Volume 2, Issue 1 | March 2015
The Council Perspective
The Future of the Arctic
The Arctic is experiencing stunning change as warming temperatures melt ice and reshape
the region environmentally, politically, and economically. While the resulting coastal erosion
and rising sea levels worldwide pose serious threats to natural ecosystems, the situation also
presents potential economic opportunities. The possibility of reaching significant oil and gas
reserves and vast mineral deposits, as well as the prospect of shorter shipping times, are just
some of the potential economic benefits of the Arctic becoming more accessible. As these
environmental events unfold, however, the region s geopolitical and historical significance
for many countries, Arctic and non-Arctic alike, is certain to impact diplomatic relations and
security in the region and, ultimately, economic outcomes.
In this issue of The Council Perspective, the Global Business Policy Council explores the
business implications of the changing Arctic from three critical perspectives. Part one looks at
the environmental dimension of climate change in the Arctic: What changes are taking place
now and in the coming decades and what will they mean for the region and the globe? Part two
explores Arctic governing structures and geopolitical dynamics: What legal regimes are the
most important and who are the critical actors? The third section examines the economic
dimensions of the Arctic: What are the key drivers of the Arctic economy and what are the risks
and opportunities of operating in the region? The issue concludes with a discussion of the
critical business implications of the combined three perspectives, as well as recommended
actions for the private sector to contend with rapidly changing realities in the Arctic.
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Volume 2, Issue 1 | March 2015
The Changing Arctic Landscape
How is climate change redefining the Arctic environment?
Key findings
" The Arctic has lost 3 to 4 percent of its sea ice each decade since 1979 and could
experience ice-free summers by the 2030s. The rising sea levels that are the result of this
ice melt have significant implications for the safety of natural ecosystems both in the
region and worldwide, including areas inhabited by humans.
" Global climate change will continue to affect the Arctic more rapidly than other areas.
Both temperature increases and their impact on the environment disproportionately
affect the Arctic, and changes in the region will have an outsized effect on the climate
throughout the world. These changes will impact navigable shipping routes, habitable
land, infrastructure, health conditions, and food supply.
Climate changes in the Arctic
According to the NASA Goddard Institute for Space Studies, global temperatures rose
approximately 1.2 degrees Celsius (2.2 degrees Fahrenheit) from 1880 to 2012, a trend that has
accelerated over the past 30 years (see figure 1). While this may not seem significant, the
impact on the Arctic has been profound and greater than anywhere else in the world. North
of the 66th parallel, temperatures are rising at twice the rate that they are worldwide.1
Figure
Global temperatures have been increasing rapidly, especially within the past years
Global surface air temperature anomaly
(degrees Celsius)

.
.
.
.


 .
 .
 .
 .
Note: Anomaly is plotted with respect to a base period between and .
Sources: NASA Goddard Institute for Space Studies; A.T. Kearney analysis
1
Peter Christie and Martin Sommerkorn, RACER: Rapid Assessment of Circum-arctic Ecosystem Resilience, 2nd ed.
(Ottawa: WWF Global Arctic Programme, 2012)
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For the past 30 years, rising temperatures have been melting what were once considered
permanent ice structures: ice sheets, ice caps, glaciers, and multiyear sea ice (see figure 2).
According to the Arctic Monitoring and Assessment Programme (AMAP) of the Arctic Council,
the Arctic has been losing approximately 3 to 4 percent of its sea ice each decade since 1979,
and the decline has accelerated since 2000. The U.S. National Snow and Ice Data Center, which
tracks sea ice in the Arctic, reports that the past 10 years have seen the 10 smallest Arctic ice
extents on record. These changes are happening more rapidly than scientists predicted just a
few years ago, and they expect the trends to continue. In fact, within the next few decades, the
Arctic could be close to ice-free during the summer months, contributing to rising sea levels
and threatening the safety of natural ecosystems both in the region and globally, including
areas inhabited by humans.
Figure
The Arctic ice cover is receding
Russia Russia Russia Russia
United United United United
States States States States
Norway Norway Norway Norway
Canada Greenland Canada Greenland Canada Greenland Canada Greenland
September September September September
Median sea ice extent between and
Sources: NASA Earth Observatory; A.T. Kearney analysis
Further challenges, such as feedback loops and black carbon, are exacerbating this trend.
Feedback loops occur when ice melts and the newly exposed surfaces both land and water
absorb more of the sun s heat than snow or ice would. This in turn causes more ice and snow
to melt, accelerating the process of climate change. Carbon emissions and other pollutants
disproportionately affect the fragile Arctic climate. Black carbon pollution darkens the surfaces
of snow and ice, causing them to absorb more heat and melt more quickly. It also can linger in
the air, absorbing the sun s heat and causing temperatures to rise. Black carbon emitted north of
40°N in most cases in North America, Europe, or Russia has the greatest impact on the Arctic.
