Lecturer and Research fellow, Center of Polar and Ocean Studies, Tongji University, China
Visiting at: Fridtjof Nansen Institute, Norway
Period: 1 month
Research Theme: Uncertainties in the Arctic Exploitation and their impacts on China's Arctic Policy
Dr. SU Ping, lecturer and research fellow at Center of Polar and Ocean Studies of Tongji University was granted the opportunity to conduct a one-month term fellowship at Fridtjof Nansen Institute in Oslo, Norway from October to November, 2014. During her stay in the Nordic region, she has attended four international conferences, visited eleven institutes and universities, collected rich reading materials, finished two paper reports, established possible network and research projects and concluded some policy suggestion.
An excerpt below is part of her research report, titled "Uncertainties in the Arctic Exploitation and their Impacts on China's Arctic policy", finished in Norway based on her researching findings and academic activities conducted in the Nordic research community.
Uncertainties in the Arctic Exploitation and their Impacts on China's Arctic Policy
With the oil prices being down below $50 a barrel, the ships sailing through the Northern Sea Route (NSR) decreasing to 53 and the political uncertainties over Ukraine crisis, Arctic, portrayed as one of the biggest unexplored energy region in the world and the shortest new sea route from East Asia to Northern Europe, is exposed to many uncertainties in addition to environmental opposition and harsh weather condition.
The most frequently quoted figures are from U.S. Geological Survey Circum-Arctic Resource Appraisal (2008); they estimate that there are about 90 billion barrels of oil, 1,699 trillion cubic feet of natural gas (approximately 30% of the world’s undiscovered conventional gas) and 44 billion barrels of natural gas liquids that might remain undiscovered in the Arctic. In addition, it is also commonly acknowledged that the new sea route is estimated to be 40 percent shorter than the Suez Canal route and thus, a trip from Shanghai to Rotterdam is estimated to be about seven days and 2,750 miles shorter.
But the costs and risks of Arctic exploration are ignored by most papers and articles generally,as a result the figures of USGS and new sea routes are very popular to serve the evidence of potential Arctic conflict and major power’s ambition in this area. This paper is going to analyze the long ignored situation of Arctic exploitation and the countermeasures of China’s Arctic policy.
1. The main uncertainties of Arctic exploitation
The main uncertainties of Arctic exploitation pose challenges and risks for natural resource, oil and gas exploitation and shipping. Some could be compromised by high level of technique and operation standards such as tackling possible oil spills but some are going to face severe tests in recent decades, such as world market impact.
Firstly, the world energy market hits the oil and gas business exploitation in high north as the continued decline in oil prices has made the oil companies engaged in the Arctic no profit. The Arctic oil would be profitable at US $100 per barrel but the global oil prices have been falling from peak (US $150 in 2008, US$120 in 2012, US $100 in September 2014) to US $48 in 2015. On the contrary, the Middle East and African oil would be more cheap and easy and the shale gas market at US $41.4 billion is expected to grow to US $104 billion by 2020. Therefore the drilling in cold, harsh and expensive Arctic energy fields is considered less lucrative, at least before the oil prices is back on original track.
Secondly, shipping in the Arctic faces the challenge of poor infrastructure, difficult search and rescue, high insurance fee, short sailing period and harsh weather conditions compared to other sea routes. The news from the Northern Sea Route(NSR)for 2014 is not very encouraging, after a positive trend in the number of ships sailing through the NSR(2 vessels in 2007; 3 vessels in 2008; 5 vessels in 2009; 10 vessels in 2010; 34 vessels in 2011; 46 vessels in 2012 and 71 vessels in 2013), the transits have reduced significantly in 2014. According to the Russian NSR Information Office, only 53 vessels transited along the NSR. In which 31 vessels made the entire length of NSR and 22 vessels either departure from or arrived at ports inside the NSR.
According to the analysis of Polar Risks Group, the reasons to this decrease are as following. Firstly, two NSR choke points experienced too much sea ice. Secondly, many ship-owners were discouraged after the 2013 NSR season due to the fact that 2013 sea ice minimum extent didn’t beat 2012’s all-time record. Thirdly, Novatek stopped shipping gas condensate to Asia from the Vitino oil terminal. Fourthly, Kovdor Mining didn’t agree on shipping prices — contributing to more than 20% of decrease in cargo from 2013. Geopolitical risk with the Ukraine and Russian sanctions also played a role, but a minor one. Some ship-owners feared that Russia would stop offering support or dramatically raise NSR tariffs — that did not happen.
Thirdly, the cost of Arctic developments like infrastructures, equipment, insurance and labor forces are more expensive than other areas. The poor infrastructures and equipment in the Arctic exploitation are in great need to be established and modernized such as transportation corridors, roads, rails, airports, ports, communication infrastructures, pipelines and icebreakers.
