Everybody Wants To Rule The Pole, Part II


 

In the same year that the Karluk sank, the first air conditioner was installed in a private home; it measured 7ft. high, 6ft. wide, and a mere 20 feet in length.

Archduke Ferdinand was assassinated in June; a few months later the first motorized vehicle appeared in warfare, when a tractor joined horses in the task of moving supplies through the mud.

Home radios weren’t invented yet, but down at symphony hall music lovers heard for the first time Prokofiev’s Sinfonietta, Scriabin’s Prelude No. 2, and Stravinsky’s now famous Three Pieces for String Quartet.

The first electric traffic light was installed, a new material called stainless steel appeared on store shelves, and a 19 year-old Babe Ruth made his major league debut with the Boston Red Sox.

And yet, despite a hundred years of progress, we know little more about the Arctic today than did Stefansson and Bartlett in 1914. Over 90% of its floor remains unknown.

The Arctic only accounts for 6% of the planet. And even with an unmapped sea floor, last year the Arctic produced:

40 percent of the world’s palladium,

20 percent of its diamonds,

15 percent of its platinum,

11 percent of it cobalt,

10 percent of its nickel,

9 percent of the world’s tungsten, and

20 percent of Russia’s entire GDP.

What’s more, the Arctic is estimated to hold at least 33% of the world’s undiscovered natural gas reserves, 13% of the world’s remaining undiscovered oil, and vast quantities of gold, silver, phosphate, bauxite, iron ore, graphite, copper, titanium, iron, lead, coal, uranium and rare earth metals.

In other words, everything you can dig up and sell decided to congregate up north under a bunch of ice.

Far less underground wealth has incited many of history’s greatest gold rushes, but a rush to mine trillions in resources is just the beginning of this story. Other attributes of the Artic also promise great prosperity.

Shipping: Over 90% of the world’s goods are transported by sea.

Two months after the Karluk sank, an engineering triumph was unveiled that would change transport forever. The Panama Canal was a 48-mile long shortcut that bridged the Atlantic and Pacific Oceans, the same way the Suez Canal, 40 years earlier, had bridged the Atlantic with the Indian Ocean.

The Suez and Panama canals eliminated the need for ships to travel around the southern tips of Africa and South America, respectively. This reduced journey times by as much as 40% (fact check), saving thousands of miles and billions of dollars.

A hundred years later, newly thawed Arctic paths threaten to sideline the dominance both canals have enjoyed for a century. The Northwest Passage and The Northeast Passage (Also referred to as The Northern Sea Route) offer an alternative to the canals, shorter and faster by up to 30%.

Presently, one passage is more suited to commercial shipping than the other. Much of the multi-year ice throughout the Northwest Passage is too deep for icebreakers to cut a sustained path suitable for commercial shipping. And it’s underdeveloped, so it will likely be decades before the Northwest Passage poses a threat to the Panama Canal.

The Northeast Passage, however, is a different story, and a direct challenge to the Suez path. Shorter. Faster. Cheaper. And as Putin likes to point out, no pirates either. That’s a relief.

Shanghai to The Netherlands via the Northeast Passage is 2,500 miles less than using the Suez Canal. That’s 24% shorter.

Yokohama, Japan to the Netherlands via the Northeast Passage is over 4,000 miles less than using the Suez Canal. That’s 37% shorter.

But for the Northeast Passage to become the commercial path of choice from Asia to the Atlantic and back, it will need more than just a shorter route. Which leads us to the next Arctic development unfolding now, to the tune of billions of dollars:

Infrastructure: To be functional and competitive, the NE Passage needs

-Accessible ports that can provide supplies, provisions and general support throughout the voyage.

-Ship Repair Yards.

-Adequate mapping and navigational data.

-Operational Search and Rescue framework.

-Multiple Ice breakers: large ships purpose-built to break through ice-covered seas, creating safe waterways for ships to travel along.

Developing infrastructure along the Northeast Passage is a colossal task that will take billions of dollars over many years to establish, thus providing a lucrative opportunity for companies and countries contracted/connected to any aspect of the infrastructure process.

Infrastructure projects are notoriously expensive, and typically secured through debt, providing another layer of opportunity via monetary support and financing.

Financing: financially backing infrastructure projects can be wildly profitable for the financier, while also adding to his influence, power, and reach in a region

What’s better than financing multi-billion dollar projects, backed by the government, that are almost guaranteed to become behind schedule and over budget, earning you even more?

For ambitious countries who lie outside of Arctic/Near-Arctic regions, and have the cash to play, partnering with an existing Arctic nation as a financer has proved to be an effective strategy to establish influence and permanence in the region.