Impact of Arctic climate change on indigenous peoples
Indigenous populations that have inhabited the Arctic for thousands of years are seeing
Arctic coastlines rapidly erode, leading to the destruction of buildings and infrastructure,
and endangering local communities, particularly those built on permafrost. Increasingly,
whole communities need to relocate to avert crisis. As of 2013, 12 out of 31 at-risk Alaskan
communities planned to move to new locations, but they faced difficulties identifying
appropriate new sites, building new infrastructure, and financing their moves.
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The size of indigenous communities in the
Arctic is significant. According to the
University of Lapland, about half of Canada s
Arctic population and a majority of
Greenland s is composed of indigenous
peoples. Furthermore, there are about
600,000 indigenous people in Russia, which
comprises approximately 10 percent of the
country s Arctic population.
Due to past industrial and government activities, the Arctic is also host to dangerous pollutants,
including heavy metals, oil and petroleum products, nuclear radiation, and persistent organic
pollutants (POPs). Permafrost, which long kept some of these pollutants frozen, is releasing them
into the atmosphere as it thaws. These pollutants pose serious risks to the entire food chain.
Released POPs are ingested by Arctic mammals, such as beluga whales, ringed seals, and polar
bears, and stored in their fatty tissues. This poses a serious health risk to indigenous peoples who
hunt and consume these mammals. Reported cases of indigenous peoples with high levels of
toxins in their blood and breast milk are on the rise.
Global effects of Arctic changes
The Arctic region plays an important role
in maintaining a stable global climate,
atmospheric systems, and oceanic circulation,
so changes in the Arctic climate will affect
weather patterns, temperatures, and biological
diversity worldwide. For instance, AMAP has
found that melting glaciers and sea ice are the
greatest contributors to the global rise in sea
levels. In addition, thawing Arctic permafrost releases carbon dioxide and methane gases into
the atmosphere, accelerating global climate change. Finally, the loss of wildlife resulting from
these changes disrupts the global food chain, including the fish, birds, and mammals that
provide important food sources for humans.
Since the fifteenth century when the quest for a Northwest Passage to shorten shipping time
to the Orient propelled men to risk their lives trying to cross the ice along modern-day Canada s
borders the dream of an open shipping passage through the Arctic has enticed business and
political leaders. As climate change continues to melt the Arctic ice, this dream and even the
prospect of ice-free Arctic summers could become reality as early as the 2030s. However, the
advancement of shipping and trade routes in the region will depend on the development of the
security and geopolitical environment over the next two decades. In this increasingly complex
operational landscape, the actions of governments, firms, and other organizations will shape
the direction of future Arctic relations and business opportunities.
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Governance of the Arctic
What role do governments, international institutions, and non-state
actors play in the Arctic?
Key findings
" The Arctic Council has become the leading global forum to deal with Arctic issues, but its
membership is limited and the organization is unable to address matters related to  hard
security.
" In geographic terms, Russia is the largest Arctic nation, with half of all land and one-third
of all marine geography north of the 66th parallel. Cooperation between Arctic nations
has been strong in the post-Cold War era, although recent tensions following the Russian
annexation of Crimea are presenting new challenges.
" Non-Arctic countries are also staking claims in the region, creating new geopolitical
tensions. Most notably, China is investing in icebreakers and rare earth mineral mines
in Greenland, and it is collaborating with Iceland on the Arctic Circle Initiative.
Regional geographic context
The five countries that border the Arctic represent the most important geopolitical players in
the region. Each of these nations Canada, the United States, Russia, Norway, and Denmark
(via Greenland) is entitled to control its own exclusive economic zone (EEZ), which extends
200 nautical miles from its continental shelf, as dictated by the United Nations Convention on
the Law of the Sea (UNCLOS). With 157 signatories, UNCLOS, which defines the rights and
responsibilities of nations with respect to their use of the world s oceans, is perhaps the most
significant international treaty relating to the Arctic. The treaty also establishes guidelines for
businesses, the environment, and the management of marine natural resources.
The United States remains one of just a handful of nations that have not yet ratified UNCLOS.
As a result, although it abides by the rules of the Convention, it is unable to submit territorial
claims to formally define its EEZ in the Arctic. This may place it at a disadvantage, since all the
other Arctic nations have moved aggressively to define their EEZs. Because the Arctic is
home to what may be the world s largest remaining untapped gas reserves and some of its
greatest undeveloped oil reserves, as well as zinc, iron, nickel, and other rare earth metals,
those countries that control portions of the Arctic shelf are in a position to reap significant
economic rewards. In December 2014, Denmark became the first country to lay a formal claim
to part of the North Pole when it registered a request for about 900,000 square kilometers
(350,000 square miles) beyond the coast of Greenland. However, validating and approving
claims remains a time-consuming process. With Canada and Russia also likely to submit
claims in the near future, some experts predict that it could take until 2030 or longer before
these territorial issues are resolved.
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The Arctic Council
In 1996, the Ottawa Declaration established the Arctic Council, an intergovernmental forum to
 provide a means for promoting cooperation, coordination, and interaction among the Arctic
States and indigenous communities. In addition to the five Arctic border countries, Finland,
Sweden, and Iceland are full members of the Arctic Council. Members of the indigenous Arctic
communities also hold permanent seats since part of the organization s mission is to support
sustainable development of the environment and maintain the health and well-being of its native
peoples. As permanent participants, they have full consultation rights regarding the Council s
negotiating decisions.
