The Arctic contains the largest untapped reserve of hydrocarbons in the world. International Energy Agency surveys estimate that undiscovered reserves above the Arctic Circle could exceed 25 trillion cubic meters of natural gas and 150 billion barrels of oil. But the mineral resources most attractive for China are rare earths. The Arctic region, in particular the Danish territory of Greenland, is very rich in rare earth elements (REE) deposits. Estimates place Greenland's undiscovered REE reserves above 12 million tons, nearly 10 percent of global reserves.
In addition to REE, the Arctic is very attractive to China because it could offer much faster shipping lanes between China's export ports and the high-yield markets of Europe and the Eastern Seaboard of North America as well as the possibility of bringing raw materials from Siberia to Chinese ports. Shipping distances, and thus costs, could be reduced by 30 to 50 percent if the northern sea routes were used instead of traditional shipping lanes around the Strait of Malacca and the Panama Canal. Shipping between Shanghai and Hamburg would be 6,400 kilometers (4,000 miles) shorter, saving about six days, if Arctic routes were used instead of the Malacca and Suez routes.
Many Challenges, a Few Opportunities
Access to this mineral and shipping boon depends on the ongoing global warming trend and the rapid decrease of the ice cover on both land and sea. This is the main problem with the development of shipping lanes: It takes time. While climate warming takes place most rapidly in the Arctic, there is still significant ice cover during most of the year, restricting shipping without icebreaker escort to a couple of weeks during the summer. Estimates vary significantly, but it would be unrealistic to expect a completely ice-free route in the Arctic — one that would remain open for at least half the year — for another decade or two at the earliest. Additionally, the insurance premium on the risk of iceberg collision and draft restriction on the Arctic coastline will outweigh the savings on lower shipping times in the short to medium term. This means the bulk of China's shipping will have to transit traditional routes for at least the next decade.
Other problems stand in the way of China's being able to access the Arctic's oil and natural gas wealth. Although hydrocarbons are, in value, probably the most important resource of the Arctic, China likely could not directly tap into them. First, more than two-thirds of these reserves are situated within Russian territorial waters. Second, China simply does not have the expertise to be a significant technological partner for exploitation in the territorial waters of friendlier nations or territories, such as Greenland.
Accessing Greenland's REE reserves seems to be the most important and viable Arctic strategy for Beijing in the short term. China is already the largest exporter of REE and controls upward of 95 percent of the world's production. It also holds around one-third of the world's known reserves of REE. This, in addition to China's existing experience in REE exploitation, gives Beijing an edge during talks with potential partners. Beijing's interest in Greenland shows its intent to dominate the world's upstream REE production — an increasingly strategic set of resources for high-value-added products. This in turn would allow China to increase its leverage over major consumers of REE, such as Japan and the United States.
Current technological capabilities remain a major obstacle to real REE exploration in the Arctic, but this is not a significant problem for China. As the world leader in REE production, China is less concerned with bringing new REE production online than it is with keeping other countries from increasing their own production.
In order to sway Denmark and Greenland, Chinese investors are reportedly preparing an initial investment of up to $200 million for major infrastructure projects in Greenland, including three new airports and the expansion of port facilities in Nuuk, the capital. China is hoping heavy investment in infrastructure will allow it to replace Australia and Canada as the dominant players in REE mining in Greenland (such mining is still underdeveloped due to the high costs associated with the lack of infrastructure).
There are only eight Arctic nations, and this severely limits China's opportunity for expansion in the region. The reluctance of the United States, Russia and Canada to allow Chinese influence on their northern borders, as well as their capacity to develop the region by their own means, places the three largest Arctic nations out of China's reach.
As Hu's and Wen's visits show, China has mainly focused its Arctic development efforts on the Nordic nations. China's main partners in the region are Sweden, Denmark and Iceland, which have all been severely hit by the financial crisis that has swept the European continent and are looking for high-caliber foreign investment. Unlike Russia, Canada or the United States, these smaller Northern European nations cannot develop the resources of the Arctic by themselves due to the staggering investment costs of developing the world's most inhospitable region and their own precarious financial situations.
China can also be a well-received partner for the development of the European Arctic due to the near impossibility of Beijing's becoming a strategic threat in the region (a concern that has been consistently raised regarding Russia's Arctic ambitions). It also bears recalling that Iceland, Norway and Greenland are not part of the European Union, which is the traditional provider of high-cost infrastructure for its members.
China will have to tread carefully to avoid scaring off its potential Nordic partners. For example, in 2011, Chinese tycoon Huang Nubo offered 1 billion krona ($7.9 million) for 300 square kilometers (roughly 120 square miles) of land in northeast Iceland for developing properties, hotels and other facilities. The bid was met with widespread skepticism within the country, which feared the deal would give China too large of a strategic foothold in Iceland. The deal was amended to change the purchase to a lease and was signed in May 2012 after Wen's visit to the country.
Beijing may also have to accomodate the Nordic countries' extremely liberal politics and regard for human rights if China hopes to access the Arctic's resources. China's usual infrastructure development model, in which it imports the majority of workers from the mainland and provides them with poor living conditions, has already sparked protests in Denmark.
China's involvement in the European Arctic could benefit all of the countries involved, particularly as the fallout of the EU financial crisis worsens. Beijing has given clear signs that it is willing to accommodate the Nordic countries' conditions in exchange for access to the Arctic's wealth, but sizable issues, particularly concerning human rights and worker deals, still must be resolved. A deepening of China's investment in the European Arctic can be expected in the short and medium term, alongside measured diplomatic efforts to bridge cultural and strategic challenges.