Navigating Risks, Opportunities in Arctic Shipping -Report

By MarEx 2014-08-21 10:21:00

In October 2013, the bulk carrier Nordic Orion made the first-ever successful commercial transit of the Arctic’s Northwest Passage, delivering a cargo of coal from Vancouver to Finland. The voyage marked a new phase of Arctic navigation, coming just four years after the first international commercial transit of the region’s Northern Sea Route. The Nordic Orion’s journey took around a week less than had it traveled via the Panama Canal, saving the operator both the toll fees and US$80,000 in fuel costs.

Global climate change — specifically the melting of sea ice — presents opportunities for international marine transportation networks in the Arctic, at least during the summer months. Recent discoveries of oil and the potential financial and time savings are making the Arctic routes more appealing to the shipping industry. Potential Arctic sea routes exist that enable ships to move between the Atlantic and Pacific oceans, thus cutting the distance between East Asia and Western Europe.

Some of these routes offer alternatives to the Panama and Suez canals, but they are not without risk. Extreme climate and weather conditions create unique hazards, including floating ice, thick fog, and violent storms. Despite new safety features, vessels remain vulnerable to ice damage, machinery breakdown, and more. The harsh environment also creates challenges for crews, few of which have been trained for or have experience in such conditions. And, should a vessel run into difficulty, help is likely to be a long way away.

Understandably, the international shipping industry is keen to start maximizing the opportunities afforded by Arctic navigation. Yet the marine insurance industry — whose collaboration is essential to the commercial viability of Arctic transit — holds a host of safety and navigational concerns, meaning that any negotiations will need to be handled carefully by those who have been engaged in the issues of this region for some time already.

Future Considerations

The major concerns for knowledgeable hull and P&I underwriters regarding Arctic navigation focus not only on the ice and climate, but on the added costs associated with salvage, support, and repair facilities. Faced with a request to insure such a voyage, the first response of a prudent underwriter is to question its feasibility and enquire about its planning. Without any hard facts on preparedness, it will be difficult, if not impossible, for underwriters to put a price on an insurable risk with confidence, or even to agree to cover a voyage in the first place.

Were this problem to be resolved, it is safe to assume that hull underwriters, knowing the record of hull damage that such voyages have resulted in to date, will ask for extensive surveys of the vessels before permitting Arctic transit under the insurance. It is also likely that deductibles for ice and/or ice-related damage — such as when ice heights build up from the bow and rake the vessel further along leading to plate buckling and deformation damage — may be considerably increased for the duration of the voyage.

A requirement to carry large numbers of spare parts could also be a featured condition, particularly pumps, pipes, and other equipment likely to be at risk from ice damage. Although not normally a hull insurers immediate concern, the competence and the experience of the officers and crew operating in these waters may be another factor affecting insurers appetite for accepting the risk.

Conclusion

As things currently stand, the majority of ships and their crews are not ready, the support service facilities are not in place, and the risks involved are not understood at a level to enable underwriters to price insurance for Arctic transit with either clarity or certainty.

Use of the NSR accounts for a comparatively small percentage of the total global marine transport activity, and to date the NWP has only been used by a few vessels. Nevertheless, these levels appear set to increase significantly over the coming years, especially with discoveries of huge mineral resources in the north of Russia, extending out into the Arctic Ocean, Kara, Pechora, Laptev, and East Siberian Seas.

Add to this the increasing finds of oil and gas deposits north of Alaska, Canada, and around Greenland, and it is perhaps ineTvitable that hull and P&I insurers will be more frequently asked to consider allowing vessels to navigate the northern waters. However, underwriters’ concerns surrounding remoteness, lack of salvage support services, and other risks means that it is by no means certain that they will accommodate such requests. If and when they do, such negotiations will need to be handled carefully by those who have been studying and engaged in the issues of this region for some time already.

FULL REPORT

This report was led by Marsh Risk Management Research.