Countries need to work together to
develop capabilities to respond to oil
spills or conduct search-and-rescue
operations in the Arctic.
Twelve countries are permanent observers, including six new countries as of May 2013 China,
India, South Korea, Italy, Japan, and Singapore. The addition of these new members marked the
first expansion of non-Arctic nations to observer status since the Arctic Council was formed in
1996. While the Arctic Council sees this expansion as an indication of the organization s increasing
prestige and resources, new observer countries were motivated by their growing economic and
research interests in the region. Additionally, nine intergovernmental and interparliamentary
organizations, as well as 11 nongovernmental organizations (NGOs), participate as observers
possibly including the European Union in the near future.
The Arctic Council has made significant research contributions to understanding the Arctic
environment through working groups, long-term impact assessments, and specific task forces
such as the Task Force for Action on Black Carbon and Methane. The Arctic Council has even
established binding multilateral agreements on regional issues such as search-and-rescue
protocols and oil-spill response. However, the Arctic Council is unable to enforce these treaties
or coordinate practice exercises between signatory states due to its funding constraints and a
self-imposed restriction against addressing  hard security. While security discussions on
military presence and cooperation in the region have occurred bilaterally, they do not occur
multilaterally as part of the Council. This illustrates the limits of the Council s reach in exercising
Arctic governance. Further work is needed at the country level and through cross-country
cooperation to develop response capabilities in the event of an oil spill or need for a rescue
operation in the Arctic.
Beyond the Arctic Council s work on issues related to environmental research, search and
rescue, and oil-spill response, the organization has recently moved to facilitate greater
engagement with the private sector. In 2013 the Council established the Arctic Economic
Council (AEC), under Canadian chairmanship, aimed at fostering business development in the
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region, engaging in deeper circumpolar cooperation, and providing a business perspective
to the work of the Arctic Council. While some critics fear that the AEC will elevate business
interests over those of environmental groups and indigenous peoples, many leaders see the
potential for a business role in sustainable development in the Arctic.
Table
Arctic agreements and organizations
Year
founded Focus
United Nations Convention on Treaty defining the rights and responsibilities of
the Law of the Sea (UNCLOS) nations ocean usage
International Code for Ships Agreement that, when finalized, will lay out
Operating in Polar Waters environmental regulations to protect polar waters,
(Polar Code) including a certification requirement for ships that
sail through them
Arctic Council Leading intergovernmental forum to promote
research, cooperation, coordination, and interaction
among Arctic states and peoples
Permanent Participants of Arctic Inuit Circumpolar Council, Gwich in Council
Council (six indigenous groups) International, Aleu International Association,
Saami Council, Arctic Athabascan Council, Russian
Association of Indigenous Peoples of the North
Conference of Parliamentarians Parliamentary body with representatives from all
of the Arctic Region (CPAR) five Arctic states and the European Parliament, as
well as permanent participants representing the
indigenous peoples
North Atlantic Treaty Provides for the cooperative security of the North
Organization (NATO) Atlantic states; four of the five Arctic nations are
members of NATO
The World Winter Cities Network of  winter cities that come together
Association for Mayors to share best practices, technologies, and city
planning ideas
Arctic Circle Forum for business leaders, think tanks, and
government leaders from non-Arctic states designed
to increase their participation in Arctic debates
The Nordic Council Interparliamentary body of the north region; members
include Denmark, Finland, Iceland, Norway, Sweden,
the Faroe Islands, Greenland, and Åland
The University of the Arctic Cooperative network of universities, colleges, and
research institutes concerned with education and
research in and about the North
Source: A.T. Kearney analysis
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Agreements
Organizations
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The Polar Code
The recently established International Code for Ships Operating in Polar Waters (Polar Code)
also has a critical role to play in Arctic governance. The code was drafted by the International
Maritime Organization (IMO), a specialized agency of the United Nations that concentrates on
maritime regulation, and is set to go into effect in 2017 pending final approval from IMO
governing bodies. It covers a wide range of environmental and shipping safety measures, from
ship design to search-and-rescue procedures. Because the code covers both the environment
and shipping, it will be binding under both the International Convention for the Safety of Life at
Sea (SOLAS) and the International Convention for the Prevention of Pollution from Ships
(MARPOL). The Maritime Environment Protection Committee (MEPC) must approve the code at
its next session in May 2015. Most experts believe approval will be granted, as MEPC has already
endorsed draft texts of the code. Pending MEPC s sanction, the code will go into effect in 2017,
along with the SOLAS amendments. All the Arctic nations are set to agree to the code, a strong
signal that they recognize the importance of cooperation in shipping safety to all parties
operating in the Arctic environment.
Economic sights are set on the Arctic.
