Risks in Arctic Resource Development – Expert QA

first_imgCharles Emmerson cautions firms developing Arctic resources to understand political risks and ‘live best practice’.   A former head of global risk at the World Economic Forum,  Emmerson’s new book, The Future History of the Arctic (Random House/Public Affairs, 2010), was recently described by the Spectator as “one of the most impressive accounts of the contemporary Arctic”.  The book delves into the history of man’s relationship with this unforgiving wilderness, and outlines how the Arctic is heating up both environmentally and politically, moving from the edge of global consciousness to the centre of the issues that will define the world in the 21st  century.  Chief among these is the escalating scramble for its natural resources.Critical Resource, an advisory firm specialising in sustainability and stakeholder issues, whose particular focus is on the natural resource industries, caught up with Emmerson to discuss the challenges facing states and extractive companies hoping to profit from resources opened up by receding ice:Critical Resource: Is a scramble for the Arctic’s natural resources now underway? What is the likelihood of conflict between the different interested states over its resources?Emmerson: There are really three different scrambles underway in the Arctic: for companies, for Russia and for other states. For the international oil companies (IOCs) – and for mineral resource companies in general – it’s all a question of keeping up production in a world where there are no easy options left. If they think they can do it and turn a profit, the IOCs don’t really have much choice. For Russia, it’s more complicated – oil and gas are the life-blood of the state and geopolitical power, so the question is: can they turn to the Arctic fast enough to replace production lost elsewhere, and do they need Western partners? For other states, it’s more about making sure claims to the Arctic are as extensive as possible. The process of deciding who owns what is helped but not solved by international law. There will be plenty of jostling and competition but not necessarily conflict. In some ways, the presence of resources increases the incentives for states to get their act together and cut deals, because no private company will invest without them.Critical Resource: As you mention in your book, governments and extractive companies have known about the Arctic’s resources for decades, but major development has not always materialised. Does this history highlight any lessons for resource development in the Arctic today?Emmerson: Oil seepages were noted on the Mackenzie in Canada in the 18th century, Greenland in the 19th. But resources aren’t produced because they’re there, but because the price is right or because the politics are (preferably both). Infrastructure is a major issue – there has to be a first-mover, often the state. Without the Trans-Alaska Pipeline having political support, the North Slope never would have been developed. Canada’s own pipeline plans were stymied in the mid-1970s and so the region – almost as promising geologically – was put on ice. The key issue in large parts of the Arctic now is going to be understanding political risk, and making long-term investments.Critical Resource: Are there big differences in the ways that countries with territorial claims to parts of the Arctic – US, Russia, Canada, Denmark, and Norway – have viewed or gone about developing resources in the region in the past?Emmerson: The Russian Arctic is more populated, by a mile, than any other part of the Arctic. That’s largely because the Soviet Union was a planned economy, in which geopolitical strategy counted for a lot, and human and environmental costs were generally discounted. Some of the biggest boosts in Russia’s Arctic population came in the 1930s – with mining for gold, coal, nickel often accompanied by gulag labour. Russia’s still getting to grips with the transition from the economic and geographical consequences of the planned economy. The legacy, in resource development, was low-tech production, few environmental standards and poor management. That’s being overcome, but it’s still an issue. On the face of it, America has been strategic about resource development – but companies have often been in the lead, and sometimes wagging the national security dog. Norway’s been very inclusive, with high environmental standards and baselines – it’s really the gold standard.Critical Resource: Can large-scale resource development in the Arctic now take place in a way that protects the environment and helps rather than harms its indigenous peoples? What are the lessons of the BP Gulf of Mexico disaster for offshore drilling in the region?Emmerson: Resource development carries risks. Those risks are greater in technically challenging areas – though the technical challenges in the Arctic and the Gulf of Mexico are different. The risks are greater in more environmentally sensitive areas or where there’s relatively little clean-up infrastructure or technologies. You can’t get away from this. The point is, if drilling is going to happen, then it needs to be done right, with the best regulations and prior environmental baselines in place. Potential liabilities need to be clear and enforceable. The lessons from the Gulf of Mexico are, broadly, you need a highly precautionary approach, your whole company is at risk if you don’t make safety a priority, but even then, things may go wrong.  Indigenous people have very mixed attitudes to development – many are in favour of it.  The best way of ensuring their interests are protected is through local engagement – but some companies are much better at this than others, and some countries are more receptive to it than others.Critical Resource: In other resource-rich areas of the world, the discovery and exploitation of natural resources has often contributed to increased secessionist sentiment. Is this likely in the Arctic as well (e.g., in Greenland)?Emmerson: It’s highly likely in Greenland, but not so much elsewhere. Many in Greenland would like to seek independence, but the country is financially dependent on Denmark for the time being. If and when that situation changes, independence will be on the cards. From the point of view of political risk for companies this is good news, because it means that Greenland’s commitment to resource development is very anchored. Much much longer-term there may be issues around Nunavut. Certainly, if Canada ever were to fall apart, which I think is unlikely, there could be challenges there.Critical Resource: Resource companies are clearly growing more interested in the Arctic, for example with Cairn Energy’s recent oil discovery offshore Greenland and the growing interest in the major iron ore deposits on Baffin Island. What are your main points of advice to companies seeking to exploit Arctic resources?Emmerson: Get to know the region. Seek advice about the region. Understand the political risk. Go where the political risks are best understood, or lowest, or most tractable. Do it right. Live best practice. Skimping on safety or the environment is not just bad, it’s bad business. A strong regulatory regime can be a friend, not an adversary. If in a joint-venture, make sure there is sufficient joint oversight of environmental issues. You can share legal liability, but not reputational risk. Critical Resource – http://www.c-resources.com/.last_img