Building up the Arctic

The Arctic is a strategic region and its development is among Russia’s priorities for the coming decades. The Northern Sea Route is a crucial pivot for the whole plan, providing a new trade transport alternative between Asia and Europe. To build up the Arctic effectively, a modern Arctic fleet and an Arctic shipping system will be needed, believes Nikita Dobroslasky.

Recently, once development of the Arctic zone was officially declared a vital strategic priority, in the words of President Putin, Russia will this century build up the Arctic, the government has started putting more emphasis on the issue. In particular, a corresponding strategy and a programme for integrated development of the Arctic zone up to 2035 have been developed and adopted. At the same time, work has been stepped up on developing the Northern Sea Route (NSR), as a key factor for implementing this plan. There is understandable interest in developing this transport route. The NSR ensures national security and strengthens Russia’s geopolitical presence in the Arctic. At the same time, it is also an important transport corridor, a key link in the entire infrastructure.

The NSR is the shortest sea route from Asia to Europe. Since 2014, the traffic volume on the NSR, with Atomflot and Rosatom as its only operator, has been growing rapidly. During this time, it has expanded around 5.5-fold, reaching 33 m tonnes by the end of 2020; and, according to the plan, it should grow to 80 m tonnes by 2024. The volume of transit last year increased by almost 1.2 m tonnes. Such dynamics of cargo transportation along the NSR have so far been primarily associated with major projects extracting oil and gas, metals and ore, as well as with LNG production in the Arctic. So far, in the current navigation conditions in the seas of the Arctic Ocean, the transport route is only cost-effective for exporting hydrocarbons. At the same time, the high potential of the NSR is of great interest to all cargo transportation market players. Leading transport companies are already making trial voyages and pilotage of ships, and are exploring opportunities for infrastructure development in the region.

The increasing shipping intensity adds to the NSR’s appeal as a transit route. With this in mind, it is already strategically justified to develop the NSR not only exclusively for exporting natural resources from the Arctic zone or for Severny Zavoz (Northern Supply Haul), but also for container transportation. This is especially promising since, owing to the intensifying global climate change, the navigation conditions on the NSR are likely to improve. It is expected that, already after 2050, this route will become available for year-round navigation by ships without ice strengthening. Improvement of the ice conditions in the Arctic is already allowing an increasing number of vessels to transit the NSR in summer and autumn. Navigation in 2019 showed that the increase in transit is due to use of low ice class ships. This indicates that seasonal transit on the NSR is developing.

A second major factor in shipping was the reduction in the average duration of passage through the NSR from 15 days in 2014 to 9.7 days in 2018. Based on the shipping statistics in 2019, the average duration fell to 9.5 days. This figure corresponds to an average speed of 13 mph, which is the recommended maximum speed for ships in open pack ice. So, as a result of navigation development on the NSR, the passage time has come close to optimal and is to stay between nine and ten days. If we study the breakdown of transit, it still consists mostly of raw materials, including oil, iron ore and fertiliser. Even so, the volume of finished goods transportation is also gradually increasing. In particular, for three consecutive years, the NSR has been used to supply towers and equipment for wind farms in Europe.

The plan is to achieve the nearest target of cargo turnover for the NSR – which, according to the state programme, is up to 80 m tonnes by 2024 – primarily by increasing the transportation volume of products from new mining enterprises. This is particularly expected to happen owing to launch of the 4th line of the Yamal LNG project, which will add more than 1 m tonnes (NGLs, LNG) to the cargo base. Cargo traffic in the period up to 2030 will be determined by the projects launched to produce LNG, by the supply of oil from the Novoportovskoye field and delivery of cargo for the second wave of Arctic megaprojects.

These projects include LNG production at Arctic LNG-2 and Ob LNG, as well as production of oil by Vostok Oil. At the same time, there is little certainty over coal projects. They are not expected to be launched in the near future without large-scale exploration works being carried out first. When conducting assessments as per the protocols of the commissions for development of major deposits in the Arctic and interviewing subsoil users, the experts of the SKOLKOVO Moscow School of Management determined an alternative schedule for transportation through the NSR: the volume amounted to about 50 m tonnes a year by 2024, which is around 30 m tonnes below the official targets of the state programme.