The Polar Code is a landmark agreement crafted over years of negotiation. It requires certification
of ships sailing in polar waters, bans the discharge of oil and oily mixtures, and limits the release of
sewage. But some environmental groups assert that important issues still need to be addressed.
For example, the Polar Code does not ban heavy fuel oil in the Arctic, even though this type of fuel
is already proscribed in the Antarctic. This issue is particularly salient because there are currently
no methods to clean heavy fuel oil spills under Arctic conditions. The code also does not address
black carbon emissions, invasive species, underwater noise, or preservation of seabird colonies.
In the future, environmental groups are likely to continue to press for bans on heavy fuel oil and
limits on black carbon emissions in the Arctic.
Growing stakeholder tensions
While these governing bodies and international agreements play a critical role in Arctic gover-
nance, it is individual countries that will continue to have the most power in the region. All five
Arctic nations have advanced detailed national Arctic strategies within the past six years, a sign
of the increased attention the region is receiving on a national stage. While cooperative gover-
nance, environmental protection, and security play a role in each strategy, aspects related to
economic development are more prominent than they were in the past. Sustainable devel-
opment remains the focus, but there is little doubt that countries are becoming more attuned to
the region s economic potential.
Although Norway and Canada continue to be significant players in Arctic governance and
leadership, it is Russia with more than 60 percent of the Arctic s land area and 80 percent of
its population that may play the most critical role in how the region develops. Since the end
of the Cold War, military cooperation between Arctic governments in the region has been
strong. For example, coordination between the U.S. Coast Guard s District 17 in Alaska and the
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Volume 2, Issue 1 | March 2015
Eastern Border Guard Service of Russia regarding shipping traffic in the Bering Strait has been
a model of bilateral cooperation between the two former rivals. Furthermore, joint exercises,
such as Pomor 2011 between Russia s Northern Fleet and Norway and the biennial Northern
Eagle exercise between Russia, the United States, and Norway, have strengthened military
cooperation in the region. However, tensions escalated following the Russian annexation of
Crimea in March 2014. Western sanctions have prevented Western oil majors from contributing
technology, goods, or services to Arctic drilling efforts, and the United States cancelled
Northern Eagle 2014. Canada boycotted an April 2014 Arctic Council meeting in Moscow in
protest over Russia s policies in Ukraine. The lasting impact of these developments on Arctic
relations remains unclear, although some analysts think that military collaboration in the
region, given its successful history, will resume when tensions recede.
Non-Arctic nations have continued to express their growing interest in the region, contributing
to an increase in tensions. China, in particular, has been engaged in the Arctic, having estab-
lished mines for rare earth minerals in Greenland. Some Chinese real estate tycoons have even
attempted to buy large tracts of land in Iceland, which has led to speculation that China may
intend to develop an Arctic shipping port in that country. Beijing has long asserted its right to be
active in the Arctic, arguing that it is entitled to traverse international waters in the so-called
 donut hole beyond the 200 nautical mile EEZ of the five Arctic nations. Even though Chinese
billionaire Huang Nubo s bid to buy land in Iceland fell through, he turned his attention to
Norway in 2014, vowing that his and China s ambitions in the region remain. The country has
even built one icebreaker, currently owned and operated by the Polar Research Institute of
China, with plans to build another by 2016 (see figure 3). It is worth noting that the United States
has allowed its fleet to languish to just one active heavy icebreaker, the Polar Star, originally
Figure
Current and planned icebreakers
Russia
Finland
Canada
United States
Sweden
Denmark
China
Germany
Heavy class
Norway
Medium class
Light class
South Korea
Under construction
Japan
Planned
Sources: U.S. Coast Guard Office of Waterways and Ocean Policy; A.T. Kearney analysis
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commissioned in 1976.2 Russia is the world leader with a fleet of 40 icebreakers, six of them
heavy icebreakers (of which four are active), and it plans to complete what will be the world s
largest nuclear-powered icebreaker in 2017.
Finally, key stakeholders in the region are not limited to governments. Private corporations,
NGOs, environmental activists, and indigenous populations all play a significant role in Arctic
relations. Greenpeace, for example, has been very vocal in its objections to Arctic drilling; when
protesters attempted to climb onto a Gazprom oil rig in 2013, 30 of them were detained by the
Russian authorities. Corporations, such as ExxonMobil and Russia s Gazprom and Rosneft, are
also actively involved in research in the region. These and other companies have invested billions
in Arctic infrastructure for extraction purposes over the past 30 years, and they want a larger role
in multilateral governance of the Arctic. Business and government leaders, particularly those
from non-Arctic countries, played a leading role in establishing the Arctic Circle in 2013 a forum
to increase their participation in the debates surrounding the region. The organization is viewed
by some as a response to the Arctic Council, which they argue gives disproportionate advantage
to its eight permanent members. Since its inception, the Arctic Circle has served mainly as a
forum for business interests and some think tanks but has not managed to advance any policies
or recommendations.
