The Northern Sea Route (NSR) is the shortest sea route from Asia to Europe. According to experts, after 2050 it will be available for year-round passage of conventional vessels with no ice reinforcement. Given this, it is a good strategy right now to develop the NSR not only for pure export of natural resources from the Arctic zone or for the “Northern Supply”, but also for container transportation. In 2016, a model for creating a regular Arctic container line on the basis of the Northern Sea Route was developed. A niche where NSR shipments are more profitable compared to the southern route is the transit of container cargo between the ports of the Northeast Asia (China, Japan, the Republic of Korea) and North Europe (Rotterdam, Hamburg, etc.) The container traffic on routes where the use of the NSR can potentially give a significant payoff to carriers, is about 455 thousand TEU. The commissioning of new facilities for the production of liquefied natural gas (LNG) and the development of infrastructure in the Arctic will help significantly increase traffic along the NSR.
The transport route from Europe to Asia in high latitudes became one of the main discussion topics during the Eastern Economic Forum, which was held in Vladivostok September 6–7, 2017. Issues associated with the operation of the NSR, and the prospects for development of the northernmost transport route in the world were discussed within the framework of the thematic panel “Development of the Northern Sea Route. From words to action”.
Prepared by Frost & Sullivan
The commercial operation of the NSR is in full swing now, especially in the western part (from Murmansk to the port of Sabetta). Here the traffic volume can already be compared to the European numbers. The growth of cargo traffic is evident today and the trend is going to continue in the future. In 2016, the volume of cargo transportation along the Northern Sea Route reached the record breaking 7.3 million tons, which is a 35% increase YoY. The volume of the infrastructure dry construction cargo alone reaches 1.5 million tons annually. The growth of cargo turnover was facilitated by the implementation of projects on construction of Sabetta port and on the development of gas fields in Yamal (Yamal-LNG). The increase in the total traffic also affected the growth in the volumes of transit traffic along the NSR.
“By 2022, the volume of traffic will reach 40 million tons,” predicts Evgeny Ambrosov, the First Deputy General Director of PJSC Sovcomflot and Vice-President of the Arctic Economic Council. “The further growth in freight turnover will be due to the commissioning of new LNG production capacities (Arctic-LNG, Pechora-LNG) and the development of oil and gas fields. By 2025, the NSR will transport about 65 million tons of hydrocarbons.”
Commenting on the results of the panel, Leonid Petukhov, the General Director of the ANO “Far East Investment and Export Agency”, stressed that: “The development of the NSR is moving in all major directions—the icebreaker fleet is gradually growing, the infrastructure is being upgraded, work is being done to remove administrative and trade barriers; on the whole, conditions are being formed for increasing the volumes of container transportations in the medium term, private (including foreign) investors are involved in the projects.”
The fleet of Russia’s largest shipping company, Sovcomflot, has recently been supplemented by three new MR vessels (6 in total), and in August 2017, Christophe de Margerie (reinforced ice class Arc-7) gas carrier made its first commercial flight delivering LNG from Norway to the South Korea. The vessel went through the NSR for a record 6.5 days without the help of an icebreaker. “Christophe de Margerie” is the first gas carrier in a series of 15 vessels of this type planned for construction.
The initiative of PJSC Sovcomflot on the construction of new vessels using LNG as fuel was also developed. According to E. Ambrosov, this decision will reduce the volume of carbon dioxide emissions by 15%, nitrogen emissions by 80%, and sulfur emissions by 90%. The construction of the ships will start in 2019 at the Zvezda plant, and the first ship will leave the shipyard as early as in 2022.
Infrastructure upgrade will also require significant investments, so it is necessary not only to rely on the strengths and capabilities of Russia, but also to use international cooperation. In the opinion of Tero Vauraste, Vice-Chairman of the Arctic Economic Council, the investment proposals should be prepared right now, including the ones for interested foreign players and for proactive attraction of the private capital. “We need to increase the investment attractiveness of the northern regions. Today, the money of taxpayers alone is not enough for the development of the Arctic, so we must work hard to increase the transparency of doing business,” emphasizes the expert. “I do not think that container transportation will become the main direction of using the NSR in the foreseeable future, but in one way or another we need to work on eliminating the trade barriers. In the next 2–3 years we will not be able to switch to the free trade regime, but we will cope with individual trade barriers”.
Foreign companies are demonstrating high interest in using the Northern Sea Route. “Japan has two main interests related to the NSR. The first one is the diversification of transport routes between Asia and Europe and the second is the development of the energy base,” said Shinichi Ishii, senior consultant at Nomura Research Institute, Ltd. “The Hokkaido government has a program to participate in the NSR, and in the future, Hokkaido intends to become a gateway to the NSR.”
