Supply Chains and the Northwest Passage

Stephen DeAngelis

December 13, 2010

Since European explorers first pushed out to sea centuries ago, one of their goals was to find a shorter ocean passage between Europe and Asia. Such a trade route would make the shipment of goods quicker and cheaper (i.e., more profitable). It wasn’t until the early twentieth century, however, that someone (Roald Amundsen in 1903–1906) actually navigated the treacherous oceans of the northern hemisphere. Until 2009, the Arctic pack ice prevented regular maritime shipping for most of the year. Climate change, however, has reduced the severity of the pack ice and shippers are, for the first time, seriously considering the establishment of regular trade routes through the so-called Northwest Passage. Sovereignty claims and other security issues are among the challenges that must be addressed before northern maritime trade becomes commonplace. Canada, for example, considers parts of the anticipated Northwest Passage internal Canadian waters. Trading nations, like the United States and some European countries, assert that these waterways are, under international law, considered international straits or areas of safe passage that allow free and unencumbered transit. A quick glance at the map below makes it evidently clear why Canada is concerned about this matter.

Northwest passage

To address these concerns (and other security issues related to the widening of the Panama Canal), the United States Navy hosted a two-day “shipping game” last week at the U.S. Naval War College in Newport, RI [“U.S. Navy inviting executives to play ‘shipping game’,” by Andrea Shalal-Esa, Reuters, 8 December 2010]. What was unique about this exercise is that it involved participants from the business world as well as traditional participants from the security sector. Shalal-Esa wrote her article just as the game was scheduled to begin. She reported:

“Executives from top U.S. companies, including Wal-Mart and Exxon, are teaming up with the U.S. Navy … in a ‘gaming’ exercise to study how a warming Arctic Ocean and the widening of the Panama Canal could dramatically change global shipping. The complex two-day exercise, which begins Wednesday at the Naval War College in Newport, Rhode Island, will look at the security concerns and massive investments that may be necessary to cope with the shake up of global trade routes.”

Since its founding during the American Revolution, the U.S. Navy has touted itself as a protector of international shipping lanes. Even during the height of the Cold War, the Navy routinely conducted “Freedom of Navigation” exercises that sent warships through disputed passages to make the point that these routes, under international law, were permitted to be used by all nations for peaceful transit. Just after assuming his position as Chief of Naval Operations, Admiral Gary Roughead partnered with his counterparts from the Coast Guard (Admiral Thad Allen) and Marine Corps (General James Conway) to develop a new Maritime Strategy [“A Cooperative Strategy for 21st Century Seapower,” October 2007]. This new strategy was intended to broaden the security framework around “seapower” to include all aspects of U.S. national power: diplomatic, intelligence, military, and economic. As noted in the introduction of the document, “citizens were involved in development of this strategy through a series of public forums known as the ‘Conversations with the Country.’ Three themes dominated these discussions: our people want us to remain strong; they want us to protect them and our homeland, and they want us to work with partners around the world to prevent war.”

Enterra Solutions played a small role in these “Conversations with the Country.” Enterra’s Senior Director of Research and Communications, Bradd Hayes, a former professor at the Naval War College, was contracted to support them. As these “conversations” took place, it was clear that the Navy’s vision of seapower was expanding and that it wanted to be more inclusive as it moved its strategy forward into the twenty-first century. Admiral Roughead obviously remains committed to this course. “I want people who are looking at this through a different lens,” he told Shalal-Esa in an interview. “He said the Navy needed industry’s input to map out the broad economic, military and environmental consequences of both a wider Panama Canal and the warming Arctic.” The “shipping exercise” clearly fits into the broader framework envisioned by Roughead, Allen, and Conway. In the Strategy they wrote, “This strategy stresses an approach that integrates seapower with other elements of national power, as well as those of our friends and allies. It describes how seapower will be applied around the world to protect and sustain our way of life, as we join with other like-minded nations to protect and sustain the global, inter-connected system through which we prosper.” Shalal-Esa continues:

“‘All too often we go crashing into these things and we haven’t really thought out the problem, or we’ve thought out the problem only through our lens,’ said Roughead, who has been to the Arctic region several times, earning the honorary title of ‘blue noser.’ Roughead said he was ‘floored’ by the interest shown by industry. Analysts say increased commerce through the Panama Canal — and later the Arctic Ocean — could help companies save billions of dollars in fuel and shipping costs. Other companies taking part in the ‘Global Shipping Game’ include [Loews], shipping giant Maersk, Raytheon Co, computer maker Dell, Zurich Insurance, toymaker Hasbro Inc, General Electric Co and railway operator CSX. Port operators, academics and diplomats from Panama and Chile will also help study the two issues, which may also lead to big changes in port cities and railway traffic on land.”

The fact that such a diversified group of participants was willing and anxious to get together to discuss how changing conditions could affect global supply chains is significant. For participating companies, the exercise is a good deal because most of the cost of the exercise was borne by the U.S. Navy. Participants, however, will be able to take what they learn back to their organizations to be used in “what if” exercises they might conduct. I’ve been in touch with one of the individuals charged with running the shipping exercise and he has promised to send me any published results. If I think they are of interest, I’ll post a follow-on blog early next year.

