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Saturday, 03 January 2015 16:44

Declining traffic through the northern sea route: what went wrong?

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Shipping news from the Northern Sea Route (NSR) for 2014 is not very encouraging on two counts. First, after a positive trend in the number of ships sailing through the NSR (4 vessels in 2010; 34 vessels in 2011; 46 vessels in 2012; and 71 vessels in 2013), the transits have reduced in 2014. According to the Russian NSR Information Office, only 31 vessels transited between Zhelania and Dezhnev along the NSR.

Second, the volume of cargo transported through the NSR fell by nearly 77 per cent from 1,355,897 tons in 2013 to 274,000 tons in 2014. Earlier, cargo volumes through the NSR had shown signs of continuous increase from 0.800 million tons in 2011 to 1.30 million tons in 2012. This also put to rest the belief that the cargo volume through the NSR would increase nearly 10 times to 19 million tons by 2021 provided the Arctic sea ice continued to shrink at the same rate in the future allowing more ships to use the NSR.

The above statistics raise an important question: why, in 2014, there was a sudden reduction in number of ships sailing through the NSR and the related decline in volume of cargo. There are at least seven reasons; first is the high cost of production of oil in the Arctic. The global oil prices have been falling from peak US $ 150 in 2008, US $120 in 2012 and US $100 in September 2014. It was hoped that the oil prices would stabilize at about US $100 and would be profitable for oil production in the Arctic. However, the continued decline in oil prices, now at about US $60 and the likelihood of plummeting further to US $ 40, has caused worries among the oil companies engaged in the Arctic. In that case, the Middle East oil would be more attractive than drilling in harsh and difficult Arctic oil fields.

Second, the Shale gas boom had an impact on oil exploration in the Arctic. According to estimates, in 2014, the shale gas market was US $41.4 billion and is expected to grow to US $104 billion by 2020 making Arctic oil and gas less attractive.

Third, the low volume of cargo (iron ore and gas condensates) transported through the NSR is due to business problems. The Kovdor Mining Company, which transports bulk cargo from Murmansk, could not reach an agreement on shipping prices and carried 200,000 tons less than the earlier years. Similarly, Novatek stopped shipping out gas condensate from Vitino on the Kola Peninsula and moved its business elsewhere.

Fourth, the Ukraine crisis has impacted on Russia’s Arctic energy sector. The economic and technological sanctions imposed by the US and the European Union on Russia have precluded financing of projects. For instance, Exxon Mobil had to stop cooperation with Russian energy companies such as Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft. Similarly, western shipping companies have shied away from doing business with Russian firms. In this context, Russia's state-owned United Shipbuilding Corporation is under sanctions and the managing director of Arctech, which builds icebreakers and other Arctic offshore vessels, has stated “It is true that the U.S. sanctions have influenced our banking relations”. These had a negative impact on the Russian Arctic energy trade due to higher costs of production and transportation from existing facilities and new exploration ventures were put on hold.

Fifth, there are fears, though not corroborated, that Russia may react to these sanctions by not offering support and safety services, which are critical for vessels sailing through the NSR.

Sixth, the shipping companies are not yet convinced of the profits they would earn by transporting goods between Europe and Asia through the NSR as compared to the traditional route through the Indian Ocean. Further, the low fuel prices will be able to offset the longer distance. In addition, they note, the earlier voyages were only demonstrative in nature.

Seventh, Arctic resources such as oil & gas, metals and minerals are also available elsewhere in the world. Resource hungry nations like China and India have found new markets in Australia, Latin America and Africa and it is easy to transport at lower costs.

Although the 2014 NSR data is not encouraging and may not be attractive to businesses, it is fair to argue that the setbacks for NSR are temporary. Russia is turning to Asian countries such as China for finance and alternative technologies to keep up the production. It is keen to develop the Arctic energy sector as it constitutes nearly 10 to 15 per cent of its GDP and it has firm orders for gas from China totaling US $$400 billion under a 30-year China-Russia gas deal. If the western sanctions are lifted, the NSR would regain its attractiveness and western technology giants may still find Russian Arctic an attractive destination for long term investment.

Dr. Vijay Sakhuja is the Director, National Maritime Foundation, New Delhi. The views expressed are those of the author and do not reflect the official policy or position of the Indian Navy or National Maritime Foundation.

Source: http://www.maritimeindia.org/CommentryView.aspx?NMFCID=5375

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