Arctic Riches: The Economics of a Changing Frontier

THE STORY SIMPLIFIED

CRITICAL CONTEXT:
Climate Change in the Arctic

The Arctic, defined as the region above 66.5° north, is undergoing dramatic transformations due to climate change:

• Warming: The Arctic is heating at four times the speed of the rest of the world along with increasing rainfall.

• Ice Loss: Sea ice is disappearing at a rate of 1 trillion metric tons per decade (an average of 273.97 million metric tons per day).

• Permafrost Thaw: Thawing permafrost releases greenhouse gases, accelerating warming and causing infrastructure damage—40% of Northern Russia’s infrastructure is reportedly affected.

• Ecosystems: Rapid changes are stressing Arctic ecosystems, endangering unique and threatened species.

Importantly, these environmental shifts are increasing the region's accessibility for human economic activities.

OIL AND GAS IN THE ARCTIC

Significant Potential:
A 2008 US Geological Survey estimated that the Arctic continental shelf holds 30% of the world’s undiscovered natural gas and 13% of its undiscovered oil, making it the largest unexplored area for petroleum.

Current Players & Projects:
Several major Arctic oil and gas projects are already underway, despite the high cost of Arctic crude extraction—averaging $75 per barrel compared to the global average of $48.5 per barrel for conventional oil between 2015 and 2020.

• Vostok Oil Project (Russia): Led by Rosneft, this Siberian venture has 6 billion metric tons of verified liquid hydrocarbon reserves. It aims to produce 30 million metric tons of crude oil in 2024.

• Yamal Peninsula Projects (Russia): Gazprom leads projects like the Kharasaveyskoye and Semakovskoye gas fields. The Yamal LNG project, involving Chinese partners, focuses on liquefied natural gas.

• Barents Sea Projects (Norway): Two key projects are underway in Norway’s Barents Sea: Goliat Oil and Johan Castberg. Goliat, operated by Vår Energi (a joint venture involving Equinor), began production in 2016 and extracted 111.7M barrels by 2022, with 85.42M barrels estimated remaining. Johan Castberg, set to start production in 2025, holds an estimated 450–650M barrels of recoverable oil.

• Willow Project (USA): Approved in 2023, this $8 billion Alaskan project by ConocoPhillips targets 600M barrels of oil, with daily production expected to reach 180,000 barrels.

• Beaufort-Mackenzie Basin (Canada): Estimated reserves of 1.2B barrels remain largely undeveloped due to regulatory and economic challenges.

• Greenland: Estimated to hold significant oil reserves but has refrained from pursuing extraction.

Notable Dynamics:
BP divested from Rosneft in February 2022 due to Russia's invasion of Ukraine, while Shell abandoned its Chukchi Sea drilling project in 2015 primarily due to disappointing exploration results and high costs.

CRITICAL MINERALS IN THE ARCTIC

Significant Potential:
The Arctic holds substantial deposits of critical minerals, including nickel, cobalt, copper, rare earth elements, lithium, zinc, gold, iron, palladium, and tellurium. These resources are essential for various industries, from renewable energy to advanced electronics, positioning the Arctic as vital to decouple critical supply chains away from China (check out our analysis on The Race for Electric Vehicle Dominance).

Current Mining in a Changing Arctic:
Several key mining operations are active across the Arctic, though many face increasing challenges due to melting permafrost, which threatens infrastructure and operations.

• Red Dog Mine (Alaska): Red Dog is one of the world's largest zinc mines, operated by Teck Resources. In 2019, thawing disrupted its water management system, prompting Teck to spend $20 million on mitigation efforts.

• Nornickel Mines (Russia): Nornickel operates extensively in Arctic regions, including Norilsk on the Taimyr Peninsula and Murmansk on the Kola Peninsula. The company is the world’s largest producer of refined nickel and palladium and a major copper and platinum supplier. However, environmental issues, such as a 21,000-ton diesel spill resulting in over $2 billion in fines, have raised serious concerns. Their Siberian mines, Oktyabrsky and Taimyrsky, are also being impacted by permafrost thaw with subterranean water inflows into the mines.