Shalal-Esa explains that the $5.25 billion effort to widen the Panama Canal is due to be completed in 2014 and that the completion of that project “will shake up global trade routes by vastly increasing the amount of cargo that can pass through the 50-mile (80-km) link between the Atlantic and Pacific oceans.” Although that may sound like hyperbole, Dr. Hans G. Payer, a consulting naval architect, assures us that it is not. He wrote:

“The Panama Canal with its geopolitical and economical role has been of enormous strategic importance to world shipping and world trade in the past. It has had such a significant influence, that the existing canal lock dimensions have led to a subdivision of the world fleet between ships which can pass through the Canal up to the Panamax-size and those that can not, the Post-Panamax vessels.” [“Adequacy of Selected Lock Size Parameters for Expanded Panama Canal,” Post-Panamax Lock Size Review Study, 5 December 2005]

Shalal-Esa reports “that the wider canal will allow about 90 percent of global cargo ships to pass through, including 86 percent of tankers carrying liquid natural gas, compared to just 6 percent now.” Turning to the long-anticipated Northwest Passage, Shalal-Esa reports that “the warming of the Arctic Ocean will open the world’s fifth ocean to fishing, tourism, oil and gas drilling, and eventually commercial shipping.” She continues with comments from Admiral Roughead:

“‘We have not seen a change like that since the end of the ice age,’ he told a conference last month. ‘It’s one that will have a significant effect on trade and on prosperity.’ … [He also indicated that the Navy] needed to think about the impact of rising sea levels on big coastal areas and changes in the formerly frozen Arctic. Navy scientists say commercial shippers could save 5,000 miles and lots of fuel by using sending goods from Asia to Europe via the Arctic beginning in the mid-2030s, when they expect ice-free conditions for a full month each year. By 2050,the Arctic will likely be ice-free for two to three months, spurring even greater traffic in the region.”

In fact, Navy Oceanographer Rear Admiral David Titley, claims that “we could be looking at major shipping routes going through the Arctic in just a matter of decades” and that “the Bering Strait could become a key shipping passage in just 40 years.” Shalal-Esa reports that Admiral Roughead “hoped early attention, including [the] gaming exercise, would stave off crises later.” In her interview with Roughead, he noted that “investing in Arctic activities would be ‘really expensive’ for industry initially, given the austere environment, but [those investments] could also provide big rewards. … ‘The economics are going to drive when it makes it worth somebody’s while to go up there to either take advantage of the transportation or take advantage of the resources. Because they’re going to go up to make money,” he said.” Taking advantage of the resources is one reason that the exercise will also “look at the United Nations Convention on the Law of the Sea, a treaty which defines the rights and responsibilities of nations in their use of the world’s oceans.” She continues:

“The United States abides by the treaty, but has not ratified it, despite strong pleas by Roughead and others. ‘It’s extraordinarily important that we as a country become party to that treaty. Otherwise we are not going to be at the table when they start talking about how this is going down,’ he said. Roughead said he began focusing on Arctic warming several years ago when he spent time on a submarine there and heard firsthand about changing ice conditions. He said it would probably be about five years before the Navy needed bigger funding to prepare for the opening of the Arctic, but said it was important to understand the issues involved now to allow for better budgeting and planning later. Decisions will eventually have to be made buying new ships to operate in the region or hardening existing ships to deal with the extreme cold of the North Pole; buying more satellites to relay communications; and related issues, he said.”

To learn more about the United Nations Convention on the Law of the Sea and why some people believe it should be ratified, read the comments of two serving military officers, Butch Bracknell, a Marine lieutenant colonel and Senior Fellow at the Atlantic Council of the United States in Washington, and James Kraska, a commander and professor of law at the Naval War College in Newport, RI [“Ending America’s ‘sea blindness’,” Baltimore Sun, 6 December 2010]. Commander Kraska participated in last weeks exercise. Among other things, Kraska and Bracknell write:

“From 1973 to 1982, the United States, working with the other major maritime powers, led negotiation of the Law of the Sea Convention. The nation was successful in securing the right of American submarines to transit throughout the world’s numerous international straits without surfacing; the right to conduct air, surface and subsurface naval activities and intelligence missions anywhere in the oceans beyond a narrow 12-nautical-mile territorial sea; and the right to innocent passage inside the territorial seas of other states. These provisions are absolutely essential for American security, so it is troubling that the country is not a party to the convention.”

The most critical portion of the United Nations Convention on the Law of the Sea for those concerned with supply chains is “the right to innocent passage inside the territorial seas of other states.” A significant proportion of the world’s maritime trade takes place close to shore. But even international maritime shipments must often pass through the territorial seas of one nation or another as they ply their way to their ultimate destination. Without this “right,” countries could start charging passage fees that would dramatically increase transportation costs or close off areas for transit completely. Because the widened Panama Canal is just around the corner, ocean carriers have been planning for that event for a number of years. Until now, the opening of the Northwest Passage for several months of the year has really not been on their scope. Although four decades may sound like a long time to prepare for this eventuality, the future always seems to have a way of surprising us. I applaud the Navy and representatives from enlightened companies who assembled together to think ahead.