The Fuse

China Races for Arctic Dominance

by Bradley Nelson and Paul Ruiz | June 06, 2018

For decades, commercial access to the Arctic has been limited by prohibitive sea cover and conditions that make traversing its vast expanse enormously challenging. But much of that will soon change. According to recent reports, the Arctic Ocean could be almost entirely ice-free by the late 2030’s, providing access to new energy resources and navigable sea routes. Increased competition for the region’s resources is already underway as countries exert even greater geopolitical influence in the area. Last month, China—a country without territorial claims in the Arctic—joined the Arctic Council as an observer, calling itself a “near-Arctic” nation.

China—a country without territorial claims in the Arctic—has joined the Arctic Council as an observer, calling itself a “near-Arctic” nation.

Alongside new infrastructural investments throughout the region, China’s involvement in the Arctic could have ramifications for global oil markets. The amount of petroleum sent to China from the Middle East through the Strait of Malacca has steadily increased, despite efforts to diversify supply and find new routes through Sri Lanka or Pakistan. Over the next decade, traffic in the Strait of Malacca is expected to double, possibly leading to more accidents and slower oil transit times. According to the EIA, this potential blockage of the Strait would force nearly half of the world’s shipping fleet to reroute around the Indonesian archipelago, tying up global shipping capacity, adding to shipping costs, and possibly putting upward pressure on oil prices.

Unrestricted access to Arctic sea routes will further link China’s developing economy with some of the world’s most advanced markets, including the United States, Canada, and Norway. Goods shipped from Beijing to Europe often traverse more than 15,000 nautical miles and pass through several dangerous thoroughfares including the Strait of Malacca and the Bab-el Mandeb off east Africa. China’s trade in goods are worth some $4 trillion each year, 90 percent of which are transported by sea. Reducing transport times and costs by even a fraction could result in significant savings and reduce the need to pass through congested routes such as the Panama Canal or Strait of Malacca. One estimate suggests a “polar silk route” could cut China’s shipping distances from 30 to 50 percent.

By 2025 the U.S. may be exporting more than 4 Mbd of light and sweet crude, of which over 2.5 Mbd will go to Asia.

While transitioning Arctic conditions are unlikely to affect the bulk of China’s imports, certain trade routes could plausibly shift northward. S&P Global Platts Analytics forecast that by 2025 the U.S. will be exporting more than 4 Mbd of light and sweet crude, of which over 2.5 Mbd will go to Asia. A shorter Arctic route could open the U.S. as a potential source of crude oil supply and feed its growing demand. Fueling this Asian demand could help Washington cut its trade deficit with China and open a new market for U.S. producers whose blends are not compatible with current refinery configurations. Most directly, a Northeast Passage would open China to mature fields in the North Sea—a prospect that has already sparked a flurry of new investment there.

ChinaimportsarcticTraversing the Arctic Ocean

Spanning more than 6,000 miles of the Russian and Norwegian coast, the Northeast Passage is the most commercially viable of the three main routes that connect the Atlantic and the Pacific oceans via the Arctic. The Russians already use the Northeast Passage for limited commercial purposes, but the route has not drawn the necessary investment to achieve broader economic viability, especially as bunker fuel costs have continuously declined over the last few years. Notwithstanding these issues, the prospect of greater Arctic commerce along the Northeast Passage continues to grow. Last year, a Russian liquified natural gas ship traveled from Norway to South Korea along the Northeast Passage without an icebreaker escort for the first time, and China recently vowed to collaborate with Russia on future Arctic projects.

The prospect of greater Arctic commerce along the Northeast Passage continues to grow.

The other two Arctic routes remain difficult, and at times virtually impossible, to access for most commercial vessels including large oil tankers. The Northwest Passage, located along the coastlines of Northern Canada and Alaska, is only passable for two to three months out of the year and is significantly more complicated and time-consuming to navigate due to shallow water inlets and varied coastal terrains. The U.S. and Canadian governments lack the necessary icebreakers and local infrastructure to support large numbers of ships. And the Transpolar Sea Route—possibly the fastest and most direct route from Asia to North America—will only become navigable once polar glaciers have melted away, which may occur in the late 2030s or early 2040s.