• Meadowbank and Meliadine Mines (Canada): Located in Nunavut, these gold mines are operated by Agnico Eagle Mines and collectively produced 223,499 ounces of gold (valued at approx. 583M USD) in Q1 2024. The company has proactively employed a dry-stacking method for waste management to mitigate permafrost-related risks.

Nodules and Deep-Sea Mining:

The Lomonosov Ridge, an underwater mountain range in the Arctic Ocean, has been identified as a potential treasure trove of manganese nodules — mineral concretions composed of concentric layers of iron and manganese hydroxides. These nodules are rich in critical battery metals such as cobalt, nickel, copper, and manganese, essential for modern technologies like electric vehicles and renewable energy storage.

Barriers to Extraction:
Despite the promising resource potential, several challenges impede development:

• Technological Limitations: Current mining technologies are not sufficiently advanced to extract these resources effectively from extreme depths and conditions.

• Environmental Concerns: Deep-sea mining poses significant risks to marine ecosystems, raising fears of irreversible damage to the Arctic seabed and surrounding habitats.

The Metals Company (Canada), Deep Ocean Resources Development (Japan), Loke (Norway), Scandinavian Ocean Minerals (Sweden), and more are spearheading efforts in making deep sea nodule mining possible.

SHIPPING ROUTES

Significant Issues in Current Routes:
Traditional shipping routes, including the Suez Canal (connecting Europe to Asia) and the Panama Canal (linking the Pacific and Atlantic Oceans), have become bottlenecks for global trade due to geopolitical tensions and environmental challenges:

• Suez Canal:

  • Houthi attacks in the Red Sea have forced many vessels to reroute around the Horn of Africa, significantly increasing transit costs. (See our Analysis on The Global Houthis).

  • High-profile incidents, such as the grounding of the Ever Given in 2021, highlighted the canal's vulnerability as a global choke-point.

• Panama Canal:

  • Prolonged drought has caused water levels to drop, restricting the size and number of vessels capable of using the canal and leading to delays in global shipping.

The Arctic Alternatives:
The retreat of polar ice is creating new opportunities for northern shipping routes. These Arctic pathways promise significantly shorter transit times but remain seasonal and hazardous due to persistent sea ice and extreme weather conditions.

• Northwest Passage (NWP):

  • Navigable season: July – September.

  • Located in the Canadian Archipelago, the NWP has seen increasing use by vessels, including cruise ships.

  • Canada views the passage as part of its sovereign territory and has sought to restrict traffic to address climate change concerns. However, the U.S. disputes this, asserting that the NWP is an international strait.

• Northeast Passage (NEP) and Northern Sea Route (NSR):

  • Navigable season: July – October.

  • The Northern Sea Route (NSR) is a specific, Russian-controlled maritime corridor within the broader Northeast Passage (NEP).

  • Russia has prioritized the development of the NSR, planning to invest 275 billion rubles (2.7B USD) between 2025 and 2027. This will include port facilities, dredging operations, navigation tooling, and transportation assets such as icebreakers and ice-class cargo vessels.

  • Russia and China are collaborating to expand infrastructure under the "Polar Silk Road" initiative, further enhancing the Northern Sea Route's (NSR) viability. The Polar Silk Road, formally introduced by China in 2017, is a strategic plan to develop Arctic shipping routes as part of China's broader Belt and Road Initiative.

  • The Russian administrator of the NSR, Glavsevmorput, imposes tolls and requires ships to use Russian pilots for navigation.

While climate change may extend the navigable period for these Arctic routes, it is also expected to increase the frequency of severe weather events, posing ongoing risks to their reliability and safety.

TO BE CONTINUED: TERRITORIAL DISPUTES, COOPERATION ATTEMPTS, AND MILITARY DYNAMICS.

The Arctic’s vast potential for resource extraction and shipping has heightened competition over its ownership and control. With boundaries still contested, nations like Russia, Canada, the U.S., and Denmark (via Greenland) have expanded their territorial claims, sparking a militarization of the region. Meanwhile, China is claiming to be an “Arctic state.”

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