - Center for Circumpolar Security Studies.

Terence M Toland is a research associate for the Europe Program at CSIS.

This article is based on the concluding section of the recent CSIS report “Arctic Economics in the 21st Century: The Benefits and Costs of Cold.”

The full report can be found at http://csis.org/region/arctic