Finally, Strategic Military Presence is a priority for modern superpowers. The Arctic has been prized since the Cold War as a strategic location, given its proximity to major powers.

Conversely, opportunities to circumvent the existing trade route system (and western financing) may be welcome by countries who seek greater sovereignty from western influence.

With so much to covet, nations everywhere are positioning to share in the spoils of their Arctic neighbors.

Eight countries claim land within the Arctic Circle, five of them boast coastal land. For entertainment (and cruelty) purposes, instead of listing them, let’s name them using only their flags and an empty map:

If you got all of those on the 1st try, or the 12th, I owe you a beer, flag enthusiast.

If you’re wondering why Greenland is grey and absent a flag, just ask Denmark.

Finland was the first to bring this gang of eight together, in 1991, to talk pollution. Today they call themselves “The Arctic Council,” and they navigate pole issues like science expeditions, search and rescue responsibilities, environmentalism—and proper ski gear.

The Council doesn’t have any legal authority, can’t regulate behavior, and has a self- imposed gag order when it comes to discussing “hard power,” which I learned means controlling other parties by military force, coercion, threats, or economic carrots and sticks.

Back home in southern Kentucky, they just call it being an asshole.

So really, they’re just a club. A nice guy club with a pretty cool Lord of the Flies/Hunger Games-ish name—Behold, The Arctic Council—and a tree-house fort and sleepovers and a “No Assholes Allowed” sign stapled to the door.  Sweet club, but a club nonetheless.

Even so, on account of the Arctic being hotter than a fistful of Bitcoin, everyone wants to join.

So, the Council did what any self-respecting club does, they said No…kind of.

Only the original eight can be “Member States.” Hey, rules are rules. But six groups indigenous to the Arctic were allowed in as “Permanent Participants.” So member states can bring in their kid brothers, who are allowed to talk, but not to vote.

Yet still more wanted in, so the club created a third-class proletariat called “Observers to the Arctic Council,” whose role is to watch reverently from the back. No voting. And no talking, unless called upon to pay tribute.

At Vanderbilt, they called that a “pledge class,” and apparently ritual servitude isn’t so dead after all––to date duly appointed observers include 13 actual countries and at least another dozen charities, groups, and other clubs that like to watch.

But the comedy doesn’t end there. You know how every club has the one kid who they’ll never let in? Well for the Arctic Council, that kid is the European Union. Poor EU has been applying to become just a lowly observer since 2008.

EU­ applied again last year, and this time just for kicks the Council had one of their duly appointed observers—The Association of World Reindeer Herders (Observer since 2000) —deliver the bad news: “Sorry EU, wrong password. You can try again in two years kiddo.”

Moving on from treehouse gangs, the closest thing to a governing body with a debatable degree of authority in the Arctic is a group of scientists within the UN known as the Commission on the Limits of the Continental Shelf.

Let’s be honest, their name could use some work. But at least they’re an official UN body, operating within the structure decreed by the United Nations Convention on the Law of the Sea:

-Each coastal nation has right to an “exclusive economic zone” (EEZ), which extends 200 miles from its coast, an area that nation is free to exploit to its heart’s content.

-Everything beyond 200 miles belongs to nobody and everybody—international waters— UNLESS a country can provide sufficient geological evidence that their “extended continental shelf” reaches beyond 200 miles, in which case they could claim exclusive right to the resources on and below the sea bed of their extended shelf.

Subject to the approval of the UN Commission on the Limits of the Continental Shelf, of course.

In theory, science and the sea floor are objective and where someone’s continental shelf is or isn’t would be a matter of fact.

In practice, it’s closer to your favorite jury trial: expert scientist on one side vs. expert scientist on the other.

Which brings us to the subject of disputes. As it stands today, there are a number of unresolved territory disputes between artic nations and even non-arctic nations.

The most interesting, of course, concerns the North Pole.

Canada has said for five years that the North Pole is clearly theirs; they will make their case to the commission this year.

In 2014 Denmark claimed the pole, and then some, via Greenland­­––which apparently is both independent and the property of Denmark.

By their measurements, Greenland extends for another 900,000 sq. kilometers (over twice the size of California), all the way to the edge of Russia’s EEZ, where it abruptly ends in the name of politeness.

Russia made their case for the pole in 2001. Then they did it again in 2007, claiming an area 3X the size of California (take that, Denmark!), and the estimated 10,000 billion tons of hydrocarbons below it.

That’s 10,000,000,000,000 tons!