Such a significant difference in official and expert estimates is explained by the high risks facing projects for industrial development of deposits and processing of raw materials in the Arctic region. On the one hand, such projects in the Arctic rely on a high-quality resource base while, on the other, they are implemented in  difficult climatic conditions and in remote areas with a poorly developed infrastructure. They are subject to sanctions, as well as to a  stricter climate regulation, and are also sensitive to final product price fluctuations. Given the ambitious stated production plans, the volume of confirmed reserves is in some cases too low to ensure sufficient cargo flow in the long term.

To manage risk, companies must undertake more complex logistics. In particular, this includes using terminals for transshipment from ice-class vessels to conventional vessels. At the same time, Arctic projects receive substantial tax and administrative support from the state. The way these factors balance out will largely determine whether the mining companies’ plans can be implemented in reality.

The NSR development concept is to implement a comprehensive project with an international status. The new route has to become competitive in terms of global logistics. This is a conceptual requirement for the Sevmorput National Project, with a total cost of 735 billion rubles, including budgetary funding of 274 billion rubles. Modernisation and creation of a new infrastructure in the Arctic region is a prerequisite for its success. This includes ports, a bunkering infrastructure, navigation services and an emergency response infrastructure. In particular, the plan provides for developing the two main ports, Pevek and Sabetta, in the period up to 2021 and developing the port infrastructure to match the pace of industrial development in the Russian Arctic.

The range of activities includes personnel training, provision of medical care and medical evacuation. Measures to stimulate transit cargo traffic include developing hub ports beyond the NSR: the ports of Murmansk and PetropavlovskKamchatsky, and justifying establishment of a container operator. According to the plan, the latter will provide not only for transit, but also multimodal transportation for domestic needs. To provide energy for industrial projects, the plan is to develop a single database of projects with technological and energy parameters.

The energy capacities that ensure development of the NSR could be based on using LNG and methanol, as well as renewable energy sources. The infrastructure development plan includes ensuring environmental safety during navigation and port operations in NSR waters, and comprehensively monitoring the lithosphere, cryosphere, atmosphere, and hydrosphere. Consolidating the NSR infrastructure as a single complex will ensure a high level of shipping digitalisation, accounting for weather conditions and the optimal route based on the weather and climate conditions, as well as on analysis of satellite images of the ice situation.

Artificial intelligence elements can help in building optimal navigation routes, which will reduce fuel consumption and environmental impact, choosing the most efficient fleet structure, and ensuring navigation safety. As a result of digitalisation of oil exports from the Prirazlomnaya platform and the Novy Port field in the Barents Sea, the unit cost of exporting one tonne of Arctic oil has fallen by 10%.

Another prerequisite for achieving the NSR development programme goals is to create a modern fleet based on new Arctic-class vessels. The fleet currently operating in the region is not able to meet the set goals and needs to be replaced or modernised as soon as possible. According to data from the Russian Maritime Register of Shipping classification society, there are 439 vessels of all classes registered in Russia’s Arctic ports, most of them 20 or more years old. Most vessels of the operating Arctic fleet are relatively small, with a deadweight of up to one thousand tonnes. Only two vessels, the Umba and Natali tankers, have a deadweight of over 100 thousand tonnes. At the same time, almost all the ships are fuelled by fuel oil and diesel. So, to provide for export of manufactured products using the NSR, a new Arctic fleet needs to be built of vessels with an ice class of at least Arc4, in order to allow for year-round navigation in the Arctic.