According to Dmitry Purim, CEO of PJSC Sovfracht, it is equally important to ensure the development of information technologies and the Internet in the Arctic. This will simplify the work of supply vessels and reduce the container logistics cost. “Over several years of work in the Arctic, we managed to reduce freight costs by about 40% in terms of freight ton,” Purim said. “This is not only due to the strengthening of coordination, quality of work and planning, but also to the introduction of information technologies.” He also acknowledged that “the main driver of the Arctic development, the undisputed mainstream, is the realization of hydrocarbon projects, but the development of IT products is very important for small and medium-sized businesses: if the Arctic had an accessible Internet, it would help significantly reduce all Arctic logistics cost”.
According to Dmitry Gudimenko, CEO of Capital Development Group, the project of a broadband Internet cable from Europe to Asia is already in the high readiness stage. “The project shows good profitability in the short term,” he believes. “One of the key issues to date is the involvement of major players such as Facebook, Google, and Chinese telecommunication companies.”
New opportunities for trans-Arctic navigation through the NSR will also emerge due to the reduction in the ice cover in the Arctic region. As the ice retreats, the Arctic routes will become shorter and faster. With the current trend, by 2030 the Arctic will completely get rid of ice in the warm season. So, cargo ships will be less likely to require the help of icebreakers, and navigation will be open at least 6 months a year. Reduction in the ice area in summer and autumn makes the NSR more attractive for sea container transport. “On the average, over a decade the ice thickness is reduced by 13%” said Riccardo Valentini, professor at the Tuscia University (Italy) and head of the European Mediterranean Climate Change Center. “We need to improve the accuracy of sea forecasts, ice conditions and seasonal risks.”
According to Kirill Golokhvast, Vice Rector for Research at the Far Eastern Federal University (FEFU), the situational Arctic Center (“Arctic Campus”) in Arkhangelsk will be created in the near future with the support of the Polar Association, which will provide online visualization of the fleet and available cargo base, and will allow to predict the most optimal routes of vessels on the basis of current information about the ice situation and forecasts for its change, as well as to project the cost of the Arctic logistics.
Lately the lack of a counterparty in the form of a management company with the functions similar to the management companies of Suez or Panama Canals has been referred to as one of the factors constraining the development of the NSR. Today FGCP “Administration of the Northern Sea Route” performs only administrative functions, issues permits for the right to pass through the Northern Sea Route and, on the whole, has limited capacities in the system of the Russian government. As a result, companies are faced with the need to interact with a number of counterparties, including ministries, local ports, companies providing agency and bunkering services. There are also questions related to the quality of “on-site” services.
Vasily Grudev, investment director of the ANO “Far East Investment and Export Agency”, said that in April 2017, the Government of the Russian Federation instructed to work out the issues related to the possibility of creating a special structure for managing the NSR.
According to D. Purim, creation of the management company will allow to render business services in the “one stop shop” mode and, as a result, to eliminate a number of administrative barriers. “But it is important that the management company does not interfere in those segments that the business can cope with independently”.
Vladimir Korchanov, first Vice-President of FESCO transport company, shares this opinion, saying that the presence of a counterparty in the form of a management company will facilitate development of NSR’s eastern part, optimization of logistics and enhancement in the navigation safety. “We now have no problems with navigation on the Northern Sea Route. Problems begin on the shore and are associated with obtaining permits for unloading cargo and brigades, etc.” summed up the expert.
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About the panel
The thematic panel “Development of the Northern Sea Route. From words to action” was held September 6, 2017 within the framework of the 3rd Eastern Economic Forum with the assistance and support of ANO “Far East Investment and Export Agency”.
The discussion gathered a number of industry professionals—representatives of Russian and international scientific organizations, as well as functional and top managers of oil and gas, shipbuilding and transport companies from Russia, Japan, South Korea, China, the Netherlands, etc. Among them was Evgeny Ambrosov, First Deputy General Director of PJSC Sovcomflot, Tero Vauraste, Chairman of the Arctic Economic Council, Vladimir Korchanov, First Vice-President of FESCO, Rene Berkvens, CEO of Damen Shipyards Group NV, Riccardo Valentini, Nobel Peace Prize Laureate and Head of European Center for the Mediterranean Climate Change, and others. Alexander Dyukov, Chairman of the Board and General Director of PJSC Gazprom Neft, also visited the session.
After the discussion, the session moderator, Managing Director of the Russian Frost & Sullivan office Alexey Volostnov and the Director General of the ANO “Far East Investment and Export Agency” Leonid Petukhov signed an agreement on coordination of activities to improve the conditions for the implementation of the socio-economic development strategy of the Far East until 2020, and on the effective assistance to the development of the Northern Sea Route.
