The Arctic might be the world's final—and possibly most attractive—emerging market.
While most investors are focused on the economic potential of lower latitudes, due to increased access from climate change, the Arctic is quietly undergoing a radical transformation that is attracting the attention of savvy investors. But the U.S. is asleep at the wheel, leaving some of the world's largest oil, natural gas and mineral resources to be developed by others.
The U.S., an Arctic nation by virtue of Alaska's 44,000 miles of coastline and a land area two-and-a-half times that of Texas, is at a critical juncture where it must decide if it wants to open up its 49th state to development. If the answer is yes, it must decide how to manage the process so it is environmentally sustainable, coordinated with its circumpolar neighbors, and done with the support of local populations.
Long frozen, literally and figuratively, to outside investors, melting sea ice and thawing tundra are yielding huge resource opportunities. According to the U.S. Geological Survey and Alaskan state studies, 22 percent of the world's undiscovered oil and gas reserves are to be found in the Arctic. On the North Slope alone, there's an estimated 40 billion barrels of oil and 236 trillion cubic feet of gas.
The Arctic is also home to some of the world's largest zinc, nickel and rare earth mineral deposits, and increasingly important in a warming world, fresh water. Another resource is the Arctic's sea routes, which, if realized, are many thousands of miles shorter than traditional seaways around the two capes or through the two canals. The Bering Strait could one day be home to the next Singapore. With massive tidal, wind and geothermal capacity, the Arctic also has renewable energy potential.
Russia is actively working to open the Barents region. Canada is doing the same in the Yukon. Norway and Iceland each have multibillion-dollar energy projects underway. And Greenland, for now still under Danish rule, is exploring 31 billion barrels of oil estimated to be off its coast.
But the U.S. has left Alaska in the icebox. Energy production in the North Slope is in decline for years to the point of threatening the viability of the trans-Alaskan pipeline. In contrast to other nations pocketing the Arctic's bounty, Alaska has no major new investment projects.
If the U.S. wants to catch up, here are some policy initiatives that federal, state and native leaders might consider:
First, the U.S. needs to demonstrate political leadership. Secretary of State Hillary Clinton's recent participation in the Arctic Council meeting in Nuuk, Greenland, (a first) was a good start.
The U.S. should be taking proactive approach to resolving disputes such as our disagreement with Canada over the Northwest Passage, or our maritime border in the Beaufort Sea. Most importantly, we must finally sign on to the 1982 U.N. Convention on the Law of the Sea, which every responsible voice in the U.S. national security establishment has long called for.
Becoming party to this treaty has many benefits in the Arctic and elsewhere. Crucially, it will allow the U.S. to participate in the established process of claiming exclusive rights to the resources over, on and under its extended continental shelf—a predicate for establishing a stable legal climate before attracting investment. The nation will also need to revitalize its icebreaker fleet to support Arctic maritime activities, as it does on the nation's other four coasts.
Second, the federal government should get out of the way of local commerce. This might be facilitated by a congressional "Arctic Preservation and Development Act," which could lay out the rules of the game, balancing environmental protection and the state's economic interests.
Lastly, and consistent with President Obama's formal commitment last month to an open national investment policy, federal and state governments should craft an ambitious strategy to attract foreign capital. Alaskan leaders might especially think about courting Asian investors that are in relatively close proximity, particularly Japan, South Korea and China. As the country's recent deficit challenges underscore, welcoming any investor interested the American Arctic would create meaningful new jobs and contribute to the nation's economic recovery. Of course, any foreign investment will need to navigate the federal government's review process, run by the interagency Committee on Foreign Investment in the United States, that's designed to safeguard national security interests.
Alaska should consider using its $40 billion Triple-A rated permanent fund—all from oil revenues—like a sovereign wealth fund, emulating models abroad for investing alongside with private monies. Deploying this capital reserve smartly would allow Alaska to accelerate Arctic development projects that are shovel ready. If the money is steered toward increasing oil production and financing renewable energy projects—both Obama administration priorities—it would have the added benefit of helping the country reduce its dependence on Middle East oil.
If the U.S. can wake up to the Arctic potential it possesses, Secretary of State William Seward's 1867 purchase of Alaska for 7.2 million dollars could be the single greatest investment in American history.
Scott Borgerson is a co-founder and managing director of CargoMetrics. Scott Minerd is a co-founder and chief investment officer of The Guggenheim Group.
The above commentary first appeared in The Wall Street Journal online on July 22, 2011, and is republished here with the authors' permission.
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