Arctic Governance: Volume 2

Energy, Living Marine Resources and Shipping

Ida Folkestad Soltvedt, Svein Vigeland Rottem, Geir Hønneland

• Publisher: I.B. Tauris
• Year: 2018
• Print ISBN: 9781838605841
• eBook ISBN: 9781838608026
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Diplomacy & Treaties
• Index: Politics & International Relations

The Polar North is known to be home to large gas and oil reserves and its position holds significant trading and military advantages, yet the maritime boundaries of the region remain ill-defined. In the twenty-first century the Arctic is undergoing profound change. As the sea ice melts, a result of accelerating climate change, global governance has become vital.
In this first of three volumes, the latest research and analysis from the Fridtjof Nansen Institute, the world's leading Arctic research body, is brought together. Arctic Governance: Law and Politics investigates the legal and political order of the Polar North, focusing on governance structures and the Law of the Sea. Are the current mechanisms at work effective? Are the Arctic states' interests really clashing, or is the atmosphere of a more cooperative nature? Skilfully delineating policy in the region and analysing the consequences of treaty agreements, Arctic Governance's uncovering of a rather orderly 'Arctic race' will become an indispensable contribution to contemporary International Relations concerning the Polar North.

PART I

ENERGY

CHAPTER 1

ARCTIC OFFSHORE PETROLEUM: RESOURCES AND POLITICAL FUNDAMENTALS

Dag Harald Claes and Arild Moe¹

Introduction

Arctic energy resources have attracted global attention, especially over the last ten years. Interest was spurred by the publication of resource estimates indicating a huge potential.² This happened at the same time as the melting of sea ice was becoming evident, making Arctic offshore exploration easier. It was widely expected that the Arctic region would play an important role in future global energy supplies. This conclusion was supported by the observation that the international oil industry lacked access and investment opportunities in traditional producing regions. In the media and in several academic publications the Arctic was portrayed as a ‘last frontier’ open for conquering by powerful states in a military battle much like the traditional colonial wars.³ And in October 2008 the European Parliament stated that it ‘remains particularly concerned over the ongoing race for natural resources in the Arctic, which may lead to security threats for the EU and overall international instability’.⁴

In this chapter we revisit the Arctic energy potential and the legal framework for development of Arctic offshore resources. Can jurisdictional disputes become an obstacle to Arctic energy development, and is it conceivable that petroleum activities in contested areas or areas outside national jurisdiction could lead to inter-state conflicts? How important are Arctic resources in global energy supplies, and where are the largest concentrations of hydrocarbons? What is the outlook for development?

Natural Resources and State Jurisdiction

Oil and gas are non-renewable resources. The exploitation of these resources involves a resource rent, which is ‘the surplus generated as the difference between the price of a certain good using a natural resource and the unit costs of converting that natural resource into the good’.⁵ The presence of the resource rent increases the economic gains in resource extracting industries compared to ‘ordinary’ businesses, disregarding other factors. This in turn stimulates state regulation and often state ownership in resource exploration and production.⁶ In cases where the state does not engage itself directly in the industry, it uses taxation in order to capture most of the resource rent. A special relationship emerges between companies with capital and technological know-how seeking opportunities for foreign direct investment in the upstream segment of the oil industry on the one side, and host governments that control the oil resources but seek revenues from extraction of the resources. Initially the companies have the upper hand as they can choose where to go, but once they have made a substantial investment they are hostages in the hands of the government. The companies' investments are sunk costs and the government can impose additional conditions on the companies and increase taxation without risking the companies leaving the country. This phenomenon was named the obsolescing bargain by Raymond Vernon.⁷ For these reasons, oil and gas exploration in high seas outside national jurisdiction would be far more lucrative for commercial actors. At the same time, oil or gas discoveries outside the jurisdiction of any one country would increase the likelihood of conflict between states aiming for resources in the same area and a first-strike situation, where the winner takes it all, could emerge. Is this the case in the Arctic?

According to the Law of the Sea, the coastal states enjoy sovereign rights to exploitation of minerals in the seabed outside their coasts. Article 76 of the UN Convention on the Law of the Sea (UNCLOS) grants all coastal states a continental shelf of 200 nautical miles if it does not meet another state's shelf.⁸ Clearly the coastal states may have large economic benefits from their continental shelves, provided, of course, they contain valuable and exploitable resources. Obviously delimitation of the continental shelf between neighbouring states can have big economic implications and be a source of conflict. The question is if there are many contested areas in the Arctic of relevance for resource exploitation?

There are some disputed areas in the Arctic. But as of 2015 McDorman and Schofield identified only one unresolved maritime dispute involving overlapping claims within the 200-nm zone, namely between the USA and Canada in the Beaufort Sea.⁹ This is hardly an area where interstate conflict would be expected. These legal scholars consider the boundary between the USA as complete, even if Russia has not ratified the boundary agreement from 1990, as both sides agreed to abide by the terms of the agreement.¹⁰ Other disputed boundaries – between Denmark (Greenland) and Norway (Svalbard), and between Canada and Denmark (Greenland) – are considered partially agreed. The biggest boundary dispute, and also with large relevance for petroleum development, was between Russia and Norway and revolved around a disputed sea area of some 175,000 square kilometres in the Barents Sea and Arctic Ocean. The dispute was solved amicably in 2010 after many years of negotiations.¹¹ It is quite clear that there has not been a situation with large, contested continental shelf areas within the 200-nm zone, accessible for exploitation. If anything, the situation has improved further over the last ten years.