Outlook
The ways public and private stakeholders in
the Arctic interact over the next five years will
be critical to the future development of the
region. As the United States begins its
chairmanship of the Arctic Council in April
2015, it will likely work to fulfill the goals
advanced in the White House s 2013 National
Strategy for the Arctic Region namely to
ensure an Arctic that is  peaceful, stable, and
free of conflict. To achieve this goal, continued
cooperation and coordination between all stakeholders countries, private corporations,
indigenous peoples, and NGOs will be essential. However, for the Arctic to become a stable
business operating environment, much work is still needed. Competing territorial claims,
combined with changing regulatory standards, have created a difficult and uncertain operating
environment, particularly for the extractive industry. As is discussed in the following section,
while the region presents enormous economic opportunities, serious challenges remain.
2
The country s second heavy icebreaker, the Polar Sea, commissioned in 1978 and refitted in 2006, is currently inactive.
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Arctic Economics
What are the implications of a rapidly changing Arctic for businesses
and the global economy?
Key findings
" There are huge economic opportunities in the Arctic, but infrastructure constraints and
regulatory challenges pose significant risks to operating in such a harsh environment.
" The Arctic has an estimated 90 billion barrels of oil and 47.3 trillion cubic meters
(1,669 trillion cubic feet) of natural gas, the majority of which is offshore. The Arctic is
also home to 40 percent of the world s palladium (located mostly in Russia), 20 percent
of its diamonds, and significant stores of platinum, cobalt, nickel, tungsten, and zinc.
" As the polar ice caps continue to melt, the Arctic is becoming more viable as both a
destination and a trans-shipping passageway. Using either of the two Arctic passages
the Northwest Passage and the Northern Sea Route (NSR) could decrease travel time
between the United States, Europe, and Asia by 40 percent. This would save shipping
companies money in fuel and other resources and would allow faster delivery of goods
around the world.
The Arctic presents enticing economic opportunities and, according to insurer Lloyd s and the
independent policy institute Chatham House, could attract an estimated $100 billion in
investment over the next 10 years in five growing areas: oil and gas exploration, mineral
resources, shipping, commercial fishing, and ecotourism. However, many challenges remain.
While the Arctic environment is changing rapidly, it is still a harsh and dangerous place for
humans. Excessive cold, poor satellite communications and GPS capabilities, and limited
capacity for search and rescue are just a few of the obstacles companies must consider when
deciding whether to operate there. Furthermore, companies need regulatory guidance and
certainty in order to make investments in the Arctic. Clear processes and regulations remain
underdeveloped and continue to change in much of the Arctic, standing in the way of signif-
icant investment in the region, particularly by U.S. companies.
Oil and gas exploration
The Arctic is home to approximately one-fourth of the earth s undiscovered hydrocarbon
reserves an estimated 13 percent of the world s undiscovered oil, 30 percent of its natural
gas, and 20 percent of its natural gas liquids. Experts project that the vast majority of these
hydrocarbons 84 percent are located offshore. According to U.S. Navy studies, deposits
located within the U.S. territorial zones alone could exceed $1 trillion in value.
In recent years both Arctic and non-Arctic nations have shown growing interest in the potential
of the Arctic for extraction of hydrocarbons. Of the Arctic states, Russia has invested most
heavily in oil and gas exploration in the region not surprising, given that 43 of the 61 large oil
and natural-gas fields already discovered in the Arctic are located within its EEZ. This compares
to only 11 in Canada, six in the United States, one in Norway, and none in Greenland (Denmark).
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Russia s relative strength in this area is likely to remain in the medium term, particularly as
other governments weigh environmental versus economic returns in the Arctic. In January,
U.S. President Barack Obama said he will ask Congress to designate nearly 5 million hectares
(12.3 million acres) of the Arctic National Wildlife Refuge in Alaska as wilderness, providing the
strongest level of federal protection to forbid a range of activity that includes drilling for oil
and gas and construction of roads. While passage of the proposal seems unlikely, particularly
given strong congressional opposition from the Alaskan delegation, the move reflects the
administration s environmental concerns regarding oil and gas exploration in the region.
While the United States and Norway have moved to curtail offshore exploration, Moscow has
signed joint ventures valued at approximately $40 billion with ExxonMobil, ENI, and Statoil to
explore the region. However, following the March 2014 annexation of Crimea, Western sanctions
targeting Arctic oil production have delayed Russia s exploration, as the country relies heavily on
Western technology to drill wells and extract oil. Furthermore, in September 2014, ExxonMobil
suspended cooperation with Russia s state-backed Rosneft to conform with sanctions soon after
they discovered 1 billion barrels of oil in the Kara Sea, an area that Moscow believes could have
more deposits than the Gulf of Mexico. Although the sanctions are not expected to affect
current oil production, if restrictions continue in the long term, the Financial Times has reported
that Russia s oil production could decline by as much as 20 percent by 2020. Sanctions could
also hurt Russia s ability to partner with U.S. and European companies in the Arctic in the future.
