Arctic resources: Now it’s their turn | The Economist

An article in this week’s Economist brings back to mind a thought that occurs from time to time. The article discusses the emerging response of the Inupiat throughout the Arctic to resource development. Arctic resources: Now it’s their turn, Economist, Mar. 3, 2011.

The passage from the piece that brings the recurring thought to mind is the following:

“The Inuit are not against development, but want to ensure that it happens on their terms. This partly means sparing the environment—but it also means receiving their share. ‘For centuries the Arctic lands and waters have been exploited by everybody—except the Inuit. Now it’s our turn,’ Kuupik Kleist, Greenland’s prime minister, said at a meeting in Ottawa. … [At the same meeting] it was the Inuit success stories that most grabbed delegates. One example is the Red Dog Mine in northern Alaska. Created as a joint venture between the operator, Teck Alaska, and the local Inupiat, it has fed much cash—$146m in 2010 alone—into the Inupiat’s coffers. Such deals may be too steep for the appetite of many resource companies with Arctic dreams. But the increasingly interconnected Inuit are unlikely to settle for less in one country when they know what their counterparts have received in another.”

Joint venture arrangements between private and state owned oil companies for the development of state owned resources is a common practice throughout the international oil industry. As a recent paper concluded, “[t]oday for an international oil company to operate in any major country it needs to build a joint venture partnership with the national oil company.” C. Crandall, D. Das, G. Goenka, J. Whittaker, J, Gracey and R. Fulmer, Shell: Seizing global opportunities, focusing on local partners, Thunderbird School of Global Management, Aug. 11, 2010.

Interestingly, the exception to that rule is in the United States. Here, the international oil companies have forged ahead without involvement with a local partner. That is understandable for a number of reasons. Many of the international oil companies originally are from the U.S., or at least have a portion of their roots in the U.S. The U.S. also has not formed any “national oil companies” with which to participate; instead, the participation model of the federal and state governments in the U.S. has been to follow the private mineral interest example and participate passively, by leasing the mineral interests the government owns to the oil companies, in exchange for a percentage share of the revenues which may result.

The Economist piece raises the question again, however, whether the more normal international model would work better for Alaska and Arctic development. One of the benefits of the international model is that it provides the local stakeholders with an economic interest in the potential rewards of the development project. Certainly, the potential for reward comes with risk, which the local stakeholders need to be prepared to accept as well. But the benefits to the private oil company from direct local stakeholder ownership involvement potentially are significant.

For example, if local stakeholders have a direct economic interest in a project, they will suffer from delay in the same manner as the private investors. This aligns both parties’ interests in promptly developing solutions to any impediments facing the project. As with local partners in the international context, local stakeholders also can be very helpful in navigating local concerns and laws that otherwise might be unfamiliar to a more remote investor. Additionally, state oil company involvement potentially results in better governmental understanding of the industry, and thus a better approach to industry issues. As a recent study by the World Bank puts it:

The presence of a strong NOC, supporters say, benefits overall efficiency levels in the industry, and thus improves total value creation. The most commonly cited argument in this context is the role of NOCs in reducing the state’s informational asymmetries vis-à-vis private operators, which leads to better sector regulation and less opportunities for rent seeking and rent skimming. … The establishment of NOCs enable[ ] governments to gain first-hand information on the operational and financial conditions facing all companies, and to establish a benchmark against which they could judge the performance of the POCs. NOCs thus provided the producing states a “window to the oil industry” (Grayson 1981, p.10).

Overview of the Political and Economic Arguments in Favor of and Against the Establishment of a NOC, The World Bank Group, June 2009 at 20-21.

As the World Bank study points out, there are potential downsides from state oil company participation in resource projects. Id. At 24-35. There are some significant success stories, however, where the downsides have been avoided and state oil company participation in national resource development has produced significant benefits. See, e.g., R. Gordon and T. Stenvoll, Statoil: A Study in Political Entrepreneurship, Japan Petroleum Energy Center and The James A. Baker III Institute for Public Policy, Rice University, March 2007. The question is whether those benefits are possible through local and state ownership in the development of Alaska’s Arctic resources. See P. Epler, Let’s Call it … Alaska Oil Inc., Alaska Dispatch, Sept. 28, 2010.

Bottom Line:  Maybe its time to be thinking about a different model for approaching Arctic resource development.