But every aspect of development in Arctic is not easy: the cost of distance from consumption centers increases transportation times and costs; distance from manufacturing centers requires that companies maintain equipment redundancies and a large inventory of spare parts; harsh weather requires specially designed equipment that can withstand the frigid temperatures; and higher wages are needed to bring on and keep personnel in the remote areas. Additionally, poor soil conditions can require additional site preparations for onshore facilities to prevent equipment from sinking; softening tundra from thawing permafrost can limit exploration during warm months; offshore production facilities can be damaged by ice flows and severe storms; and unpredictable weather can hinder shipments of equipment and personnel.
Four thly, the environmental impact of commercial activity on climate change; biodiversity and local communities are very sensitive especially for indigenous groups and environmental organizations. Greenpeace, one of the most active environmental organization that attempts to board oilrigs every summer, and they will very likely make new attempts in 2015. As a result, on one hand, the rig owner and operator have to be very cautious and the strong opposition of environmental organization and indigenous people will just add to the problems related to the standard of operation, technology and the cost of Arctic exploitation.
Fifthly, Arctic is an area deeply affected by major power relations such as the U.S., European Union and Russia relations. Ukraine crisis deteriorate Russia and NATO, European Union and U.S. relations. The military buildup in Arctic adds to potential conflict. The withdrawal of Western energy and shipping companies from Russia influenced the financing, facilities and new exploration of projects. The sanctions have negative impact on the search and rescue cooperation in the Arctic, there is a possibility that Russia will respond to the sanctions by not providing support and safety services which add the risks of vessels sailing through the Northern Sea Route.
We witness a slowdown of Arctic interest and investment in the beginning of 2015 due to all risks and uncertainties. Some scholars are asking whether commercial interest in the Arctic is a bubble about to burst.
2. The countermeasures of China’s Arctic policy on uncertainties of Arctic Development
From CNKI and NFSSC database statistics, China’s Arc tic decision makers and scholars do not have comprehensive assessment on Arctic risks and are concerned about being left out of either raw material development in the region or the use of Arctic trade routes. But from my interviews with Chinese scholars and government officials, there is some recognition on the new trend in the Arctic.
Firstly, prudent assessment on Arctic exploitation is important although government official and scholars are very optimistic on Arctic exploitation. The Projects Guidance of National Funding of Social Science of China 2014 and 2015 reveal that Chinese government and academics gradually turn to the challenges as the guidance for two years suggest the research on the theory and practice on China’s involvement in Polar exploitation. My interviews on Chinese government officials also show their rational attitude on commercial shipping. Although China has successfully tried the test shipping but they insist the commercial shipping is different from one or two test as commercial shipping has higher standard on data collection and knowledge such as ice melting extent and weather forecast. In addition, Chinese companies are prudent on investment especially on gas and oil exploitation and shipping. Rich resources reserve doesn’t necessarily mean successful exploitation and business value.
Secondly, further involvement of Arctic governance is an important step. China is trying to understand regimes, regulations and standards related with Arctic and follow these norms. Shanghai Institute for International Studies (SIIS), one of the most important research institutions on China’s Arctic policy, published two books on Arctic governance at the end of 2014. And National Social Science Funding of China funded two research projects on Arctic governance at the same year. This topic never got funding from 2008 to 2013.
Thirdly, China will have more Cooperation with Arctic states. With respect to bilateral relations, China has made substantial progresses with both Iceland and Denmark. A Chinese-Icelandic free trade agreement was signed in
2013 and an Aurora observatory was established in Akureyri. China also keeps a good relation with Danish leaders. Russia and China both see the Arctic as a resource-rich region. Especially Russia wants to strengthen its economy with Arctic rich resources. Low oil price is striking from Russia’s economic standpoint and a lot of that development will be delayed and might be stopped completely. At the background of EU sanctions and low oil prices, China has some energy resources cooperation with Russia. China and Russia cooperation is limited into the field of economic cooperation as two states have not expressed plans of strategic cooperation. Russia is very wary about China’s involvement in Arctic affairs and it is not necessary for China to stand against EU and US for Russia. But anyway a collapsed Russia does not meet the interest of China.
It is commonly believed that China's involvement on polar affairs has become more diverse in recent years. Although climate change remains at the priority of China’s Arctic policy, economic concerns are also taking on a higher priority.
But the low global oil prices, decreasing vessels in NSR, high exploitation cost and environment sensitivity will cause delays in potential Arctic development. Arctic is off less economic significance to China than many Chinese expect, in short and midterm. With the increasing recognition on Arctic risks and uncertainties, China will have more prudent and comprehensive assessment on Arctic development.
In this case, China could stay engaged in possible energy development for future consideration, and develop partnerships with Arctic states not only for fossil fuel projects but also for potential alternative energy sources. As well, China could support new infrastructure projects in the Northern Sea Route area, including energy projects but also shipping hubs. Arctic resource and sea route could be one of the diversified energy, natural resources and transits for China.
For the long term cooperation in Arctic, China will relocate its existence in Arctic region and take more focus on scientific innovation, Arctic governance, sustainable development and regional cooperation.