GREENLANDIC NATURAL RESOURCES -HOW TO IMPROVE … · factors influence on the profits of the companies, and the positive effects of the society. Among these factors we find access

GREENLANDIC NATURAL RESOURCES -HOW TO IMPROVE REGIONAL VALUE CREATION AND RIPPLE EFFECTS

Background Paper for the Committee for Greenlandic Mineral Resources to the Benefit of Society Bodo, December, 2013

Odd Jarl Borch, Bodo Graduate School of Business,

University of Nordland, Norway,

[email protected]

SUMMARY

In this note we emphasize the factors that influence on the profit, value creation and regional

ripple effects of large-scale natural resource exploitation. A broad range of supply and demand

factors influence on the profits of the companies, and the positive effects of the society. Among

these factors we find access to and the competitiveness, of regional input factors such as labor

and supplies, and the demand side including both market growth and the exploiting companies

development concepts, technology and policy. Of special importance from the producer side is

the time frame for exploration and exploitation, technology used with respect to automation of

production, the mix of work force hired and the competiveness of the work force in an

international market, the degree of regional processing of raw materials, and the localization of

the producers’ administration and specialized staff. In a high cost country like Greenland the

producer will try to cut costs through automation processes, and limit the local value added

processing. Also, projects may be run from outside the region in so-called integrated operations,

and supplies sent from abroad.

At the input side, the value creation may depend on factors like available work force at

production level in the region, knowhow and management capability, regional supplier/sub-

contractor companies, risk capital and entrepreneurial culture. Even though there are several

positive efforts, Greenland as a small country has limited resources and is short on every input

dimension. This means that strategies like the timing of new projects, contracts that gives more

responsibility and rights to the developer and producer, and partnerships with companies and

governments in the neighboring countries may be critical for the survival of the project.

Running several projects simultaneously is possible in the exploration process, but may prove

very risky in the production phase. This is especially true as Greenland becomes heavily

dependent on the extremely volatile international markets for raw materials including fish

products. A global recession may after a period of heavy investments have devastating effects on

the Greenlandic economy.

The discussion above also implies that the prognoses for the number of jobs and the

government income presented by the producing company may be on the positive side. More

independent analyses drawing on the experiences from other high-cost countries should be

included.

Committee for Greenlandic Mineral Resources to the Benefit of Society Background paper on value creation

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In the long run, Greenland may have a substantial potential upside related to mining and oil and

gas exploitation. The opportunities for growth in employees and value creation from minerals

and oil reserves depend on the richness of the resource and the world market. The Greenland

government administration and other public institutions are well developed, but have limited

man power. There is a lack of private entrepreneurs and risk capital that may hamper the value

creation effects and lays bigger burdens on the government. The revenue potential is related to

government taxes and royalties, inland employment and ripple effects from infrastructure

investments. Experience, among others from Norway is that the ripple effects will be limited in

the short run but accumulate over time. Additional upside effects may come indirectly through

higher consumption, supplies to projects, especially over time as the know-how, as well as the

subcontractor system and the infrastructure improves.

In sum, the exploitation of natural resources is a high risk venture. The raw material markets

are highly volatile. The exploration and development costs and the operating costs of

exploitation are at a very high level in the Greenlandic setting due to climate, distance to market

and infrastructure limitations. The benefits and incomes depend on the richness of natural

resources and growth in the global economy. There is a risk of limited profit margins on mining

projects in high cost countries like Greenland.

This also means that the downside of this type of commercial activity is significant. There is a

risk of losing investment money at the ownership side, and investing in infrastructure and

preparedness system that will be sunk costs if the project fails. With a significant financial risk,

there is also reluctance from the producer companies to pay royalties and taxes, preparedness

costs, invest in infrastructure development and make use of inland work force.

There is also a risk of pollution and accidents in a very vulnerable environment. Here we may

talk about extreme sums in recovery investments if severe pollution appears.

Availability of input as to work force, knowhow, financial capital and entrepreneurs are at

present limited in Greenland. Providing the necessary infrastructure as to transportation,

housing and service, government administration, accident and pollution preparedness is costly,

but possible. This lack of capability of regional investments means that the net ripple effects will

be limited in the short run. If the government manages to release risk capital from other sectors

Committee for Greenlandic Mineral Resources to the Benefit of Society

Background paper on value creation

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this may make a difference. This funding may provide opportunities for strategic alliances with

foreign companies. However, here is a need for a priority as to projects in exploration versus the

exploitation phase due to capacity limitations. International partnerships with neighboring

countries may provide the platform for a faster exploitation and risk mitigation.