Then, they sent two submarines down 12,000 feet to the actual sea bed of the North Pole, where they planted a Russian flag made of titanium—you know, just to be clear.

In 2015, they submitted even more data backing their claim. And again a year later.

The verdict?

From the harmless comedy of treehouse diplomacy, the North Pole debate now goes down the rabbit hole of absurdity. Not only has the commission failed to resolve any of the conflicting arctic claims, it turns out that it if it wants to, it can confirm Russia’s claims.

And Denmark’s.

And Canada’s.

They can all, apparently, be right. At the same time.

In the South, we’d call this situation “clear as mud.”

But it gets even better. The commission has no interest in resolving border disputes; by design, they only exist to make recommendations to the countries involved, based on the science.

Then, it’s up to the countries themselves to figure it out with each other.

How do you think that will work out in the end?

While some countries are holding onto the illusion that non-existent—or even conflicting—scientific recommendations will somehow settle claims to the most valuable piece of land to come up for grabs since western man discovered North and South America, others­­—think China and Russia—are not so naïve.

Russia is playing the game with the U.N. committee for the moment, but it’s preparing for every eventuality. It’s obviously easier and cheaper for Putin if the science falls his way and the other countries blink, but one need only look to the shear amount of resources being deployed to believe he’ll get what he wants, one way or another.

Take, for instance, the most important piece of technology that must be mass produced to make the arctic navigable—and patrolable—the Icebreakers. How does Russia’s fleet stack up against the rest?

A simpler resource being deployed is just people.

While the shear amount of real estate Russia has in the Arctic is certainly working it its favor, Israeli-style settlements dot the landscape too—places like Barentsburg, Slavbard (see Stormtroopers)—that Russia keeps running, at incredible expense, to further its lead in Arctic population.

And while Russia is playing the “soft power” game at The Arctic Council, it’s prepping its “hard power” game too. Should a Crimea-type solution be necessary, they’ve beaten the rest of the world to the punch when it comes to military readiness:

China’s ability to garner influence in the region is limited, of course, by the fact that it has no land or coastline within the arctic circle. In fact it’s over 900 miles away. But it does have money, and is putting it to use wherever it can.

Negotiations are already underway, for example, for China to build a massive iron-ore mine in Greenland, with Greenland just passing legislation that would allow 3,000 Chinese workers into the country to build the mine and surrounding infrastructure.

China shook hands on a free-trade pact with Iceland in 2013, and similar deals are in the works now with Canada, Norway, and the EU.

And China has pledged (via oil company Sinopec) to finance Alaska LNG, a 43 billion-dollar gas export project.

It’s biggest move, however, has been forming a strategic long-term partnership with Russia. Russia’s grand ambitions in the area require an unthinkable amount of capital, and with Western sanctions in place against the nation, China’s cash makes for a convenient sidestep of western financing.

China already ponied up a cool 12 billion to finance Russia’s gas project Yamal LNG, and the Chinese government recently revised its trillion-dollar Belt and Road Initiative to include development of the Northeast Passage alongside Russia.

So all that infrastructure, all those ports, all that shipping—all the spoils of the Northeast Passage—have become a joint venture between the Russians and the Chinese.

Well played, China.

As for America, she is late to the game. Very late. Under previous administrations the Alaskan Arctic has largely been left alone, perhaps rightly, with attempts to develop and explore lost in the chaos of D.C.

But that may be changing. Quietly tucked inside the recent Trump Tax Cut was a small provision that settled once and for all a fierce 40 year-old debate, one involving both parties of congress, environmentalists, and corporations alike.

As passed by congress, the provision authorizes drilling and resource exploration across a 1.5 million-acre area just north of Alaska—The Arctic National Wildlife Refuge.

This occurs alongside announcements to open up over 90% of the total acreage of the National Outer Continental Shelf for exploration and development (currently 94% of it is off-limits).

Does this signal a general change in attitude and aggressiveness when it comes to borders and control in the far north? If so, that could profoundly affect the current balance of Arctic power.

And in an interesting twist, it turns out the United States signed, but never ratified, the Convention on the law of the sea, so it has a convenient reason to disregard the status quo of existing boundaries

How do you play it as an investor? Knowing the story before it becomes headline news is the first part. We haven’t placed our specific bets just yet, the story is too young, but look out for The FatCat mid-week; we’ll update you on the companies we’re keeping an eye on.

 

-Christoph Grizzard, The FatCat Investor

Copyright 2018 FatCat Consulting Limited. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from the publisher. This report is copyrighted and registered. k.462©


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