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On the Economic Future of the Arctic

(from Lloyd’s Report 2012: Arctic Opening – Opportunity and Risk in the High North)

 

The economic future of the Arctic is poised between opportunity and uncertainty. Growing interest in four key sectors – mineral resources (oil, gas and mining), fisheries, logistics (including shipping) and Arctic tourism – could generate investment reaching $100bn or more in the Arctic region over the next decade, mostly in the minerals sector. The epicentre of that investment is likely to be in the Barents Sea area, north of Norway and Russia, and in northern Alaska. Smaller investments, but with major local and international consequences, could occur in Greenland, Canada and elsewhere in the Arctic. A range of other economic activities – prospecting for biological material, harnessing Arctic hydro-power, and scientific research – may prove to be significant dimensions of economic development in some parts of the Arctic.

Though the prospects are significant, the trajectory and speed of Arctic economic development are uncertain. Some aspects of Arctic development – particularly in the mineral resource sectors – depend heavily on global supply and demand dynamics. Investment projections often rely on a small number of mega-projects (xiv) (such as the Shtokman offshore gas development, or offshore oil developments in the South Kara Sea) which can be cancelled, delayed or scaled back depending on market conditions. For example, Arctic liquefied natural gas (LNG) projects will increasingly need to take into account North American shale gas production. Falling commodity prices would probably put many Arctic projects on hold.

In the meantime, there are huge infrastructure and knowledge gaps across the Arctic, constraining development and increasing the risks of frontier projects. There may be perceived trade-offs between different economic activities in the Arctic – such as between fishing and offshore oil and gas. The political and regulatory conditions in the Arctic, shaped by local, national and global policy priorities, are subject to change. Geological risks are inherent in mineral exploration activity in the Arctic as elsewhere. There are also additional risks; they range from a uniquely challenging range of operational risks, to the inevitable environmental risks caused by increased industrial activity and the constant possibility of environmental catastrophe with regional fall-out.

Footnotes:

(xiv) Mega-projects are large scale investment projects typically costing more than $1billion.

Bibliography



    Charles Emmerson, Glada Lahn, 2012, On the Economic Future of the Arctic, Lloyd’s.©


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