Cold Hard Profits on the Roof of the World
by Carl Delfeld, Global Equities & Emerging Markets Specialist, Investment U
Thursday, September 15, 2011: Issue #1601
I have visited some crazy places in search of investment opportunities, but the Arctic Circle was not at the top of my list.
After all, doesn’t the average person think it’s a huge chunk of ice with some brave Eskimos and lonely polar bears?
But then I learned of some developments under way in the North that have me itching to visit “the roof of the world” in search of adventure and profits.
There are reasons this region needs to be on our radar screen in the coming years… and big players that can make investors a tidy profit when global demand for energy and minerals continues to spike.
The Arctic Circle is huge and at the bull’s eye of the world’s yet-undeveloped natural resources. It represents one-sixth of the world’s landmass, stretching over 24 time zones, but it’s inhabited by only four million people (for reasons that are obvious.)
And the stakes are gigantic. It’s estimated that the region has 25 percent of the world’s undiscovered reserves of oil and natural gas plus, a bundle of important minerals like nickel and cobalt. The total value of these reserves could easily exceed $1 trillion.
For the United States, the area within its current rights to develop could comprise 40 percent of its undeveloped energy reserves. And there’s another interesting story that makes the Arctic a potential treasure trove for investors: Global demand and competition for resources. The Arctic rush is another boost to the global rivalry between the countries that have a stake in the region: the United States, Russia, Canada, Norway, Greenland (a dependency of Denmark), plus Iceland, Sweden and Finland.
But what really makes this an unbeatable story right now is that the region is melting three times faster than expected, creating a “blue ocean” navigable waterway around the Arctic Circle.
This means the region’s natural resources can be more easily tapped and transported with current technology. Plus, some ships will be able move through the circle, saving a lot of time and money getting goods to their markets.
Let’s look at the logistics and trade issue first. Say you’re moving wheat from Hamburg, Germany to Yokohama, Japan. If you travel around the Cape of Good Hope, it is a long journey of 14,750 nautical miles.
Through the Panama Canal it’s 12,780 miles.
The Suez Canal route cuts this to 11,433 miles.
But take the shortcut through the Northwest Passage Route of Arctic and it’s less than 6,000 miles, according the U.S. Department of Defense.
While only some types of ships will be able to take advantage of these savings, the result will be sharply lower costs and bigger profit margins.
The battle over resources in the region is just beginning. The United Nation’s Convention on the Law of the Sea (which the United States has not yet signed) gives countries a right to areas within 200 miles of their shore, but there are loopholes the size of a supertanker in the agreement leading to confusion and conflict.
This means power politics will be played on a global scale. Greenland, the world’s largest island, hopes to gain its complete independence from Denmark by developing its $52 billion of oil and natural gas reserves.
In a story worthy of a James Bond flick, a Chinese tycoon and former Chinese government high level mandarin is seeking approval to build a 300-square-mile resort in the northern region of Iceland. Opponents charge that it’s a play to develop an Asian cargo hub given its proximity to potential deep water ports.
Conspiracy stories aside, the importance of this story was brought home by the recently announced mega deal between ExxonMobil (NYSE: XOM) and Russia’s Rosneft to jointly develop resources in the Kara and Black Seas.
No less than Russian premier Vladimir Putin was present at the signing ceremony lauding ExxonMobil’s track record of managing energy projects and their cutting edge ice technology. The price of the deal was put at $3.2 billion, but this is just the tip of the iceberg.
Over the next five to 10 years, it’s expected that up to $200 billion will be spent on joint development projects. Pipelines will need to be built to transport oil and gas and around 10 new ice proof platforms will need to be constructed in the Kara Sea at a price tag of $15 billion a pop.
ExxonMobil is just a start. I’m going to find out for Oxford Club members which smaller companies will potentially snag this bonanza of business.
Keep your eye out for more on this fascinating story which will surely yield us cold, hard profits.
Good investing,
Carl Delfeld
Article by Investment U
