Why The Arctic Is A Risky Bonanza – Analysis

By Jaya Ramachandran

The pace of environmental transformation currently taking place in the Arctic is unprecedented and its future rather uncertain, a new report has warned. “Some of the technologies that will help to shape that future, such as those involved in deep water drilling and ice management are already tried, while others are still in their infancy or yet to be developed,” says Lloyd’s CEO Richard Ward in a foreword to the report.

“Given that several states have jurisdiction over different parts of the Arctic, it will become even more important to develop and agree clear governance frameworks to allow effective and coordinated responses to disasters,” says Ward.

Lloyd’s is the world’s leading specialist insurance market, conducting business in over 200 countries and territories worldwide – and is often the first to insure new, unusual or complex risks. It brings together a concentration of specialist underwriting expertise and talent backed by excellent financial ratings which cover the whole market.

Titled ‘ARCTIC OPENING: Opportunity and Risk in the High North’, the report has been published by Britain’s famous Chatham House, an independent think-tank. It explores how fluctuations in energy prices have driven, and will continue to drive, the pace of exploration in the Arctic and the importance of both political stability and public support in attracting future investment.

There is indeed a wide range of potential scenarios for the Arctic’s economic future, depending primarily on local investment conditions and global commodity prices. Oil and gas, mining and the shipping industries will be the biggest drivers and beneficiaries of Arctic economic development, says Charles Emmerson, the report’s lead author.

“Industries supporting these activities, such as fisheries, aquaculture, tourism and scientific research, could also contribute to the longer-term economic sustainability of Arctic communities,” says Emmerson, adding: “Based on current trends, expected investment in the Arctic could reach $100bn or more over the next decade. However, given the high risk/potentially high reward nature of Arctic investment, this figure could be significantly higher or lower.”

Salient conclusions of the report are:

Investment in science and research – both by government agencies and by private companies – is essential to close knowledge gaps, reduce uncertainties and manage risks. Arctic economic development can only proceed at a rate that takes into account these factors, that can be measured against environmental baselines and that recognises the primary role of governments in setting frameworks and establishing public policy priorities. Further research is required to ensure future development takes place sustainably and does not cause irreparable damage to the environment.

Major investment is required in infrastructure and surveillance to enable safe economic activity. In many areas – shipping, search and rescue – infrastructure is currently insufficient to meet the expected demands of economic development. Public/private co-operation is needed to provide this infrastructure.

Full-scale exercises based on worst-case scenarios of environmental disaster should be run by companies with government involvement and oversight to provide a transparent account of the state of knowledge and capabilities, to foster expertise and to assuage legitimate public concerns.

Companies have a responsibility and interest in establishing industry-wide standards and expectations for safety and stewardship, through the Arctic Council, through the International Maritime Organisation or through industry associations. Failure by one company will have impacts for others.

Integrated ecosystem-based management, incorporating the full range of economic factors, is needed in order to avoid one activity harming and displacing others and to take full account of the cumulative impacts of development. Long-term viability should be a key policy consideration for governments, business and other stakeholders.

The mosaic of regulations and governments in the Arctic creates a multi-jurisdictional challenge for investment and operations in the Arctic. Working through the Arctic Council to promote high and common regulations for Arctic economic activity is key. Both domestic legislation and international agreements should therefore adopt a safety-case analysis rather than a prescriptive approach to risk management, says the report.

It also urges States to provide strong and transparent oversight through appropriate government agencies, aligning risks and incentives for private companies with the broader public interest, and ensuring that private economic interests do not overcome legitimate public concerns.

The report further asks Governments to be clear about the purpose and scope of military activities in the Arctic, so as to prevent misunderstanding or miscalculations from developing. “At the same time, additional state policing capacity in the Arctic – to police and protect – should be broadly welcomed,” says the report.

Given the extreme and fast-changing risks facing companies in the Arctic, robust risk management approaches will be vital to allow sustainable economic development and to ensure that all stakeholders can benefit from economic opportunities, the report points out. “In addition to embedding a risk culture throughout the organisation, adopting best practice standards and implementing practical risk mitigation measures, any comprehensive risk management approach is likely to consider transferring risks as a key part of the strategy.”

The report points to uncertainties and knowledge gaps that exist around the nature of environmental change, the geological potential of the Arctic and environmental baselines, as well as seabed mapping, and how to deal with the risks of significant Arctic industrial activity. “Governments, research institutes, non-governmental organisations and businesses can help close these gaps, as a way of reducing risk and ensuring that development takes place within sensible, defined, ecological limits,” says the report’s lead author Emmerson.

Some other important aspects of the report are:

• The Arctic will remain a complex risk environment. Many of the operational risks to Arctic economic development – particularly oil and gas developments, and shipping – amplify one another. At the same time, the resilience of the Arctic’s ecosystems to withstand risk events is weak, and political and corporate sensitivity to a disaster is high.

• While particular risk events – such as an oil-spill – are not necessarily more likely in the Arctic than in other extreme environments, the potential environmental consequences, difficulty and cost of clean-up may be significantly greater, with implications for governments, businesses and the insurance industry. Transborder risks, covering several jurisdictions, add further complications.

• Given the Arctic’s iconic status and sensitive environment, Arctic development is often politically contentious, with sometimes opposing interests and perspectives between local, national and international levels. Political support for development will therefore continue to represent an uncertainty for businesses seeking to invest in Arctic projects.

• There are major differences between regulatory regimes, standards and governance capacity across the Arctic states. The challenges of Arctic development demand coordinated responses where viable, common standards where possible, transparency and best practice across the north. These frameworks need to be in place to enable sustainable development and uphold the public interest.

• Companies operating in the Arctic require robust risk management frameworks and processes that adopt best practice and contain worst case scenarios, crisis response plans and full-scale exercises. There are many practical steps businesses can take to manage risks effectively, including investing in Arctic-specific technologies and implementing best-in-class operational and safety standards, as well as transferring some of the risks to specialist insurers.

Lloyd’s CEO says: “The ‘known-unknowns’ of the High North present particular challenges for those involved in exploration and extraction. The Arctic is a frontier unlike any other, and the industries and companies it attracts will need to develop and implement robust risk management systems to meet these challenges and manage both their carbon and environmental footprint on this pristine setting.”