Archive

No. 2, 2009

Prof. Yury Yershov ,
Dr. Sc. (Economics), Deputy Director of the Research Institute for Foreign Economic Relations of the Higher School of Economics (State University)

THE BLACK GOLD OF THE ARCTIC OCEAN


Development of hydrocarbon fields in the Arctic has an important role to play in the development of the Russian economy in the 21st century

Russia has the most extensive continental shelf, with the Arctic accounting for 85% of the total. Therefore, offshore field infrastructure development is a priority for the country. According to the Program of Hydrocarbon Development on the Russian Federation Shelf, offshore gas production is to reach 170 billion m3, and oil and gas condensate to exceed 10 million tons a year by 2030. The program identifies the Barents Sea, the Gulf of Ob and the Taz Bay as the key areas for gas production. Particular emphasis is made on the Shtokmanovskoye field with its estimated reserves of 3.7 trillion m3 of gas and 31 million tons of condensate.

The cherished Arctic "cake"

For the last few years, world public opinion has been fixed on a novel global problem related to developing the Arctic which occupies one sixth of the Earth surface including two thirds of the Arctic Ocean. Today, there are eight (rather than seven as it used to be) states, including Iceland, claiming a share of the Arctic.

The value of the matter concerning participation in the future redivision of the ocean is really high. According to the new U.S. Geological Survey, the region accounts for 30% of the world undiscovered reserves of natural gas (46.7 trillion m3) and 13% of undiscovered reserves of oil (in excess of 12 billion tons of oil and 6 billion tons of condensate). The purely estimated cost of oil production in areas that are most easy to develop and access would be $35 to 40 per barrel, and from $40 to 100 per barrel across the region. The polar subsurface also contains other valuable resources, in particular, gold, platinum, tin, nickel, etc. Of course, not all of the above mentioned reserves are concentrated in the undivided part of the Arctic, as these also include the reserves in the economic zones of the Arctic states and their mainland coastal areas to the north of the Polar Circle. Nonetheless, as far as the remaining reserves are concerned, in today's situation, where the price of oil reached $150 per barrel in mid-2008 and the world requires almost a 0.7% increase in energy consumption for each percent of GDP growth, the Arctic game is worth the candle.

The ongoing global financial and economic crisis tends to scale down energy demand, but one should bear in mind that crises come and go, and as they are gone, an economic upturn begins, with much higher energy consumption.

The Arctic region has another attractive feature: transcontinental systems which are still under development - the Northern Sea Route and the Northwest Passage from Canada to Greenland. These shipping routes can link European and Pacific sea routes and, due to reduced transportation costs, encourage business ties between foreign partners, Russia in the first place.

The international law framework

The 1982 UN Convention on the Law of the Sea signed by 140 states is a key international document granting the countries having access to the sea the right of control over the offshore area, the seabed and subsoil.

The Convention establishes sovereign rights of coastal states over the territorial sea within the limit of 12 nautical miles and over exclusive economic zones extending for 200 nautical miles from the coast line. The Convention also establishes the coastal states' right of control over the continental shelf viewed as the natural prolongation of the land territory of the coastal state to a distance of 200 nautical miles.

In the exclusive economic zone and on the continental shelf, the coastal state-party to the Convention has the exclusive right to use marine resources, for instance, to fishing, and exploitation of the seabed, in particular, arrangements for mineral resources production.

For countries wishing to extend their exclusive right to the shelf beyond 200 nautical miles, the Convention establishes a special procedure requiring a relevant mandatory application to be prepared and submitted to the UN Commission on the Limits of the Continental Shelf for decision-making. In the event of a favorable decision, a given state shall acquire the right to extend the shelf beyond the 200 nautical mile zone and to have control over exploration and production of mineral resources there. However, the state shall not be entitled to constrain fishing by third countries in the extended zone.

The main criterion of whether a country's wish to extend the shelf is lawful or not is determined by the data on the submarine topography in the areas applied for, supplied with relevant depth indicators and information on the submarine geological structure, sedimentary rock thickness and geological and geophysical specifics evidencing that the area applied for is the prolongation of the 200-mile-zone continental shelf.