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CONTENTS SUMMARY .................................................................................................................................... 2

1. INTRODUCTION ......................................................................................................................... 6

2. DIFFERENT PROJECT TYPES AND TECHNOLOGY .......................................................................... 9

3. THE GREENLANDIC DEVELOPMENT CONTEXT AND INDUSTRY COMPETITIVENESS ..................... 11 3.1. Introduction ................................................................................................................................................................................ 11 3.2. Input factors ................................................................................................................................................................ ............... 12 3.3. Analysis of strength and weaknesses, opportunities and threats ........................................................................ 15

4. VALUE CREATION AND RIPPLE EFFECTS – SOME ALTERNATIVE PICTURES .................................. 22

5. CONCLUSIONS AND RECOMMENDATIONS ................................................................................ 27



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1. INTRODUCTION

In this paper the focus is on the factors influencing on the potential value creation, profit and

ripple effects of different types of natural resource exploitation. Among the natural resources

that have potential in Greenland we find exploitation of waterfalls for hydroelectric power

production, value added in metal production like aluminum, industry minerals, and energy

minerals like coal, oil and gas. A broad range of factors influence on the profit, local value

creation and community effects. Among these factors we find access to and the competitiveness

of input factors such as labor and supplies, and the demand side including both the market and

the exploiting companies development concepts, technology and policy.

Figure 1 below illuminates some important elements that may influence on the value creation

effects.

NATIONALINPUT

FACTORS

GOVERNMENT AND GOVERNANCE STRATEGIES

TECHNOLOGY AND TIME FRAME

DEVELOPMENT PHASES:Exploration

PlanningConstructionProduction

demobilization

EFFECTS:EmploymentIncome level

Industry structureInfrastructureExernal effects

other industriesExternal effectssocial welfare

Figure 1. Analytical model value creation

MARKET

STAKE-HOLDERS

Stakeholders: There will be different stakeholders related to the natural resources. Stakeholder

conflicts may create problems with access to resources, decision time to start-up, and extra

costs of exploitation. The other way around consensus, partnerships and industry cluster

thinking may speed up the process and increase cooperation as to the creation of ripple effects.

The stakeholders include the national and regional government, political groups, other



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industries related to the region such as the fisheries, tourism sector, leisure time users, and

environmentalists.

Input factors: The availability of input factors such as labor, financial, organizational and

human capital together with infrastructure is critical as to cost of exploitation and the

opportunity for regional and national income. Within a small country there will be considerable

limitations as to the necessary input factors, especially in the short run. This is especially true

for the access to financial risk capital and access to know-how. Here the time frame and the

active promotion of the local suppliers are important to increase local supplies. There will also

be conflicting interests as to the scarce resources, especially skilled workers. Available input

resources as well as the market prospects will be critical for the development of the projects, the

speed of exploration and the size of production.

The global market for natural resources: Investment in raw materials in a region like

Greenland is a high risk venture. The market side is of critical importance for the timing of high

risk investments. The long time horizon and the extreme fluctuations in market prices for

natural resources will provide a high degree of uncertainty for most types of natural resource

except for oil, where increased demand and reduced production opens for prosperous markets

in the foreseeable future.

Phases of development: The different phases of exploration and exploitation will provide value

creation and ripple effects in different fields. As an example, the construction phase will need

much specialized competence that will not be available from local companies. This capacity will

be bought from the market leaders in the global sub-contractor markets. Most of the technical

constructions will also be pre-fabricated modules manufactured globally and transported to

Greenland. The production phase will potentially give more stability and more focus on local

employment and supplies. For large installations there will be a significant maintenance and

development market for upgrading of the installations. If more projects are scheduled, the local

willingness to invest in added production capacity may increase. More risk capital and skilled

workers will float to the region. Secondly, positive learning effects within the regional

subcontractor system will increase their competitiveness on contracts. Thus, the local value

added production and ripple effects will increase over time, and if more projects are launched.



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Technology: The technological concepts chosen for the exploitation is critical as to local ripple

effects in the long run. Regional administration is important in this respect. Secondly, the

production concepts are of importance. A high degree of automation, as well as a lack of value

added activity will reduce local effects. Location of the different functions and parts of the value

chain is important. For example a floater production of oil at sea represents less local

employment compared with a pipeline to the coast and shore terminals for processing and

distribution. The most attractive jobs for the younger generation in Norway are within the

administration and engineering companies within interesting and well-paid jobs. Finally, the

supply policy of the exploration and production company is important. As an example, the oil

companies BP and ENI has in their last oil field development projects in Northern Norway split

contracts in smaller parts giving more opportunities for the small and medium-sized enterprises

in the region to bid for contracts.

The Government: The government regulations, contribution to infrastructure and government

support of input factors such as financial and human capital are critical to local effects. For

example, lack of capacity combined with severe regulations, bureaucracy, and high taxes will

increase the costs of the developer and reduce the willingness to invest and scale up the

projects, especially when future markets are volatile. High risk industries like mining with

extreme costs related to exploration and construction means that the investors will be reluctant

as to start-up. This may call for a discussion on government strategy as to ambitions of income

and ripple effects, especially in the short run. The government may smooth the development

project through providing risk capital to venture funds and local banks. In Norway, the

government development agency Innovation Norway provides investment subsidies and low

cost loans to the regional companies to increase innovation and production capacity in the

region. Thus, the national government may remove market imperfections as to critical input

factors and reduce investor risk.



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2. DIFFERENT PROJECT TYPES AND TECHNOLOGY

In this chapter we give a short description of the different resource types and the technology

and input needed for exploitation. We include a discussion on the time frame from the search

phase to the production start, and the necessary input factors in the different phases. Especially

offshore petroleum projects will undergo very different phases, with a broad range of sub-

suppliers involved, and a high technology level for the concepts used. Of importance is also the

organization of the project. Local management of the fields may provide a broader range of jobs,

especially for persons with academic competence. However, this depends on the long-term

prospects of the project and the available competence.

