Shaping Russia’s Northern Sea Route in the Arctic

By Nadia Rodova in Moscow

December 13, 2011 - The use of the Russian Northern Sea Route (NSR) in the Arctic for shipping cargoes eastward to the Asia-Pacific region has become more intensive this year as Russia continues testing this challenging route, registering new shipping records and offering lower tariffs for ice breakers’ services that make navigation through the area difficult, icy waters more attractive.

Russia intends to turn the NSR into one of the key trade routes of international significance and scale, which will be able to compete with traditional international corridors in terms of transportation costs, safety and quality.

However, this ambitious goal faces serious challenges, including the harsh climate conditions of the Arctic and major investments required to develop necessary infrastructure in this remote area.

The NSR runs from Russia’s port of Murmansk on the Barents Sea along the Russian Arctic coast, through the Bering Strait and then down to the Pacific Ocean.

This includes the 3,000-mile long icebound section running from the Novaya Zemlya Island in the Arctic Ocean that separates the Barents and Kara seas, to Cape Dezhnev, the northeastern-most point of Eurasia on the Chukchi Peninsula.

Retreating ice in the Arctic Ocean in recent years has allowed sporadic journeys by vessels along Russia's northern coast, raising the possibility of a new trade route from Europe to Asia opening up, with Russia actively exploring the possibility of commercial navigation in the area to send future hydrocarbons production from its northern projects to the Asia-Pacific regions.

The NSR is the “shortest route between the major markets of Europe and the Asia-Pacific regions, practically one-third shorter than the traditional southern route [via the Suez Canal]. That is why companies that choose arctic transportation will doubtlessly receive significant economic benefits and dividends," Russia’s Prime Minister Vladimir Putin stated in September.

Test shipping throughout 2010 and 2011 has shown that sending cargoes from Russia’s north to the Pacific basin via the NSR would reduce transit times by up to 45%, depending on the destination, officials at several Russian companies have confirmed.

The shorter route would translate into savings of around $600,000 per voyage on bunker fuel, compared with the traditional way through the Suez Canal, first deputy general director of Russia's biggest shipper, Sovcomflot, Evgeny Ambrosov said in November.

"Based on the current price of bunker fuel at around $600-700/mt and an assumption that a vessel uses around 50-60 mt/day, around $600,000 will be saved per a voyage," he explained.

Navigating the NSR, however, is only possible with the assistance of powerful ice breakers, which casted doubt on the route’s economical viability as the ice-free navigation season in the Arctic lasts for around 30-45 days only.

In order to simulate companies’ activity in the region, Russia reduced ice-breakers’ service fees in 2011, making transportation through the difficult, icy waters comparable with costs via the Suez Canal, according to Vladimir Mikhailichenko, the executive director of non-commercial partnership to coordinate work on the NSR usage.

Previously, service fees were some four to six times higher, in comparison with the Suez route, he said. The lower tariff helped to boost the number of tankers sent via the NSR to 41 vessels in 2011 from just 10 ships in 2010, with the total volume of transit cargoes shipped through the route increasing by over 5 times on last year to 850,000 mt, Mikhailichenko added.

The route, if implemented, would also provide an alternative lane to that via the Suez Canal, a key artery for shipping between the Atlantic and Pacific basins.

Potential closure of the Suez Canal because of unrest in Egypt in February was an immediate source of concern for energy markets.

Apart from political risks, a secondary threat to Canal traffic has been the rise of piracy off the Somali coast and in the Gulf of Aden, which is having a clear effect on regional shipping.

Despite international patrols, Somali pirates have hijacked dozens of ships in recent years and have collected tens of millions of dollars in ransoms.

The NSR would mitigate these risks but also expose shipping companies to a number of other factors, including the harsh climate with its rapidly changing weather conditions, the Arctic Sea ice draft, as well as the considerable financial investment required for the project.

Russian authorities and companies, however, seem intent on overcoming these challenges, with Russia anticipating the northern regions, including Yamal Peninsula and its adjacent Arctic offshore reserves, becoming key areas compensating for dwindling hydrocarbons output from existing matured fields in its old provinces.

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