Breaking Through the Ice
An Assessment of Northern Sea Route Opportunities
By Terri McMillan
Until recently, the Arctic region has largely been an area of untapped potential as the pristine conditions, remote location, severe ice, harsh climate patterns and complex political considerations thwarted efforts to create established and regular international shipping routes. Within the last five years, however, this situation has shifted considerably. Climate change has catalyzed the retreat of sea ice and provided an opportunity for shipping routes to penetrate areas of the High North that before were impassable.
As developing economies maintain an insatiable need for seaborne energy supplies and raw materials, a corresponding need has arisen to cut transportation costs, particularly as international trade is at an all-time high. These savings can be realized through the utilization of the Northern Sea Route (NSR).
The NSR is a system of parallel shipping lanes that traverse the coastal waters of arctic Russia, north of Siberia, beginning in the Barents Sea in the West, crossing the frigid waters off Russia’s Northern coastline, and terminating at the Bering Strait in the East. In simple terms, it represents a shortcut between East and West: an alternative to the established high-volume routes through the Suez Canal and around the Cape of Good Hope. The use of the NSR has expanded considerably within the last five years, seeing through-traffic grow significantly year-on-year.
In 2010, only four commercial vessels transited the NSR. That number rose to 46 in 2012. In 2013, Russian authorities issued 393 permits for NSR transits, and in 2014 that number pivoted upward to over 600. The Arctic is no longer unreceptive to regular shipping voyages, and analyzing the trends over the next few years will no doubt indicate strong leaders in the field, those most willing to take advantage of the economic benefits that lie in the NSR.
One such leader is China, which stands out amongst the forerunners of this new route. The vessel Young Sheng, operated by Chinese shipping line Cosco, successfully completed her first NSR voyage having set off from Dalian, China on 8 August 2013. Her cargo hold contained a load of steel and heavy machinery and she had a number of containers on her main deck. She reached her final destination, Rotterdam, completing the passage in 35 days, which would otherwise have taken 48 via Suez or even longer taking the Cape route.
Prior to this, other Chinese ships had transited the Northern Sea Route, for example the research icebreaker Xue Long in 2012. China remains a clear leader, and this is a trend that is likely to continue and remain as long as Europe continues to be China’s main trading partner.
The Drivers of Northern Sea Route Traffic
There are a number of factors that may influence operators to take advantage of the Northern Sea Route.
The most obvious factor affecting the use of the NSR is the transit time savings in comparison to the Suez or Cape routes. The benefits remain clear. In considering the example above, a voyage from Dalian to Rotterdam takes an average of 48 days via the traditional route (10,500 nautical miles in distance) through the Indian Ocean and the Suez Canal. Via the NSR, the 8,100-nautical-mile voyage is estimated to take only 35 days, ice permitting, cutting over 2,000 nautical miles off the voyage.
The facts are undeniable: The NSR represents a real contraction of transit time, which directly cuts operational costs and minimizes the extent of vessel source pollution.
The banes and boons of fluctuating oil prices have been rehearsed for as long as oil has been in use. Bunkering fuel accounts for 70 percent of a vessel’s voyage cost. As a result, any fluctuation in oil prices creates a direct impact on overall operating expenses and ultimately profit margins.
Shorter transit times mean less consumption of bunker fuel, which in turn allows shipowners to realize substantial savings. In June 2014, oil prices were at a peak of approximately $115 per barrel, and such prices quickly eroded expected profit margins. Coinciding with this spike in oil prices, 2014 saw an increase in the number of permit approvals by Russia for transit through the NSR, reaching an all-time high. This increase is not coincidental as the cost of oil meant that shipping companies were ready to attempt drastic cost-reduction measures. Utilizing the NSR on Europe-Asia transits was one such measure.
Conversely, the start of 2015 has been marked by very low oil prices. Between July 2014 and January 2015 the price of oil plunged over 55 percent. Today it stands at just under $50 per barrel. Although over 600 permits were issued in 2014, a correlation can also be made as the number of vessels actually completing NSR transits has declined. Oil prices fell continually from June 2014, and thus there was less incentive for companies to adopt cost-saving measures.