It is important to note that only four coastal states are actually entitled to shelf extension beyond the 200 mile zone as they have the relevant continental shelf extending from their coast. These are: Russia with its Siberian continental shelf; the United States with the continental shelf in Alaska; Greenland which is an autonomy within Denmark; and Canada with its continental shelf.

The heart of the Arctic problem

For Russia, given its geographical position, history and economy, the Arctic is a most important strategic region. Speaking at the September 17, 2008 Security Council session, RF President Dmitry Medvedev pointed out that up to 20% of the GDP and 22% of total Russian exports are produced in the Arctic region. "According to expert estimates," he said, "the Arctic continental shelf may contain nearly a quarter of the world's hydrocarbon resources, and exploitation of these resources would be a guarantee of Russia's energy security as a whole."

"It is one of the main objectives of the state," RF President Dmitry Medvedev stressed, "to make the Arctic a resource base for Russia in the 21st century." To this end, it is necessary above all to ensure reliable protection of Russian interests in the region and also to develop a solid legal framework regulating Russia's activities in the Arctic, in particular, to secure enactment of a Federal law on the southern limit of the Arctic zone and to have the outer limit of the continental shelf fixed in a treaty.

Going back to issues related to the international maritime law, it should be noted that Russia signed the 1982 UN Convention on the Law of the Sea in 1997 having abandoned the claim to the sole possession of the Polar areas by the USSR recorded in a Soviet Goverment Decree of 1926. According to that document, the Soviet Union's possessions reached the North Pole and went along the longitude line up to the middle of the Bering Strait in the east and up to its land frontier in the west.

Upon signing the Convention, Russia launched a policy aimed at extending the continental shelf beyond the 200 mile zone. In 2000, a relevant study was prepared to justify Russia's claim concerning the establishment of the outer limit of its Arctic continental shelf to include the submarine Lomonosov Ridge, the Mendeleyev Elevation and the Submariner Basin. In toto, Russian claims, according to the RF Ministry of Natural Resources, consist in the establishment of an outer limit of its continental shelf which would add up to 1.5 million m2 of the shelf with forecast hydrocarbon resources of 4.9 billion tons of oil equivalent. By now, the Russian Ministry of Natural Resources and Ministry of Defense, which are in charge of the Arctic shelf issues, have completed collection and processing of evidence to confirm, according to Russian experts, that the Lomonosov Ridge and the Mendeleyev Elevation belong to the Russian continental shelf.

Russia was the first country to prepare and deliver, according to the official procedure, an application for the establishment of its shelf limits. This was done in 2001. However, the application was returned as requiring improvement in the form of additional data to confirm the natural prolongation of the shelf as part of the continental platform.

It should be noted that the Russian application notwithstanding, Denmark still claims that the 1600 km submarine Lomonosov Ridge geographically belongs to Greenland, and it is thereby entitled to declare the North Pole its sphere of interest. At the same time, Canada claims that it has unquestionable evidence of the Lomonosov Ridge being the prolongation of the North American plateau.

Two different approaches to the issue of the Arctic Ocean floor, still not appropriated, emerged in the Arctic policy. One is the so-called sectoral approach based on division along the meridians meeting at the Pole (Russia, prior to ratification of the Convention, and Norway). The other approach is based on division along a midline with the border being equidistant from the coastline of coastal states. This principle is favored by Denmark, Canada and UN experts. If the latter is opted for then the North Pole would go to Denmark, and if it is the sectoral approach then all claimants would have access to the North Pole. The United States will find itself in a difficult situation whether the sectoral or the midline principle is applied.

Russia's position on this complex issue is fairly clear. During a ministerial conference in May 2008 in Greenland and a two-day ministerial conference in Russia, Russian Foreign Minister Sergey Lavrov explained the position of Russia referring to the Russian flag fixed on the floor of the Arctic Ocean in August 2007. He said that Russia laid "no claims to this area, neither can it have. There is the UN Convention on the Law of the Sea, mechanisms for its implementation, including with regard to the continental shelf. This mechanism is honored and respected by Russia as well as by other countries."




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Oil of Russia, No. 2, 2009
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