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Diamonds to Oil Bring Gold Rush Dreams to Melting Arctic

By Isaac Arnsdorf
April 30, 2014 2:01 AM EDT 16 Comments
A full moon helps illuminate the Alaskan pipeline under the glow of the Aurora Borealis near Milne Point, Alaska.
Photographer: Greg A. Syverson/Getty Images
A full moon helps illuminate the Alaskan pipeline under the glow of the Aurora Borealis near Milne Point, Alaska.

Hugh Short wants you to invest in an emerging economy with few people, fewer buildings, and which is melting at the fastest pace in millennia.

He’s talking about the Arctic, which Scott Minerd, the chief investment officer of Guggenheim Partners LLC, calls “not just the best opportunity of our generation, but of the last 12,000 years.” Short, a native of Alaska, said Pt Capital LLC, which he co-founded last year, is the first and only U.S. private-equity firm dedicated to investing in the Arctic.

Short, 41, is attempting to raise $250 million for the firm’s first fund by year-end. The ex-mayor of the frontier town of Bethel and former head of Alaska’s state investment arm plans to leverage his local connections and financial experience to develop the Arctic’s resources for the people who live there. Investors are wary while environmental groups warn of risks from oil spills and mining that would ravage the landscape.

“Unlike most of the planet, the Arctic still contains uncharted mysteries,” Santa Monica, California-based Minerd, whose firm is considering investing with Pt Capital, said in an e-mailed response to questions on April 7. “With a great deal of the development still in the planning stages, few investors are fully aware of just how great the opportunities are.”

Investment Wave

Climate change is making the Arctic’s natural resources accessible for the first time, including about 22 percent of the world’s undiscovered oil and natural gas, the U.S. Geological Survey estimates. The region, about 5.5 million square miles (14.5 million square kilometers) comprising parts of the U.S., Canada, Greenland, Iceland, Norway, Finland, Sweden and Russia, is also home to deposits of gold, silver, copper, zinc and diamonds.

While Short said he helped close more than $500 million of deals in industries from energy to real estate and mining while working at Alaska’s state investment bank and a regional development corporation, Pt Capital is his first venture into private equity. He declined to say in an April 18 phone interview how much money he’s raised so far.

What’s clear, though, is that he represents a wave of Arctic investors, both large and small.

The Arctic Opportunity

Companies will spend an estimated $100 billion in the Arctic over the next decade, according to Lloyd’s of London Ltd, the world’s oldest insurance market. A joint venture of Exxon Mobil Corp. (XOM) and OAO Rosneft is set to start its first Arctic oil well in the Kara Sea this year, a project that might fall victim to U.S. sanctions on Russia over Ukraine. The region has a $520 billion economy, with 7.1 percent annual growth, according to Short’s research.

Industrial Transformation

Short envisions an industrial transformation of the Arctic, an unprecedented build-out of oil wells and mines, new roads and pipelines, with ports serving merchant ships using the Arctic Ocean as a shortcut between east and west. Anchorage, where he lives, will become a financial center, “the Houston of the North,” he said.

Guggenheim, a New York- and Chicago-based firm that manages more than $210 billion in stocks, bonds, real estate and infrastructure such as pipelines and electrical equipment, sees value in Arctic projects such as new deep-water ports and toll roads whose fees will rise as trade grows, Minerd said.

Since those investments take longer, Short said he’s more focused on service and support companies including equipment suppliers for now. Firms in Canada, Alaska or Greenland might expand to other parts of the Arctic, and they need capital from sources such as his fund, Short said. Investing in infrastructure will come later.

Climate Change

Today’s Arctic remains largely untouched tundra, even as the region is warming faster than other parts of the planet, with the average air temperature in the U.S. Arctic set to rise by 4 degrees Fahrenheit (2.2 degrees Celsius) in the next 30 years, according to a 2013 Interior Department report to President Barack Obama. Arctic sea ice covers half the area in summer that it did in 1999.

The Arctic is a hostile environment for industry and its development will create a backlash, Michael Klare, a political science professor at Hampshire College and the author of “The Race for What’s Left,” said at a conference at Tufts University in Medford, Massachusetts, last month. There’s a “tremendous irony” that burning fossil fuels has contributed to global warming, which makes it possible to extract more fossil fuels in the Arctic, he said.