The factors below influence significantly on the local value creation.

• Time frame as to exploration and exploitation

• Degree of automation of production

– The mix of work force and technology in production

• Degree of regional processing

– Raw material only or some form of value added processing

• Regional management location

– Operational management located in region or centralized

As an example, for oil and gas exploitation there will from the start exists a need for supply

bases, a local administrative representation from the operator company, as well as vessels for

chasing of seismic surveys, drilling rigs offshore service vessels out from supply base. For

several years, there has been drilling activity along the Greenlandic west coast. Royal Arctic Line

has been good at providing base supply services both at Nuuk and Aasiaat. However, all the

ships and platforms included in the activity have been from other countries, mainly Norway,

with no crew from Greenland. As a contrast, other countries like Canada demand part of the

crew as well as administrative staff should be local, at least a number of apprentices have to be

hired.

The further activity may depend very much on the technology used and the degree of land-

based storage and processing. As an example, at the Norne field outside Northern Norway coast,



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the national oil company Statoil chose a floating storage and production vessel (FPSO). Only a

limited number of the crew lives in the region. Also, the field administration was centralized to

another region. As a consequence, the local ripple effects were limited. Today the technology for

remote administration of a production unit has increased with information technology and

concepts called integrated operations (IO). This means that less of the administrative and

engineering staff need to be present at the production site, and may even be located in another

country.

For hydro-electric power plants that are linked to value added metal production like aluminum

there will a significant scale of the activity from the start with a large number of production

workers and a large administration. However, also in this line of business there is an increasing

amount of automation that reduced the need for plant employees.

The exploitation of energy and industry minerals like coal and iron may represent a lower

number of jobs, all dependent on whether there is some value added processing included.

Taking out metals like gold, zinc, lead, uranium and rare earth minerals as well as valuable

stones represent a limited number of employees except for the mining and transport workers.

The longer time period of exploration may prepare the local community and the industry for

what is coming and provide more opportunities. With more projects over time one may expect

that local industry may increase their share of the deliveries with increased ripple effects as a

result. The longer time frame may also increase hiring local personnel that are trained in high

tech jobs.

For some minerals a stronger local involvement will be possible if the exploitation is performed

on a smaller scale with local ownership. This may be the case for exploitation of valuable stone

minerals. However, this may be costly for an activity that normally has cost advantages of large

scale production.



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3. THE GREENLANDIC DEVELOPMENT CONTEXT AND INDUSTRY

COMPETITIVENESS

3.1. Introduction

In this chapter we illuminate what input factors that are needed, their costs and availability at

Greenland, and the conditions for further industry development. We discuss the opportunity for

building the supply systems in Greenland for the input factors needed over time. The discussion

includes work force at different competence levels, financial resources including risk capital, the

supplier companies in different development phases, and the entrepreneurial culture providing

new firms and company constellations. We include a discussion on Greenlandic industrial

capacity, and competitiveness in the different subcontractor markets. We make an analysis of

the strength and weaknesses, opportunities and threats of the Greenlandic industries based on

the political, economic, social, technological, environmental and legal contingencies and context.

This analysis will be critical for the development of indicators as to local involvement and

regional ripple effects resulting from the projects. Of special importance is the fact that the

natural resource exploitation in focus are very large scale projects, taking place in a global

market, with multi-national corporations where the strategic decisions are taken far from the

site of production. These projects are to be handled by a government in a newly established self-

governing with a total number of habitants not larger than a small regional Norwegian town.

Also, like Norway in the late sixties and seventies, the dominating part of the industry is small

scale and oriented towards the fisheries. It is therefore of critical importance to know how to

balance resources available and discuss the development and allocation of critical resources in

future, to decide how much that one should invest in different resources and infrastructure, and

the criteria for how much the companies have to pay back to the society.



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The list below show the most important input factors in natural-resource exploitation:

• Work force at production level in the region

• Knowhow and management capability

• Regional supplier/sub-contractor companies

• Risk capital and entrepreneurial culture

• Accident and pollution preparedness

3.2. Input factors

Work force and human capital

The exploration and exploitation of natural resources demands skilled workers at different

levels. The need for competence is increasing year by year as more advanced technology is

developed and implemented.

In the exploration and development phase there will be a need for specialized competence for a

short period of time. This competence is normally provided by international subcontractor

companies. In these phases it will be difficult for local employees to gain the jobs except for

services and transportation. However, these phases create arenas for training of the local work

force. Therefore it is important that the owner companies include such training schemes in the

contracts.

The work force in Nuuk is at the highest level in Greenland. However, the Greenlandic work

force is limited in size when it comes to skilled and educated workers.1 There is a net export of

people in the most attractive working age of 2-700 persons per year. The unemployment rate is

quite high of up to 3-4000 persons. The mobilization potential in the unemployment group for

1 Økonomisk råd, 2012. 67,3 pct. har kun havde folkeskolen som uddannelsesmæssig baggrund, og dermed ingen formel faglig uddannelse. Dette viser et stort uddannelsesmæssigt efterslæb, hvor for mange forlader folkeskolen med ringe forudsætninger og motivation for videre uddannelse. Der er flere forklaringer på dette, herunder sprogbarrierer, jf. Økonomisk Råd (2010). Gruppen med en faglært uddannelse udgør 5,6 pct. af befolkningen i den arbejdsdygtige alder.