In addition to regulatory issues, the lack of
existing infrastructure has been an obstacle
to oil and gas companies looking to invest in
the Arctic. For example, Royal Dutch Shell put
its Arctic drilling plans on hold after the 2012
drilling season, having already invested an
estimated $6 billion into Alaskan oil explora-
tion, primarily due to equipment and infra-
structure challenges. Nevertheless, the
company s CEO Ben van Beurden announced plans in January to persevere and resume drilling
in the region. While he acknowledged the remaining regulatory issues and infrastructure
challenges, he stressed that Shell is  as well prepared as any company can be to mitigate the
risks of operating in the region. ExxonMobil, its Canadian subsidiary Imperial Oil, and BP are
still going ahead with plans to meet regulatory requirements for drilling in the Beaufort Sea,
but drilling of the first well will not begin until 2020 at the earliest. The harsh climate creates
a difficult operating environment, and companies need equipment specially designed for the
unpredictable yearly polar ice floes and deep sea beds. Current offshore drilling structures can
only reach hydrocarbons that lie in deposits less than 100 meters deep, but one-third of the
Arctic is comprised of ocean waters projected to be more than 500 meters deep. Many
countries also do not have the necessary infrastructure, such as required drilling platforms,
power plants, storage tanks, pipelines, and transportation, to extract and transport the oil and
natural gas. A study conducted by the Washington-based Woodrow Wilson Center found that
even if Canada and the United States were to invest in the necessary infrastructure today, the
resources would not be accessible until at least 2025. Investment in infrastructure development
is needed now if countries and companies hope to safely extract hydrocarbons in the future.
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Lack of necessary infrastructure not only affects the economic viability of such projects, but
also the environmental liabilities that a company would take on by drilling in the Arctic. In
2012 Christophe Margerie, while CEO of the major French oil company Total, was the first oil
executive to speak out against offshore oil exploration in the region, stating that the risk of an
oil spill in the environmentally sensitive area remained too high. In December 2014, Chevron
announced it would no longer continue its 2025 Arctic drilling plan in the Beaufort Sea
because of  the level of economic uncertainty in the industry and the lack of infrastructure
to prevent and control oil spills. Experts warn that if an oil spill were to occur at the end of the
drilling season in October, it would not be possible to stop the spill until July when seasonal
ice clears and drilling could resume. In addition, the U.S. National Research Council released
a report in April 2014 warning that the United States does not have the necessary resources to
respond to an oil spill in the region. Given these challenges, oil companies may be deterred from
investing in Arctic, which could hinder the development necessary to exploit hydrocarbons in
the medium term.
The Arctic sits on large deposits of rare
earth elements, including more than 150
in Alaska alone. China is already moving
into Greenland.
Mineral resources
The Arctic already produces 40 percent of the world s palladium (mostly in Russia), 20 percent
of its diamonds, 15 percent of platinum, 11 percent of cobalt, 10 percent of nickel, 9 percent of
tungsten, and 8 percent of zinc.3 The Red Dog mine lies north of the Arctic Circle in Alaska and is
the world s largest zinc producer, accounting for 5 percent of global mine production, and the
fourth largest lead producer, responsible for 3 percent of the world s lead. There is reason to
believe that production could increase further once land becomes more accessible.
The Arctic sits on large deposits of rare earth elements. According to an assessment by the
Alaska Division of Geological and Geophysical Surveys, there are more than 150 deposits of
rare earth minerals in Alaska alone. As its unmined reserves have become more accessible
due to melting ice, the region has become an attractive mining destination.
China has recently shown interest in expanding its presence in Greenland, which has the world s
second-largest deposits of rare earth minerals. China already produces 90 percent of the world s
rare earth minerals. Furthermore, a Chinese company is currently in negotiations with London
Mining to build an iron-ore mine in Greenland. The strategy seems to be paying off: Greenland
recently passed the Large-Scale Projects Act, allowing 3,000 Chinese workers into the country to
build the infrastructure necessary for the mine s operation.
3
Scott Borgerson,  The Coming Arctic Boom: As the Ice Melts, the Region Heats Up, Foreign Affairs 92, no. 4 (2013): 76 V
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Shipping
The Arctic is also becoming more viable as a destination and trans-shipping passageway. The
two Arctic passages the Northwest Passage and the Northern Sea Route (NSR) could
decrease travel time between the United States, Europe, and Asia by 40 percent (see figure 4).
This would reduce fuel consumption, save companies money, and speed up delivery of goods
around the world. The region has already witnessed an exponential increase in shipping traffic.
The Council on Foreign Relations reports that 71 ships crossed the Arctic Ocean between Asia
and Europe in 2013 compared with only five in 2010. Maritime transits through the Bering Strait
increased 118 percent between 2008 and 2012 according to the U.S. National Oceanic and
Atmospheric Administration. By 2020, Russia predicts that Arctic shipping will increase thirty-
fold, and the Polar Research Institute of China estimates that Arctic shipping could carry
between 5 and 15 percent of China s total trade value.