Putting money into the Arctic is too far-fetched to consider, according to Washington-based Carlyle Group LP, which manages more than $189 billion.

Political Opposition

“It is such a frontier place,” Marcel van Poecke, managing director of Carlyle International Energy Partners, said in an interview at a conference in Lausanne, Switzerland, on April 2. “That is for the big oil companies.”

The Norwegian government’s plan to permit drilling closer to the Arctic ice cap in order to extract more oil and gas is being opposed by politicians who say it may harm plant and animal life. Key political allies of Norway’s Conservative Party-led government are pushing to cut plans to offer 54 blocks in the Barents Sea to explorers such as Statoil ASA (STL) and France’s Total SA.

“It’s overly optimistic and premature that you can go into the Arctic and safely and practically develop for oil and gas,” Chuck Clusen, director of Alaska projects at the Natural Resources Defense Council in Washington, said by phone March 27. “In the U.S. Arctic, even in the best two months, July and August, you can’t operate to deal with an oil spill almost 50 percent of the time because of winds that create high waves, because of broken ice.”

Greenpeace Arrests

Last year Russia arrested Greenpeace activists who protested at an offshore oil platform. Environmentalists such as the NRDC have mobilized against the Pebble Mine, a massive proposed copper project in Alaska’s Bristol Bay. The U.S. Environmental Protection Agency said in a February statement the mine could harm salmon habitat.

“In a perfect world, sure, we’d love to not have the oil and gas next-door, but that’s not the cards we were dealt,” Short said. “The cards we were dealt is we’ve got to figure out how to coexist in this environment, protect our culture, get the resource development, provide for our families. It’s a much more complicated message than you can put on a bumper sticker.”

Short, whose mother is an Inupiat Eskimo, sees developing the Arctic’s resources as a chance for the region’s native peoples to lift themselves out of poverty and join the global economy. There are no deep-water ports north of the Aleutian Islands. A single highway connects the North Slope to the rest of North America. People in remote villages lack running water. Many subsist on hunting animals such as white-fronted geese, caribou, beluga whales, spotted seals, walruses and polar bears.

Exxon Valdez

Jobs are “the only way for them to educate their children and to create the health-care system that they need and create all the advantages that you want in Boston or any part of the world,” Short said at the Tufts conference. “The only place to get jobs is resource development.”

Short was born in Bethel, a western Alaska town of about 1,000 people at the time. His father, of German and Scottish descent, immigrated to Alaska from British Columbia in 1956, and eventually built his own taxi business.

Short said his first job after college, at the University of Alaska in Anchorage, was with the Exxon Valdez Oil Spill Trustee Council, flying to villages to find out how people had been affected by the 1989 disaster and what they needed.

Franchisee, Mayor

Back in Bethel, Short became the owner of a Subway franchise, an executive of a regional health-care system, and mayor. He said he struggled to understand why his community wasn’t as healthy and affluent as it could be.

In 2006, he attended an annual convention of Alaska natives and heard a speech by Edward Itta, an Inupiat whaler and hunter who was then mayor of Alaska’s North Slope Borough. Itta, who later became famous for negotiating with Royal Dutch Shell Plc over offshore drilling in the Chuckchi Sea, spoke of how crystal meth’s devastating toll on native communities spurred them to take control of defining their place in a changing world, Short said.

“We should be getting more financially than what model has been used in the past,” Itta, now a member of the U.S. Arctic Research Commission and an adviser to Pt Capital, said in a March 23 phone interview.

Short became head of an investing arm of the Arctic Slope Regional Corp., which represents 11,000 Inupiat Eskimos in northern Alaska villages. In 2011, Governor Sean Parnell appointed him to the Alaska Energy Authority and the Alaska Industrial Development and Export Authority, the state investment bank, where he became chairman.

Short said he began to see the challenge for global investors to navigate the Arctic’s political, environmental and social complexities.

“If I look back 30 or 40 years from now and we’ve failed on actively addressing how to bring benefits back to those communities, then ultimately I’ve failed in my job,” Short said. “I looked around and said, ‘Who’s doing it? No one’s doing it. I know how to do it.’”

To contact the reporter on this story: Isaac Arnsdorf in New York at iarnsdorf@bloomberg.net

To contact the editors responsible for this story: Millie Munshi at mmunshi@bloomberg.net Philip Revzin, Steve Stroth

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