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the kind of jobs in the industry may be limited2. It is also important to have a work force that is

willing to move to the regions where the commercial activity is taking place.

The educational system must have a capacity to change its focus towards the new industries and

the technology needed. The University of Greenland, however, only to a limited extent has this

capacity. However, the well-functioning school system and not the least the relations to the

Danish educational and research community may in a few years provide the necessary

competence. It is here important that the Greenlandic institutions make the necessary priorities

as to educational capacity within business and technology.

With more permanent activity within the natural resource industry, Greenland has a potential to

mobilize employees from Denmark and the other neighboring countries. This has very much

been the case in Northern Norway after the oil and gas activity expanded and became more

permanent. An increased number of younger people with roots in the Northern regions have

moved back to their native region. As an example, a new oil company, North Energy, was

established with its head quarter in the small town of Alta in the northernmost part of Norway.

The same stream of recruitment have we found in the neighboring town of Hammerfest where

Statoil located its natural gas production (LNG) facility. Hammerfest has also experienced a fast

growth pace because of supply base functions for the Barents Sea.

Sub-contractor manufacturing industry and service companies

The commercial companies of Greenland are adjusted to the present industry structure, mainly

small firms oriented towards the fisheries and the construction industry. There are also a

limited number of national and regional industry and service companies3. Most of them are

small and un-experienced with the high level of quality and the ISO-certifications needed.

However, the capacity and competence may grow over time, and the market share may increase

gradually. The state-owned companies like the Royal Arctic Line on transportation and base

functions, and Air Greenland on air transport are firms with a high competence level and high

2 Økonomisk Råds rapport 2012. En afgørende faktor er at øge udbuddet af kvalificeret arbejdskraft. På kort sigt er der et stort behov for at sikre, at flere unge kommer i gang med en kompetencegivende uddannelse og at

mindsker barrierer for gennemførelse af uddannelse knyttet til kollegium- og praktikpladser for arbejdsmarkedet. 3 Økonomisk Råds rapport 2012. Erhvervsstrukturen afspejler dels betydningen af fiskeriet og dels udbygningen af et velfærdsamfund med en stor offentlig sektor. Erhvervsstrukturen er således fokuseret omkring fiskeriet, indenlandske serviceerhverv (bygge- og anlæg, forrentningsservice og transport) samt den offentlige sektor.



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growth potential. Several firms have networks with partners in other countries that may

contribute with capacity and competence during a growth period. Fast growth is possible

through partnerships and with venture capitalist ownership.

Risk capital and entrepreneurial culture

To develop a competent sub-contractor industry there is a significant challenge as to

entrepreneurs and investors willing to take the commercial risk. The founding of new ventures

and further growth of the established companies depend on available risk capital. In

Scandinavian countries the risk of private investors is reduced through government investment

and innovation support. The Greenlandic government may have limited funding available for

this type of support. This may hamper the entrepreneurial orientation of the local companies. A

solution to these barriers may be to stimulate strategic alliances and partnerships with foreign

companies with the necessary know how and capacity.

The entrepreneurial and corporate culture and the corporate social responsibility of the

Scandinavian countries will be very much the same as in Greenland providing the necessary

trust for such alliances.

Accident and pollution preparedness

An important risk factor related to the exploitation of natural resources is the risk of accidents

and pollution. The large distances and lacks of infrastructure make preparedness for rescue

operations and oil spill preparedness a very difficult task. At sea, the Danish coastguard have

only a limited capacity as to ships for search and rescue operations and capability related to oil

recovery, and has acknowledged inadequate resources4. The costs and risk of this preparedness

lies very much on the project owner. This adds significantly to his costs. Especially for offshore

operations and metals like uranium there are very high expenses related to a large amount of

vessels with extra capacity. For uranium there will be high cost as to storage of radioactive stone

4 Forsvarsministeren vil bruge Rigsrevisionens pointer om arbejdet i Arktisk til at forstærke indsatsen. Danmark skal blive bedre til at kontrollere det højere antal skibe, der vil sejle omkring Grønland i takt med, at klimaforandringer har gjort det muligt at sejle i områderne. Sådan lyder det fra forsvarsminister Nicolai Wammen (S) efter en ny beretning fra Rigsrevisionen, der retter kritik af Danmarks indsats med at overvåge havmiljøet og håndhæve havmiljølovgivningen i Grønland. Kilde: http://www.kristeligt-dagblad.dk/artikel/524811:Danmark--Wammen--Vi-forstaerker-indsatsen-i-Arktisk



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http://www.kristeligt-dagblad.dk/artikel/524811:Danmark--Wammen--Vi-forstaerker-indsatsen-i-Arktisk

http://www.kristeligt-dagblad.dk/artikel/524811:Danmark--Wammen--Vi-forstaerker-indsatsen-i-Arktisk

for a very long time. If pollution is a fact, there will often be very high costs related to recovery

operations. This calls for extra insurance costs for the owner companies.