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China’s efforts in the Arctic

Global maritime commerce is set to grow substantially by 2030 due to economic growth in emerging countries, additional consumers, and greater resource demand. The exact path of maritime development is not yet clear, but the rapid growth of countries such as China is likely to create new markets for goods and drive up demand for essential energy and mineral resources. Global GDP is expected to increase by nearly 100 percent from 2010 to 2030, and global energy demand is forecast to rise by 40 percent during that time frame. By 2030, China is predicted to represent over 20 percent of global GDP—surpassing the U.S.’ global share and nearly doubling U.S. oil consumption. China’s Polar Research Institute projected that 5 to 15 percent of their county’s trade would flow through the Arctic by 2020, with dramatic increases to follow as access improves and it forms close relationships with Arctic states.

China’s Polar Research Institute projected that 5 to 15 percent of their county’s trade would flow through the Arctic by 2020, with dramatic increases to follow as access improves and it forms close relationships with Arctic states.

In January, China announced the Polar Silk Road Initiative. The policy reinforces its view that decisions over the future of the Arctic should go beyond those countries directly bordering the region. In this context, China has classified itself as a “near-Arctic” nation. Beijing’s plan envisions the development of unrestricted flows of commerce connecting Asia to Europe through the Arctic. China pledged to support efforts to improve transportation conditions on the Arctic Ocean and encourage Chinese enterprises to take part in the commercial use of the Arctic route.

China has already made significant efforts to improve its Arctic shipping capabilities. In 2013, the country’s COSCO Shipping Corporation sent a ship from northeast China’s Dalian port to Rotterdam through the Northeast Passage. The voyage was completed in 30 days, and saved a third of the usual shipping time since it typically takes 48 days to sail the most common route from northern China to Rotterdam via the Suez Canal. The country has also stepped up efforts to build closer relations with Scandinavian countries. A Chinese mining company, for instance, bought mining rights in Greenland. China has also set up a joint Arctic research center in Shanghai with institutes from all five Nordic countries and signed an exploration co-operation deal with Australia.

Impact on U.S. strategic interests

The growing accessibility of the Arctic raises questions over how the U.S. will continue to defend its military and strategic interests in the region.

The growing accessibility of the Arctic raises many questions over how the U.S. will continue to defend its military and strategic interests in the region. China will likely push for freedom of the seas and unrestricted shipping in the region. But due to the lack of clarity over whether the International Law of the Sea applies to the Arctic, and the fact that the U.S. is not yet a signatory to the agreement, the Arctic Council may be the only international organization that delineates territorial rights and arbitrates resource disputes. The legal ambiguity over the region has motivated China to fight for a seat at the Arctic Council and proactively assert its vision.

Meanwhile, the U.S. has only one heavy and one light icebreaker operating in the Arctic and five in its entire fleet. To meet growing demand for icebreakers in the region, the U.S. Coast Guard is accelerating efforts to update and expand its fleet with plans to build six more, with the first scheduled to be developed by 2023. By contrast, Russia has approximately forty Arctic icebreakers, Finland has seven, Canada and Sweden each has six, and by 2019 the Chinese will possess two heavy Arctic icebreakers with many more under development. The U.S. military has only recently begun the process of accelerating the development of a new Navy Arctic Strategy, primarily in responses to faster than predicted melting and China’s aspirations in the region.

Analysts suggest current U.S. efforts might not be enough to counter China’s ambitions. The Chinese have signed numerous agreements with Russia to provide oil and gas resources by both land and sea, and these deals have already begun to pay off for Moscow as Russia surpassed Saudi Arabia in 2017 as the largest supplier of petroleum to China. Chinese companies have also pursued joint ventures with Russian oil and gas companies to extract energy resources from the Russian Arctic and ship it through the Northeast Passage. The economic viability of this route nevertheless remains to be seen. How the market prices in the risks associated with Arctic transport is an unanswered question. Still, the race for the Arctic is just beginning.

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