When imagining the interest of the oil industry in contested areas it is often overlooked that such areas, if they exist, represent considerable risks. Since the development of offshore energy resources requires large up-front investments, companies prefer that the jurisdictional conditions are resolved and undisputed. There have been cases where one party to a delimitation dispute encouraged oil companies to start exploration in contested waters. Soviet authorities approached several Western oil companies for this purpose in the Barents Sea in the early 1980s,¹² and US authorities prepared to sell leases of blocks in waters where Canada had a claim.¹³ In both cases the oil companies refrained from involvement.

The continental shelf around the Svalbard archipelago represents a jurisdictional dispute of a different character. The Spitsbergen treaty of 1920 recognised ‘the full and absolute sovereignty of Norway’ over the archipelago, defined as islands within a geographical quadrangle. It further stated that the provisions of the treaty would apply on these islands and in their territorial waters. The most relevant provisions of the treaty is equal rights for the nationals of the signatories of the treaty to commercial activity and mining, subject to local laws and regulations. This means that Norway cannot favour its own citizens and companies, but is free to enact general regulations. Furthermore, Norway's taxation possibilities are limited. Taxes can only be collected to cover for use on Svalbard. The Norwegian interpretation of the Treaty is that its provisions are not applicable beyond the territorial waters and that Norway has exclusive resource rights on the continental shelf beyond 12 nm. This is based on a restrictive interpretation of the Treaty: it says nothing about the continental shelf. Some states have argued a different view, namely that the continental shelf must be subject to the treaty's provisions since if the signatories in 1920 had known about the shelf they would surely have included it. Variations of this view have been put forward by some states, notably the United Kingdom and Russia, whereas most states have said nothing. Some, like the USA, have reserved their position.¹⁴

Thus the controversy is not about sovereignty – all parties recognise that Norway is the relevant sovereign on the continental shelf around Svalbard–but about the basis for jurisdiction, the Law of the Sea Convention or the Spitsbergen Treaty. And since it is uncontested that Norway as sovereign can determine whether the continental shelf shall be opened for commercial activity, these maritime zones cannot be regarded as contested waters as such. However, a heated dispute might erupt if Norway opened the area for commercial activity on standard Norwegian terms. Such an opening is not in the offing, but in the spring of 2017 the Norwegian Petroleum directorate published an assessment of undiscovered oil and gas resources in the south-eastern part of the continental shelf around Svalbard, which indicated that resources could be much larger than anticipated earlier.¹⁵ This is likely to attract interest from the industry and also to trigger authorities to review their position on the jurisdictional issues. But the Norwegian authorities will probably not open for economic activity on this part of the Barents Sea continental shelf until they have recognition for a regime that suits Norwegian interests.

Outer delimitation of the continental shelf

Delimitation is not only about drawing boundaries between neighbouring shelves. The continental shelf may also extend further than 200 nautical miles, as stipulated by the Convention. Accordingly, ‘The continental shelf of a coastal State comprises the seabed and subsoil of the submarine areas that extend beyond its territorial sea throughout the natural prolongation of its land territory to the outer edge of the continental margin.’¹⁶

The Convention describes in some detail geological requirements for including a seabed area in the ‘extended’ continental shelf, entailing serious scientific documentation. A special commission (The Commission on the Limits of the Continental Shelf) composed of technical specialists has been set up by the UN to review submissions of such documentation. If the commission finds the documentation sufficient, it gives its endorsement, which means international recognition of the outer limit.

With respect to the Arctic, Norway submitted its documentation in 2006 after several years of preparatory work. Accordingly, Norway claimed an extended shelf – beyond 200 nautical miles – in three separate sea areas in the Arctic Ocean, the Barents Sea and the Norwegian and Greenland Seas, totalling approximately 235,000 square km (Figure 1.1). The claims were accompanied with extensive geological documentation.¹⁷ The commission reviewed the documentation, requiring some small adjustments.¹⁸ Other states did not object to the submission as such. The commission delivered its final recommendation on the Norwegian submission in March 2009. This was the first submission concerning the Arctic to be finally processed and meant that Norway now had internationally recognised delimitation of its extended continental shelf.

Figure 1.1 Norwegian continental shelf boundaries.¹⁹

Russia submitted its documentation on 20 December 2001, including the map below (Figure 1.2). In effect, Russia claimed sovereign rights over resources on the seabed area of some 1.2 million square km outside the 200-nautical mile line. Its geological argument was based on the linkage between the claimed areas' ridges on the seab...

Table of contents

• Front Cover
• Title Page
• Copyright
• Contents
• List of Illustrations
• List of Contributors
• Introduction
• Part I Energy
• Part II Marine Living Resources
• Part III Shipping
• Epilogue
• Bibliography