3.3. Analysis of strength and weaknesses, opportunities and threats

To anticipate the value creation opportunities and the success of the projects in question there

is a need to make an aggregated analysis and look closer into whether the Greenlandic society

has the resources needed for the new ventures. The SWOT-analysis below summarizes some of

the strength and weaknesses as well as threats and opportunities related to the value creation

effects and ripple effects.

SWOT - strength

• Political

– Small country with fast decision-making

– Transparency and political mobilization

– State owned companies with ownership in licenses

– Good relations to Danish institutions and political system

• Economical

– Several dispersed companies and some large corporations

– Well-developed set of business organizations

– Healthy gross debts figures

• Social

– Strong patriotism and feeling of ownership

– Ambitious young academic professionals

• Technology

– Some knowhow and technology for Arctic mining and offshore oil and gas activity

• Environment

– Strong focus on environment

– Greenlandic knowledge institutions with potential

– High knowledge level on Greenlandic natural resources

– Strong focus from environment NGOs

• Law

– Strict legislation as to exploitation of natural resources and work force rights



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The strength of the Greenlandic society is within the government institutions and a well-

functioning political system. Also, Greenland has state-owned companies within the transport

sector with professional leadership, and an educational system with capacity for building the

necessary competence over time. The bank system is also healthy, and provides a platform for

developing more financial institutions, for example within the venture capital industry. The

strong cultural links to the nature and the patriotism of the Greenlandic society increase the

chance of a positive involvement in the exploitation of the natural resources and involvement in

growth projects. The Greenlandic society also has a potential in a well-educated group of people

mainly working in Denmark that may be mobilized for efforts back in Greenland.

SWOT –weaknesses

• Political

– Lack of political consensus of large projects

– Lack of government capacity/competence as to large projects

– much symbolism, lacking clear industry development strategies

– Low public interest and knowledge as to resource development

• Economical

– Limited government income, dependency of DK subsidies

– Massive government financial challenges

– Lack of government funding for exploration and ownership

• Social

– Social problems and structural unemployment

– Work ethics not in line with industrial demands

• Technology

– Limited technological knowhow and academic educational capacity

– Lack of industry research programs

– Lack of supply and service companies in the technology sector

• Environment

– Vulnerable Arctic environment

• Law

– Strict legislation as to environment



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– Monopolies within transportation

The most important weakness as to fast commercial growth based on large natural resource

projects in the Greenlandic society is very much related to being a small country with a lack of

capacity in most sectors for large-scale commercial projects. The government funding is under

pressure due to difficulties in the fishing industry. The priority of scarce resources may create

political conflict not the least between regions. This may hamper the development of the

necessary infrastructure, for investment capital in the project and competence development.

The competence resources are mainly developed for other sectors and not the least for public

services, not for technology development and large commercial projects. The mobilization

potential is as a consequence limited for new projects in the outer regions.

SWOT- threats

• Political

– Difficult Internal conflict as to priorities

– Polarization between regions, industries and social groups

• Economical

– global economic recession with reduced demand for minerals

– International competition within natural resource markets

– Company taxation

– Property speculations

• Social

– Lack of entrepreneurial culture

– Brain drain to Denmark of educated people

– Negative demographic changes

– Increased structural unemployment

– Social problems and welfare dependencies

• Technology

– New technology makes raw material from Greenland less attractive

– Limits in adequate offshore technology in the Arctic

– Lack of renewal of technology within different industries and infrastructure

– Limited efforts towards research and development (R&D)



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• Environment

– Lack of sustainable protection of fisheries resources

– Protectionism and environmentalist actionism

– Vulnerability and conflict of interest as to offshore resources

• Law

– Lack of predictability as to future law and regulations for commercial projects

– Limited formal institutions and control regimes

In Greenland the political system face a challenging task in managing commercial activity and

not the least infrastructure development in new areas and at the same time solve the welfare

challenges in the Greenlandic society. There is a risk of increased political conflict due to the

tough financial priorities and increased pressure on the welfare system. There may be large

fluctuations in income from the new projects over time, and there is a risk of serious setbacks

and bankruptcies. Most of the projects in question except for the oil exploitation is vulnerable

for economic recession, and may only be exploited in periods of growth in the global economy.

As for offshore resources there are limitations in technology in the Arctic environment with risk

of pollution. Long distances, limited infrastructure and a lack of preparedness may increase this

risk. Having an active involvement from the political leadership and the government

administration is very important. For the companies there have to be predictability as to

administrative procedures, planning processes and control, and not the least as to taxes,

royalties, laws and regulation. Up to now the governance system for the large scale industry has

been a system in the making, changing with different political constellations. This may create

uncertainty as to future decision-making among the developing companies.

SWOT-opportunities

• Political

– High ambitions in government

– Improved reform willingness

• Economical

– Large mineral resources



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– Less climatic problems

– Interest from foreign companies and investors

• Social

– Enthusiasm among younger people

– High mobilization potential among educated youth

– Good historical relations to neighboring countries

• Technology

– Increased number of youth in education

– Efforts towards engineering education and research

• Law

– Adaptation of law to new commercial potential

– Increased knowledge on contractual relations

The Greenlandic society has a significant upside in the amount of natural resources available.

