The Northwest Passage
Canada (EWC) is a natural resource oriented country and the fortunes of its stock markets are highly sensitive to the economics of natural resources.
At the same time, the world is scrambling to secure long term energy supplies — China (FXI) in Africa and elsewhere, US (SPY) in the Middle East, Russia (TRF) internally with renationalization of energy assets, Venezuela with nationalization of energy assets, Bolivia with nationalization of energy assets, and more.
For these reasons it is particularly significant that otherwise quiet Canada is planning a show of force to reassert its artic territorial claims due to the natural resource potential of the area.
Consider this excerpt from the BBC website, today, July 10, 2007:
“Canada has announced plans for six naval patrol vessels and a deep-water port in the north to assert its claim to territorial waters in the Arctic. Other countries, including the US, say the waters are international territory. The $3bn (£1.5bn) announcement at Canada’s Pacific naval base comes in part to fulfil an election promise.
Ottawa also sees economic potential in protecting its claim to the Arctic, as the area is thought to be rich in natural resources. Since the end of the Cold War, Canada’s modest military and coast guard have only rarely patrolled its northern coast line. Now Prime Minister Stephen Harper says the time has come to re-assert Canada’s claim to the north.”
The waters are known as the Northwest Passage and are used by both the U.S.A. and Russia which have the ice breaker fleet to make the passage passable. However, one aspect of global warming is the decreased ice pack in the Northwest Passage that makes resource exploration and transportation easier than in prior periods.
click image to enlarge
This move undoubtedly relates to aggressive territorial moves by Russia last April, reported by Oil Marketer (4/7/2007):
“Russia surprised the world yesterday, by announcing that it has territorial rights to a significant chunk of Arctic seabed, and is seeking UN approval to develop it for oil, gas, and mining potential. The claim centres on the 1,220-mile long underwater Lomonosov Ridge, which joins Siberia to Canada. According to Russian media, the physical connection to the Russian intercontinental shelf means that the ridge is technically a part of Russia, and therefore open to exploitation.
Shocked Canadians however countered that such a claim could only have validity if Canada, which is also connected to the ridge, were also able to claim ownership of the ridge – along with most of Eurasia.
… If Russia were to simply go ahead and develop parts of the Lomonosov Ridge for exploration, the likelihood is that the world would be unable to enact measures to prevent the country from doing so.”
The Ottawa Citizen news website reports today:
“Government officials say the Arctic patrol ships will cost $3.1 billion. Another $4.3 billion will be spent on operations and maintenance over their 25-year life. Six to eight vessels will be bought, but delivery of the first ship is not expected until 2013.”
The Canadian Territorial Sea Geographic Co-ordinates Order of 1986 encapsulated the Northwest Passage, however, the legal jurisprudence for waters, especially remote, ice clogged, arctic waters, is uncertain.
The United States agrees with Canada that the islands surrounding the waterway are Canadian territory. The United States, however contends that the waterways between the northern Canadian islands are an international strait. The Russian Arctic territorial claim further complicates the issue. Canada’s decision to militarize the zone (although minimally) is a significant escalation of the debate.
Canada aleady has the longest life oil reserves in the form of oil sands, but there are significant environmental risks, including huge CO2 emmissions, associated with that energy source. Artic sources may bring more conventional liquid petroleum or gas resources to Canada.
Developments and resource findings in this region are worth watching, because they have the potential to increase the value of the Canadian economy and therefore key related resource stocks and the overall country stock funds (e.g. EWC).
We view this as a slow motion positive for Canada and those energy companies that gain contracts to explore and produce in Canada, where contractual agreements are likely to be kept and honored and where terror risks are low.
Richard Shaw
QVM Group LLC
disclosure: author does not own security mentioned in this article