However, there are many challenges that must be addressed before the Arctic can be perceived
as the  northern Suez Canal. One of these is territorial disputes over the status of the shipping
Figure
Use of the main Arctic passages could cut shipping times significantly
Eurasia
North America
Northern Sea Route Northwest Passage
Sources: NASA; A.T. Kearney analysis
lanes. For example, while the international community considers the NSR to be an international
waterway, Russia claims sovereignty and does not allow foreign vessels to traverse the passage
without permission. The Kremlin requires all vessels wishing to use the NSR to notify Russian
authorities, submit an application for guidance, and pay a mandatory  icebreaker fee, which
The Council Perspective 14
Volume 2, Issue 1 | March 2015
varies by season and ship size. In a similar situation, Canada claims part of the Northwest
Passage as its internal waters under UNCLOS, whereas the international community considers
the passage to be international waters. Canada and the United States have had disputes over
the jurisdiction of the Northwest Passage in the past, but currently do not require permission or
assess tariffs for ships using the route.
Another major challenge is the lack of communications and other infrastructure needed to
cross the Arctic Ocean. Although it is becoming more navigable, unpredictable ice floes
and extreme weather continue to make Arctic waters dangerous and turbulent. Search-and-
rescue capacity, communications infrastructure, accurate topography information, and
marine safety equipment specifically designed for polar operations need to be developed
in order for destination and trans-shipping to become practical. As noted in a statement
released in October 2013 by the CEO of Maersk, the world s largest container line,  This is
not a short-term opportunity& for commercial shipping such as container shipping. [Arctic
shipping routes are] not something that will happen within the next 10 to 20 years. So
although the opportunity for shorter routes through the Arctic exists, the traditional shipping
routes through the Suez and Panama canals are likely to continue to dominate international
trade in the near to medium term.
Fisheries
The Arctic, home to hundreds of ice-dependent species, could experience an uptick in
commercial fishing as its waters become more hospitable. Soon it will not be only traditional
Arctic fish that will be found in the region: studies from the United Nations Environmental
Programme World Conservation Monitoring Centre indicate that fish stocks are migrating
northward as ocean waters warm. Fishing in northern waters is big business: in 2010,
Canada s fish and seafood export business was valued at nearly $4 billion, and in the United
States more than 50 percent of all commercially captured U.S. seafood is harvested from
Alaska, which leads all U.S. states in both catch volume (2.4 billion kilos, or 5.4 billion pounds)
and value ($1.9 billion).4
Arctic fisheries do have the potential to pose legal challenges, however: 2.8 of the 14.0
million square kilometers (1.1 million of the 5.4 million square miles) of the Arctic Ocean
are international waters, and 92 percent of them are not yet governed by regional agreements
to regulate commercial fishing. In order to protect the fragile ecosystem and establish
sustainable fishing regulations, the five Arctic nations agreed in February 2014 to place
a moratorium on commercial fishing in international waters until adequate scientific research
is conducted and international standards are implemented. Other countries, such as the
United States and Canada, have already implemented, or are now adopting, national policies
on future fishing activities.
Ecotourism
Ecotourism is also becoming an increasingly important activity in the Arctic region, with 250
cruise ships venturing across the Arctic in 2008, compared with just 50 in 2004, according to
4
Peter Christie,  Climate Change Opens Up Arctic Fisheries but Should Canada Cut Bait?, The Globe and Mail, 28 July 2012; Craig
Medred,  Alaska Leads Nation in Seafood Catch with 5.4 Billion Pounds Last Year, Alaska Dispatch, 20 September 2012
The Council Perspective 15
Volume 2, Issue 1 | March 2015
statistics from the State University of New
York s Maritime College. Japan s Crystal
Cruises plans to take 900 passengers on a
32-day cruise through the Northwest Passage
in 2016, making it the largest and most
luxurious ship to ever make the trip. However,
the prospect of more Arctic ecotourism is
raising growing safety and environmental
concerns. In 2010 a cruise ship ran aground in
the Canadian Arctic, even though traveling
conditions were perfect. A coast guard icebreaker was able to rescue the passengers and
crew in sufficient time, but the result could have been different had the weather conditions
been dangerous. Canada is preparing for the expected uptick in Arctic-bound passenger
ships using tactics such as Operation Nanook, a joint training exercise run by the Canadian
Armed Forces and Coast Guard, which in 2014 simulated the rescue of a 50-passenger cruise
ship. The Polar Code now sets international safety and environmental specifications for cruise
ships in the Arctic but does not include construction requirements for passenger ships
operating in polar waters.
The Council Perspective 16
Volume 2, Issue 1 | March 2015
Conclusion: Business Implications
and Recommended Actions
Business implications
Environmental, political, and economic drivers in the Arctic all carry significant implications for
the private sector. The following points describe the key takeaways for the business community:
" The opening of the Arctic offers significant economic opportunity. Globally, investment in
the Arctic could reach $100 billion over the next decade, according to the independent policy
institute Chatham House. However, it may take some time before these investments yield
appreciable returns. Most shipping routes are unlikely to be viable in the short to medium term,
and Arctic fossil fuel and mineral exploration will require multi-decade resource commitments
to develop the infrastructure needed to locate and extract them.