The resources with highest commercial value like uranium and oil is at the same time the

resources with highest political, commercial and environmental costs as to exploitation. There

are also potential resources in the younger generation of motivated employees, and the

development of government institutions with high professional standards. Among the

government institutions the educational system is of critical importance. As time evolves, the

government may also gain the necessary routines for handling large projects, not the least as to

leveling the taxes and royalties, creating an adequate control regime, and develop a

preparedness system that may be able to meet critical incidents. Greenland has strong positive

relations to its neighboring countries in the North. There is a significant potential for acquiring

financial capital, human capital and knowhow from both private companies and from the

political system and the government administration of these countries.

Summary

The analysis above shows that there are positive aspects related to a well-developed modern

society with experienced government institutions. There is also a potential for access to

necessary input factors over time. However, there are structural challenges as to the necessary

resources for building up new industrial sectors and the necessary infrastructure. Access to a

competent and motivated work force is critical for both the government income side and the

ripple effects. There is a need to release work force from other sectors, to increase mobility from



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other countries and inside Greenland, and there have to be increased willingness to further

education. In this process, support may come from government and companies in the

neighboring countries.

There are limitations when it comes to government finances and conflict interests from

stakeholders related to natural resources5. The ability to adapt to new challenges may be

hampered by internal political conflicts between regions and groups. The government

regulation of the exploitation and its commercial involvement is of critical importance to the

regional value creation, the ripple effects and the direct government income6. It is also of

importance to avoid negative effects of the exploitation through safety and environmental

measures. There are critical questions as to the contract regimes with the developing companies

related to government ownership and investment, taxes and royalties, use of local suppliers,

employing trainees and educational programs, and preparedness measures as to human safety,

environment and security. To solve these challenges, the government has to have special

emphasis on the following areas:

5 Inuit-organisationen ICC og Verdensnaturfonden WWF har kritiseret høringsprocessen om store mineprojekter i Grønland. De store mineprojekter i Grønland er på vej til at blive styret af multinationale selskaber, mener ICC og WWF. Men Grønland kan stadig nå at gøre mere ud af borgerinddragelsen, siger de to organisationer. ICC og WWF har fået lavet en rapport om høringsprocesser i Grønland og er kommet med 14 anbefalinger og 16 kritik punkter. - De rettigheder, vi har tilkæmpet os som oprindelige folk, er under pres, når borgerinddragelsen om Grønlands fremtid ikke er bedre, end tilfældet er. Det er svært at lave gode høringer, men vi bliver nødt til at investere langt mere i dem, hvis de beslutninger, der træffes på råstofområdet, skal have folkelig opbakning og demokratisk legitimitet, siger ICC-formand Aqqaluk Lynge. WWF mener, at den grønlandske befolkning har krav på større borgerinddragelse.- Rapporten viser desværre en stribe uheldige eksempler på, at høringerne i Grønland slet ikke er gode nok. Befolkningen har krav på langt mere medindflydelse – til fordel for både det fremtidige Grønland og den natur, som grønlænderne lever af i dag, siger WWF Verdensnaturfondens generalsekretær Gitte Seeberg. Kilde: http://sermitsiaq.ag/organisationergroenland-demokratisk-underskud 6Det var ikke noget lyst billede, som Økonomisk Råd tegnede, da de tirsdag fremlagde deres årsrapport. -Det ser nærmest gråt ud, for der er stagnation, sagde rådets formand, professor Torben M. Andersen. Eller sagt med andre ord, økonomien er gået i stå og vi skal ikke regne med at arbejdsløsheden falder lige foreløbigt. Men selvom Økonomisk Råd tegner et gråt billede, så har det en vis optimisme i behold på landets vegne. Vurderingen er, at Grønland lige nu nærmest står på en knivs æg, det kan enten falde ud til den gode side eller til den dårlige side. -Jeg mener, at det kan lade sig gøre, at få det til at falde ud til den gode side, siger Torben M. Andersen. Men sådan et udfald kommer til at kræve dybtgående reformer, så dybtgående, at hver eneste grønlænder kommer til at mærke dem på egen krop. Torben M. Andersen noterer sig derfor med tilfredshed, at politikerne har lovet reformer både når det gælder skat, det sociale område, pensioner, boligsektoren og den offentlige administration. -Nu er det afgørende, at politikerne meget hurtigt bliver konkrete med deres reformer, siger rådsformanden. Reformerne i sig selv er dog ikke nok. Hvis der skal gang i den grønlandske økonomi, så kræver det, at mindst et af de store råstofprojekter kommer i gang meget hurtigt. Lykkes begge dele, så kan det sætte gang i en meget positiv udvikling her i landet. Kilde: http://www.knr.gl/kl/comment/reply/184236



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http://sermitsiaq.ag/organisationergroenland-demokratisk-underskud

http://www.knr.gl/kl/comment/reply/184236

• Educational capacity

• Research and development programs

• Communication infrastructure (data, maritime, air transport)

• Government loans and financial support for company development

• Royalty and tax level

• Regulation and documentation

• Local employment demands

• Salary level and differentiation

• Environment protection efforts

• Preparedness level demands

• International alliances in development

With the limited finances of the Greenlandic government the value creation effects very much

depends on the capacity to release investment money both towards infrastructure and towards

direct investments in projects7.

