Client Advisory. Chaos at 90 North: The Northwest Passage and an Arctic Legal Regime. Corporate Department. August 17, 2012

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1 Client Advisory Corporate Department Chaos at 90 North: The Northwest Passage and an Arctic Legal Regime Most continents are surrounded by oceans. The Arctic is an ocean, or at least is fast becoming an ocean, surrounded by continents. After literally centuries of recorded attempts to establish a commercially viable lane through the Arctic from the northern Atlantic to the northern Pacific, and vice versa, global warming now seems destined to open the route, the fabled Northwest Passage, within the next decade. But unless national negotiations settle substantial contested issues by then, the Passage will open (if in fact that is permitted by the relevant sovereignties) against a background of sharply contested claims by the five contiguous countries currently claiming control over part or all of the Passage s geography. Cartographer/Designer: Hugo Ahlenius, UNEP/GRID-Arendal Five countries, Canada, Denmark (Greenland), Norway, Russia, and the U.S. are contiguous to the Passage lanes. Canada and Russia both claim that critical sections of likely Passage components are internal waters giving them exclusive and plenary authority over foreign ships requiring access. Canada certainly owns approximately 19,000 islands in the archipelago does it also own the waters between them? The U.S. flatly disputes such claims and considers the Northwest Passage (the Canadian side of the polar ice cap) and the Northern Sea Route (the Russian side) to be international straits which, while owned by the respective adjacent country, are open for transit passage by all vessels, a right superior to the innocent passage

2 permitted by international law in territorial waters. International straits permit surface passage without the owning state s permission, and submarines may pass submerged, which they cannot do without permission in territorial waters. If coastal permissions are required, the fees could be enormous. One central premise of the legal statuses involved is whether the sea lanes have ever been used for international navigation, which would give the navigators free passage rights, or whether they have only ever been used for internal and coastline trades. The clear answers seem to be absolutely no, and absolutely yes, depending entirely on how the ice happens to melt and move in the relevant period. Should legal rights of sovereignties depend on the prevailing temperatures? We shall see. The U.S., since the earliest days of Nautilus Ninety North, 1 has said consistently that no one owns the Arctic archipelago to the point of possessing the right to preclude transverse, while both Canada and Russia have even claimed ownership of the North Pole, or at least precisely-defined fractional slices of it, so step carefully as you approach! The U.S. was actually the first state to test legal rights in the Northern passage, or specifically to the Northern Sea Route, which runs from the Atlantic to the Pacific in far northern Russia, and has, like the Northwest Passage, become more and more ice-free. About 50 years ago, the U.S. sent the icebreaker USCGC Northwind to the edge of the Vilkitsky Strait along the Northern Sea Route to conduct an oceanographic survey and then blinked first and turned away when Russia threatened to interfere with its passage. Since then, foreign service jawboning has been extensive, and other U.S. ships have tickled at the edges, but no nation has firmly thrown the gauntlet down against Russia with an unpermitted passage attempt. The U.S. in 1969 and 1985 twice directed trial vessels, an icebreaker and then a specially fitted model tanker, through the Northwest Passage without formal permission from Canada. In 1988 the U.S. signed an Arctic Cooperation Agreement with Canada, under which the U.S. promised that all Northwest Passage navigation by its icebreakers would require Canadian consent, and Canada promised always to give that consent. Meanwhile, the Agreement reserves both countries rights, and leaves the underlying substantive issues about the status of passage under international law for another day. But this Agreement also dealt only with icebreakers, leaving all of commercial navigation in the same legal limbo as before. In the last year, 22 ships made the Northwest Passage trip as the ice continued to recede, and about an equivalent number have completed the Northern Sea Route. Russia has quietly supported Canada s claim to Northwest Passage sovereignty, while Canada has been diplomatically just as silent about Russia s rights to the Northern Sea Route. Economic realities therefore seem to have overcome cold war bluster, at least for the time being, and cooperation is the watchword. 2 1 The U.S. Nautilus was a nuclear powered submarine that made the first underwater transit of the North Pole in Nautilus Ninety North refers to the classic account of that voyage penned by the commander of the Nautilus, William R. Anderson.