This, combined with the beginning of winter season, meant that traffic slowed to a stop after September 2014. Although 600 permits were issued, particular vessels may not have made their NSR transits as oil prices again became affordable, allowing vessels to return with little loss to their normal routes.
All of this, however, must be set against the political climate in the region. The crisis in Ukraine has put a spotlight on Russia, but more so the use of the NSR. Some shipping companies themselves have silently boycotted its use because of the threat of instability.
Oil prices are not static, and the cyclical nature of the market means that this free fall will not last. Some may advance that the cost savings resulting from falling oil prices may counter the need to utilize the NSR. In the short term, this may well appear so. However, the reality is that, while costs of oil are low, operators can make use of additional bunker savings to develop their fleets in readiness for the higher oil prices that will inevitably follow.
Russian Administrative Considerations
The passage through the NSR brings with it an administrative task of obtaining the necessary authorization and permits from the Russian authorities prior to transit. The Russian Northern Sea Route Administration was established in 2013 to organize and oversee navigation in the waters of the NSR. It is through this Administration that authorization for each vessel must be obtained.
The main goals of the Administration are to ensure safe navigation and protect the regional marine environment from pollution. To apply for all documentation, applicants must provide very detailed information about the nature of their voyage through a pre-set form the Administration provides. The NSR Administration will accept or decline applications publicly on their website for particular vessels in about one month from the time of submission.
Many approach the NSR with trepidation, given the frosty relationship that Russia has had with other states. Recent examples of the exercise of political will can be seen in relation to maritime boundary delimitation, the arrest of vessels, and the infringement of exclusive flag state jurisdiction. Despite these underlying issues, there has been no history of Russia hampering NSR vessel traffic provided all vessels are duly permitted. It is in Russia’s interest to keep this route stable and open and to increase traffic and thus state revenues, which are much needed at this time.
Political indifference remains central to the attitudes that determine whether a state wishes to use the NSR. A breakdown of diplomatic or political relations is likely to have an impact on use of the NSR. As prior authorization is necessary for transit, it is within the power of the maritime administration to not merely organize transit of vessels in the area but to effectively regulate their admittance.
Not All Smooth Sailing
Despite the economic benefits offered by the NSR, caution must be exercised as inherent risks are present in any passage through the Arctic.
The Arctic as a whole, but in particular the NSR, has remained in pristine condition because access to it has historically been fraught with difficulties. The climactic volatility, thick sea-ice and other hazardous conditions make it inhospitable and largely inaccessible for the majority of the year. As it is a dangerous region with winter weather conditions year-round, all vessels making the transit must have varying levels of ice-class certified hulls, proper equipment and adequate training. Becoming stuck in refreezing ice will spell disaster for even the most prepared vessel.
The Polar Code will bring with it a raft of new regulations, requiring an additional layer of compliance for those transiting the NSR. Updates to MARPOL, SOLAS and the ISM all mean that shipping companies must review their operational obligations to ensure compliance with the Code. This will mean additional manning costs for improved arctic training, construction and design modifications to strengthen hulls, and better safety and compliance-management systems. These represent an investment of time, expertise and substantial capital for shipping companies.
At the same time, considerable investment is being made in the Arctic, driven by vast deposits of hydrocarbons under the ice and the need for shorter shipping routes to the East.
Despite its shortcomings - a short sailing season, the cost of icebreaker pilotage, and the hazards of extreme northern conditions along the waterway - the NSR is becoming integral to the future of international trade and the further development of regional commerce. – MarEx
Terri McMillan is a Solicitor of England and Wales and also a registered Attorney at Law in Trinidad and Tobago. She has an LLM in International Maritime Law and an MSc in Maritime Operations and is currently specializing in Arctic Transit with BHM Penlaw in Hamburg.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.