7 Økonomisk råd, 2012. Kravene til styring af de offentlige finanser vil blive forstærket af storskalaprojekterne. Projekterne vil kræve betydelige investeringer i infrastruktur, boliger m.m. Øgede skatteindtægter fra Projekterne kan medvirke til finansieringen heraf. Investeringsudgifterne kommer imidlertid før de mere usikre øgede skatteindtægter, hvilket øger risikoeksponeringen for de offentlige finanser. Samtidig vil en gennemførelse af projekterne kræve en betydelig om allokering af de offentlige midler i retning af områder med en erhvervsudvikling. Dette stiller store krav både til monitorering af udviklingen og til den økonomiske politik for at styre udviklingen.



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4. VALUE CREATION AND RIPPLE EFFECTS – SOME ALTERNATIVE PICTURES

In this chapter we present the different types of value creation and ripple effects. We include

income and net profit as bases for royalties, taxes and capital surplus from owner shares.

We also include different types of jobs, level of competence and salaries. The ripple effects may

involve positive and negative external effects for other industries earning or loosing from this

activity. Here, other industries may for example loose competent workers, and other input

factors may be more expensive, for example for the primary industries. There will be changes in

industry structure, and also demographic changes as especially the younger work force will

move to more profitable regions.

Of importance is how the new industries provide investments into community infrastructure. At

the negative side the present infrastructure such as airports, roads and harbors may have

burdens that may wear down equipment and create bottle necks for other users. An important

immaterial ripple effect may come with development of the subcontractor system both within

existing and new companies towards innovations and an entrepreneurial culture. Compared

with the traditional fishing industry, the new resource-based industries need more fine-grained

cooperative networks and innovation systems.

To illustrate the span in possible value creation and ripple effects we present four different

pictures for the future varying according to project size and development concepts, government

involvement and regulations, and availability of input factors.

The following dimensions are included in these pictures:

• Market growth natural resources

– Decline-Low-high

• Government

– Investment and government control

• Technology chosen

– degree of processing

– Number of simultaneous projects



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• Development in other industries

– Growth - decline

The pictures are named The Three Legs, The black hole and Incremental Growth.

1 The Three Legs

High

investment

Fast growth

2 The black hole

-Invest and

loose

3

Incremental

growth

Market growth

natural resources High Low High

Government

investments High High Low, but

increasing over

time Other industries Growth Decline Decline

EFFECTS:

Jobs from new

projects High and fast

growing Negative Gradually

increasing Govern net

income Very high Highly negative From low to

increased indirect

effects Effects other

industries Increasing

pressure

problems

Highly negative

due to lack of

government

finances

From negative to

positive transfer

of resources

Table 1. Different pictures of future development.

The Three legs strategy shows a situation where the government invests heavily in both old and

new sectors and succeeds in the market. Development of attractive raw materials like oil, high

prices for natural resources, growth in markets for fish and tourism together with an active

Committee for Greenlandic Mineral Resources to the Benefit of Society Background paper on value creation

23

government investment and ownership control of the new resources may give high government

incomes and opportunities for fast payback of investments. Over time there is, however, a

potential problem with pressure in the economy. This may over time create an increase in

salaries and inflation, with high cost level and export problems for the traditional industries like

the fisheries. It may also reduce the profit for the new industries over time, and increase the risk

of close down. A strong government regulation of the economy will be necessary, together with

rationalization efforts in both government and private business. Secondly, investment in

education and research may increase the capacity of the society. Third, the incomes have to be

saved for future generations through welfare funds like in the Norwegian oil economy.

The Black Hole picture illuminates the risk of a fast growth policy. A high financial involvement

and fast implementation of several new projects is vulnerable for international recession. As we

are dealing with production of raw materials the entire new project as well as the fishing

industry may face economic problems at the same time. Downsizing and closed down mines

may be the consequence. If there is a continued decline in other industries like the fisheries

together with low incomes from new resource exploitation this may give the society a severe

economic shock with limited government funding to meet the structural problems and

unemployment.

A more risk-averting, pragmatic strategy is Incremental Growth. The government may limit the

number of new projects to reduce both administrative burdens and conflicting interests as to

government investments. One may also give the resource developing companies the benefits of

short term profits as a compensation for taking most of the costs of infrastructure and project

development. This may give less income in the short run but reduce risk and give a potential

growth in the long run. This alternative will give lower government incomes but increasing

indirect ripple effects on the job markets as the educational level increases and more jobs are

created in the subcontractor industry. In addition to lower government incomes, this strategy

also makes the society more dependent on the international corporations, as they will have a

larger ownership both in the resources and the infrastructure.

The scenarios show that the future of Greenland is highly sensitive for fluctuations in the

international natural resource markets. The speed of investments in new sectors for increased

physical and human capital is of importance. The government strategy and risk taking is also



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critical. A situation with high volatility in the raw material markets and a heavy taxation and

royalty scheme may hamper the development of new projects and slow down growth. If one,

however, hits the market and the resources found are valuable, the government may have

significant direct benefits as well as broad ripple effects with an active and demanding taxation

scheme.