3 The central legal document on the table affecting transit and natural resource development issues is the United Nations Convention on the Law of the Sea ( UNCLOS ), which provides signatories with a 10-year window to extend their continental shelf rights and control resources on or below the extended shelf area. Of the five relevant countries, all have signed UNCLOS, and all but the U.S. have ratified it. 2 Against that background, the legal situation is completely muddled, with disagreements regarding exactly what category of legal status applies to which specific waters, and with what consequences. National waters typically extend to 12 nautical miles; internal waters are owned by the coastline state, and certain passages, international seaways, permit access despite clear (or unclear) ownership. The claims and the exact metes and bounds of them are a patchwork quilt of inherent conflicts. Far from settling the arguments, UNCLOS seems to have compounded them. Uncertainty revolves around (1) the effectiveness of UNCLOS generally absent full ratification; (2) the exact deadlines for filing or continuing claims to the Arctic and elsewhere; (3) the related rights to a coastline country s Exclusive Economic Zone which extends 200 nautical miles from territorial sea baselines; and (4) exactly how to resolve all of the conflicts created so far and yet to come, namely whether that decision rests with the UN, or in inter-state negotiations, or elsewhere. The only certainty is that very little of the Arctic is not presently subject to some state s legally quite defensible claim, which is actively contested by another one or more state s also legally quite defensible claims. It will take a lot more than sailing in and planting a flag to settle the questions. In the middle of the present chapter of the debate is the UN Commission on the Limits of the Continental Shelf, which has been accepting claims under UNCLOS by the states which have ratified so far, without reaching any definitive conclusions on the merits. Whatever happens there, the next step will involve some progress or not on U.S. ratification, and then presentation of the U.S. position on its claims to the continental shelf resources and the other states positions, on such basic questions as whether critical geography such as the so-called Lomonosov Ridge, an underwater mountain extension, is part or Europe or of Asia or of both! None of this will happen quickly, especially since the related oil, gas, and other resources, to the extent not within settled Exclusive Economic Zones, are potentially so valuable in addition to control of the lanes themselves When UNCLOS was first proposed, the treaty had deep-seabed mining provisions that were opposed by the Regan Administration. Such provisions have been amended to the apparent satisfaction of the current and past three U.S. presidents, who have supported ratification. The recent endorsement of UNCLOS in The Wall Street Journal by five U.S. Secretaries of State in Republican administrations may signal the beginning of a new effort to have the U.S. ratify the treaty. The five authors of the article cite Arctic commercial and maritime claims as a significant reason for revisiting the treaty. The Wall Street Journal, Thursday, May 31, 2012, page A17. In opposition are 34 Republican Senators who promise that the treaty, which they have dubbed LOST, will not be ratified in Website of Senator Jim DeMint (R-S.C.), July 11, A 2008 U.S. Geological Survey estimated the oil and gas resources of the Artic to be approximately 90 billion barrels of oil, 1,669 trillion cubic feet of natural gas, and 44 billion barrels of natural gas liquids. The USGS Fact Sheet reported that more than 400 onshore oil and natural gas fields have been explored in Canada, Russia and Alaska accounting for almost 10 percent of the world s known conventional petroleum resources.

4 Concurrently, the 2008 Ilulissat Declaration among the five principal contestants (i.e., the Arctic coastal nations) states their position that Arctic issues should be settled by negotiations amongst themselves and not by the UN: We therefore see no need to develop a new comprehensive international legal regime to govern the Arctic Ocean. Since two of those states have effective veto power in the UN, negotiations seem destined to create whatever solution eventually emerges. Politics makes strange bedfellows, and one plausible prediction is that Russia and Canada will become logical allies as the inevitable negotiations someday get underway, with the U.S. leading the Team-Rest-of-the-World to argue for open transit perhaps with Suez-level passage fees to enable the primary contiguous countries to shoulder the environmental and economic and security risks involved. Cartographer/Designer: Hugo Ahlenius, UNEP/GRID-Arendal Beyond ownership and control of the transit lanes and rights to the resources, resolution of free passage debates also affects environmental regulation of the area, the rights of indigenous populations, shipping limits and safety requirements, and the relevance of commercial laws which would govern the inevitable disputes between private users of the area in every commercial context. In pursuit of such concerns, notable multilateral efforts include the following: The International Maritime Organization, an agency of the UN, adopted in 2009 guidelines for ships operating in Polar waters that the IMO anticipates will evolve into a mandatory Polar Code addressing shipping operations in the Arctic region, as well as, the impact of such operations on the environment. The eight member states of the Arctic Council (the five countries with Arctic coastlines plus Sweden, Finland and Iceland) concluded the Agreement on Cooperation in Aeronautical and Marine Search and Rescue in the Arctic in 2011 to coordinate rescue efforts notwithstanding conflicting territorial claims. Possibly, insurers will have the final say on the commercial prospects of the region. Insurance considerations for shipping, as well as mining and drilling at Arctic locations, are massive: limited electronic communications, the instability of infrastructure due to climate change (e.g., melting permafrost), uncertain weather forecasting and, of course, ice, ice floes and icebergs. The risks attendant upon the traditional 4

5 shipping routes are well known; the risks for Northwest Passage and Northern Sea Route trips are actuarial puzzles. 4 Nevertheless, because cargo shipped from Kirkenes (Norway)/Murmansk (Russia) to Shanghai (China) or Yokohama (Japan) travels roughly half the distance via the Northern Sea Route than it would via the Suez Canal, today s Henry Hudsons will continue to venture North. Whatever next happens, and when, will be a fascinating milestone in the annals of international trade in a world of global warming. Questions regarding this advisory should be addressed to Robert A. McTamaney ( , mctamaney@clm.com) or Patricia Matzye ( , matzye@clm.com). Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein Carter Ledyard & Milburn LLP. 5 4 Lloyd s and Chatham House have summarized the challenges to risk control presented by the knownunknowns of the Artic frontier in a fascinating report, Arctic Opening: Opportunity and Risk in the High North published by Lloyd s in 2012.