The programme adopted for developing the NSR implies building various types of vessel. They include rescue and auxiliary fleets, hydrographic vessels, container ships and cargo ships, some of which use LNG as fuel. Building a modern icebreaker fleet is itself an extensive programme. Moreover, industrial development of the Arctic requires a significant increase not only in the number of icebreakers but also in their size and capacity. For this purpose, Baltic Shipyard enterprises (part of the United Shipbuilding Corporation) are currently building three Project 22220 icebreakers: the Arctic, Siberia and Ural. Yet, fully-fledged navigation along the Northern Sea Route will be possible only after the three nuclear-powered Leader icebreakers ordered from the Zvezda shipyard in the Far East (managed by Rosneft) are commissioned.

Despite a number of objective difficulties, the government is assessing the potential for transit shipping on the NSR, which might, in the future, capture a share of the world’s cargo sea traffic now travelling traditional routes. The infamous incident of the week-long obstruction of the Suez Canal due to the container ship Ever Given running aground in March this year once again revived interest in such alternatives. Several trial voyages along the NSR have already taken place. During these, a number of major global transport companies evaluated this route’s transportation prospects.

The results make it clear that, in its current form, the NSR cannot yet fully meet the requirements imposed. In particular, after a trial voyage by the Venta Maersk container ship, Maersk, a leading Danish company, claimed that transportation on the NSR was futile since it did not provide for year-round transit. In turn, Sovfracht also expressed serious doubts about the possibility of organising regular container transportation. The main reason is said to be the unpredictable weather conditions. Owing to the navigation risks in the Arctic, some major shipping companies have refused to use the Arctic lines. Even so, Rusatom Cargo, a subsidiary of Rosatom, is evaluating development of an AsiaEurope container line within the Northern Sea Transport Corridor (NSTC) project.

In 2020, the “Fundamentals of the State Policy of the Russian Federation in the Arctic for the Period up to 2035” officially documented a change in the role of the NSR from a national transport communication line to a competitive international one. Since year-round transit will not be possible without building up an icebreaker fleet with at least three icebreakers of the Leader class, until 2030, transit schemes for the NSR can be developed with the emphasis on seasonal transit. According to its terms, cargo can be transported between ports in Europe and Asia and does not require mandatory transshipment at Russian ports to ice class vessels. In contrast to the volume of industrial product export, choosing transport volumes as a parameter for developing the NSR is an oversimplified approach that could lead to serious structural distortions. With seasonal transit, there is a question of economic interest for the Russian Federation, since ships transit through the NSR without using ice-routing services and the ports.

At the same time, Russia remains responsible for ensuring the safety of navigation and eliminating the consequences of possible accidents. So, there is an issue of determining the revenue centres that will ensure the economic feasibility of developing transit through the NSR. Atomflot plans to establish a ship operator for shipping on the NSR. A fleet of high ice-class vessels would make it possible to expand the operator’s activities geographically from the NSR to high latitudes. That is, it allows a latitudinal operator to be set up to carry out activities depending on the season: on the NSR in winter and on the Northwest Passage in summer. It is important to remember that the current requirements on the NSR as a transit route for foreign customers relate to more aspects than just the cost and duration of cargo transportation. The scale of environmental and climate impact is becoming an increasingly important factor. Moreover, such requirements are put forward not only by customers and cargo owners, but even by the financial organisations that provide for their operations. In any case, if operation of the NSR is properly organised, the stricter requirements imposed by the world community on the environmental aspects of transportation could become an additional advantage for this route.

The transit potential of the NSR is associated with shipowners and their customers being able not only to deliver cargo in a shorter time but also to reduce specific emissions of pollutants and greenhouse gases. An additional benefit might consist in using cheaper marine fuels, including those with a reduced carbon footprint, such as LNG. Development of transit through the NSR will provide conditions for modernising the port infrastructure and for creating a modern Russian fleet, as well as specialised national Arctic logistics operators. As a result of all this work, Russia will obtain a new technological tool suitable not only for successful competition in the modern world but also for development of its own economy and territories. This is how the theory of building up the Arctic will translate into practice.

Nikita Dobroslavsky is expert at the SKOLKOVO Moscow School of Management.

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