The value creation may appear in different areas:

• Jobs

– Number, wage level, variety, competence level and development

• Government income

– From wages, royalty, profit taxes

• Industry growth

– Number and size of firms

– Variety of firms/industries

– New firm development/entrepreneurship

• Industry structural changes

The number of local jobs will due to high costs be kept to a minimum, and there will be a

constant rationalization process as the producers gain experience. Also, the local suppliers will

have to compete with subcontractors in the highly competitive, international market with great

difficulty. Thus, the numbers of new jobs indicated from the producers side will be in the

optimistic range. For the government, there should be more detailed analyses of these figures

from independent consultants, building upon experience from other countries.

The size of the new industry projects as to investment in infrastructure and other resources, and

the potential risks will represent a heavy burden for the Greenlandic society, especially in the

short run. It will demand large investment from regional and national government and create

pressures in the economy both in the short and long run. The total costs are extremely high and

the risk as to prognosis and the international market is very high. The number of local jobs

depends on the access to skilled workers and the wage level. If the owner companies have to pay

the costs of training, and pay high salaries this may challenge projects. There will be a strong

pressure towards keeping the salaries at an international level and use specialized, imported



25

competence, especially during the construction phase. This, however, will give lower local

household income and limited tax incomes for the government in the short run. It may also

undermine the principle of a just income and tax system that has been developed especially in

the Nordic countries.

Much of the value creation process comes from regional supplies to the construction and

production phase. In Norway as an example, approx. 40-50% of the costs of investments are

spent on Norwegian companies. For regions with a limited experience for this type of deliveries

approx. ten percent is spent locally during the construction process. For the production period

the local share of the spending will increase as the activity becomes more permanent and the

local companies and the job markets adapt to the new opportunities.



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5. CONCLUSIONS AND RECOMMENDATIONS

Greenland has a substantial potential upside related to mining and oil and gas exploitation.

There are great opportunities for a significant amount of employees and value creation from

minerals and oil reserves with a high concentration and commercial value. The Greenland

government administration and other public institutions are well developed. However, the

limited size as to man power, lack of entrepreneurs and risk capital may hamper the value

creation effects, especially in the short run. The revenue potential is related to government taxes

and royalties, inland employment and ripple effects from infrastructure investments,

entrepreneurial culture and competence development. Experience, among others from Norway

is that the ripple effects will be limited in the short run but accumulate over time. Also, in the

long run there will be opportunities for new business formation as experience and competence

increases.

Additional upside effects may come indirectly through higher consumption, supplies to projects,

especially over time as the know-how, as well as the subcontractor system and the

infrastructure improves.

The exploration of natural resources is, however, a high risk venture. The raw material markets

are highly volatile. The exploration and development costs and the operating costs of

exploitation are at a very high level in the Greenlandic setting due to climate, distance to market

and infrastructure limitations. The benefits and incomes depend on the richness of natural

resources and growth in the global economy. There is a risk of limited profit margins on mining

projects in high cost countries like Greenland.

This also means that the downside of this type of commercial activity is high. There is a risk of

losing investment money at the ownership side, and investing in infrastructure and

preparedness system that will be sunk costs if the project fails.

With a significant financial risk, there is also reluctance from the producer companies to pay

royalties and taxes, preparedness costs, invest in infrastructure development and make use of

inland work force. This means that the government may have to give concessions the producer

companies as to government tax incomes both on profit and salaries.



27

There is also a risk of pollution and accidents in a very vulnerable environment. Here we may

talk about extreme sums in recovery investments if severe pollution appears, for example from

uranium mines or oil blow out or shipping accidents.

Availability of input as to work force, knowhow, financial capital and entrepreneurs are at

present limited in Greenland. Providing the necessary infrastructure as to transportation,

housing and service, government administration, accident and pollution preparedness is costly.

This lack of capability of regional investments means that the net ripple effects also will be

limited in the short run. If the government manages to release risk capital from other sectors

this may make a difference. This funding may provide opportunities for strategic alliances with

foreign companies. There is a need for priority as to projects in exploration versus the

exploitation phase due to capacity limitations. The government has to highlight special aspects

in the development of the regimes for the exploitation companies. Areas of special importance

are:

Recommendations to the government:

– Lowering the burdens of start-up new projects

– Release financial capital for public and private investments

– Financial and competence support to entrepreneurs that want to start new venture

– National and international partnerships and joint ventures

– Strengthening inland companies with capital and competence

– Education and on the job training efforts at all levels and in all phases of development

– R&D capacity especially within business and technology

– Balance resources between traditional and new industries

– Marketing efforts towards the Nordic countries to companies that may take parts in

Greenlandic joint ventures

Recommendations to companies:

– Learn from other countries developing oil and gas and mineral resources

– Improve competence of employees

– Improve quality and gain the necessary certificates

– Find partners and create joint ventures to gain financial capital and competence



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Recommendations to the job market

– Establish a broad range of vocational training programs in the regions

– Job seekers to join flexible secondary school program to qualify for higher education

– Active involvement in company recruitment and training programs

– Invest as much time as possible for education and job training for job seekers



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GREENLANDIC NATURAL RESOURCES -HOW TO IMPROVE … · factors influence on the profits of the companies, and the positive effects of the society. Among these factors we find access