" Existing geopolitical tensions will play out in this new domain. Tensions between Russia,
China, and the United States will complicate the landscape for multinational companies
in their efforts to forge deals with different countries. These tensions may also result in
regulatory uncertainty as countries jockey for geographic control and attempt to set
standards. For example, following the March 2014 annexation of Crimea, Western sanctions
targeting Arctic oil production delayed Russia s exploration. In September 2014, ExxonMobil
had to suspend cooperation with Russia s state-backed Rosneft.
" Government regulation and leadership are likely to lag behind in setting requirements
for sustainable development and economic operations in the Arctic. As a result, private
industry will have an outsized role to play in shaping the environment, through estab-
lishing best practices, contributing to infrastructure investment, and encouraging good
government policies.
Recommended actions
The private sector still has a critical role to play in shaping the future Arctic environment.
Businesses can take the following steps to stay engaged in these matters and help to create
a sustainable Arctic operating environment:
" Partner with governments and nonprofits to develop the region. Cooperation between
industry and government leaders will help establish the international standards and
infrastructure needed to strike the right balance and create an Arctic region that is both
environmentally sustainable and business-friendly. The private sector also can partner with
governments and nonprofits to conduct scientific research on resources, emission reduc-
tions, infrastructure, and oil spill prevention. They can also work together to build early
warning systems and to identify resilient areas of the Arctic that might continue to support
ecosystems after much of the region is irreversibly changed. Additionally, businesses can
play a role in bringing infrastructure needs (such as ports, communications systems, roads,
and refueling stations) and safety challenges to the attention of governments. Businesses
can also push for more incentives for investment and development in the region. If the
The Council Perspective 17
Volume 2, Issue 1 | March 2015
public and private sectors work together to leverage such areas as icebreaking activities
and infrastructure and port development, they will be able to achieve far more than they
would working independently. Businesses interested in the region should be open to
engaging in track 1.5 diplomacy with Arctic actors from governments, academia, and
NGOs. This will facilitate communications and improve understanding of the region.
" Share expertise and best practices. Some businesses may already have the technical
expertise and best practices for developing infrastructure and communications, as well
as for locating and extracting resources in a manner that causes minimal damage to the
environment. Sharing these capabilities will have a positive impact on development of the
Arctic region. Canada s Northwest Territories and Nunavut Chamber of Mines provide a
framework for businesses to share expertise and collaborate on best practices for mining,
drilling, and energy conservation in the Arctic. Companies with expertise in the shipping
and extractive industries, particularly in extreme environments, can help to set standards
for worker safety and environmental preservation. These standards may even be higher
than those mandated through regulation.
" Closely monitor Arctic regulatory changes and plan for contingencies. The Arctic will
continue to experience profound and dramatic environmental changes that have huge
implications for its economic development. Regulatory standards are still evolving and
somewhat unpredictable. Unforeseen adverse events, such as the sinking of a tourist vessel
or an oil spill, could devastate prospects for Arctic tourism or oil and gas exploration. Other
scenarios, such as faster-than-expected access to shipping lanes or the opening of large
Arctic territories to fishing, would provide competitive advantages to companies poised
for rapid action. Businesses would do well to monitor trends and events in the region and to
develop a series of plans adapted to different scenarios.
The Council Perspective 18
Volume 2, Issue 1 | March 2015
Significant Upcoming Events
14 18 March World Conference on Disaster Reduction 2015 in Sendai, Japan
17 18 March U.S. Federal Open Market Committee (FOMC) Meeting
10 11 April Summit of the Americas in Panama City, Panama
17 19 April International Monetary Fund and World Bank: Spring Meeting
23 30 April Arctic Science Summit Week in Toyama, Japan
Annual gathering of international organizations, scientists, students, and policy
makers engaged in supporting and facilitating Arctic research
24 25 April 2015 Arctic Council Ministerial Meeting in Iqaluit, Nunavut, Canada
The 2015 Ministerial Meeting will mark the conclusion of Canada s
chairmanship (2013 2015) and the beginning of the United States
chairmanship (2015 2017)
28 29 April U.S. FOMC Meeting
2 5 May 48th Annual Meeting of the Asian Development Bank in Baku, Azerbaijan
7 May UK General Election
14 15 May European Bank for Reconstruction and Development Annual Meeting
in Tbilisi, Georgia
25 May African Development Bank Annual Meeting in Abidjan, Côte d Ivoire
1 13 June 2015 International Labour Conference in Geneva, Switzerland
7 8 June G7 Leaders Summit in Elmau, Bavaria, Germany
13 June Turkey General Election
16 17 June U.S. FOMC Meeting
25 June 4 July 2015 Aspen Ideas Festival in Aspen, Colorado, United States
Global Business Policy Council Events
22 23 May A.T. Kearney Newseum Strategy Summit in Washington, DC, United States
28 30 June A.T. Kearney CEO Retreat in Silicon Valley, California, United States
28 30 October A.T. Kearney-Oxford University Scenarios Programme in
Oxford, England, United Kingdom
14 15 November A.T. Kearney Bad Ragaz Group in Bad Ragaz, Switzerland
The Council Perspective 19
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