Northern Sea Route. Vaccine for Somali Pirates.

02.10.2009 — Analysis

The Northern Sea Route might be given a new lease of life as Yamal peninsula gets more economic activity. RusBusinessNews analysts found out that the process will be assisted by the development of the Yamal Harasavey port to service the Bovanenkovo gas field which is currently being developed. However, risks are still high.

There have been talks in Russia about the need to revive the Northern Sea Route (NSR) for over 10 years now; however, only recently there was some flesh of economical feasibility put on the bones of this idea. High hopes are pinned on the Gazprom developments in the Yamal peninsula.

The Northern Sea Route going along the arctic border of Russia is the shortest distance between Europe and the Far East: the distance between St. Petersburg and Vladivostok along NSR equals 14, 280 km, whereas via the Suez channel it is about 23,200 km, and the way around the Cape of Good Hope in South Africa is over 29,400 km long. Obviously it is also the safest way of water transportation because Somali pirates are highly unlikely to go beyond the Polar Circle.

In theory, the Northern Sea Route could become not only one of the major routes for transporting the cargo from the North-West of Russia to the polar facilities and back, but also replenish the government budget on account of transit trade between the EU, Japan and China and EU and South-East Asia and the USA Pacific Coast.

However, this is mere theory. According to Vladimir Litovsky, the head of production forces distribution and development sector in the Institute of Economics of the Urals branch of the Russian Academy of Sciences, the volume of cargo transported along the Northern Sea Route reached 7 million tones in 1987 and then dropped to 1.5 million tones in the end of 1990s. The process of market transformation caused the economic activity in the Russian Arctic region to shrink. Such a dramatic drop in cargo traffic lead to the crisis in the whole Arctic transportation system. About 5 steamship companies and 10 ports of the sea fleet, and 8 steamship companies and 6 ports of the river fleet were struck by the crisis. Cargo turnover in the ports of Amderma, Khatanga and Dikson has almost completely ceased.

In the next two years Russian authorities are hoping to increase the yearly cargo volume to 10 million tones. These expectations are largely associated with the oil and gas field developments in the Barents Sea.

In fact, the development of major oil and gas fields in Russia is shifting more and more to the coastal territories and the arctic shelf. Suffice it to say that according to the estimates not less than 20% of hydrocarbon material will be extracted here by 2030 and naval communication will become increasingly important for its transportation. However, the development of the Northern Sea Route is associated with huge investments and a number of risks.

Independent experts name the following risks. Environmental risks: up to 0.5 million cubic metres of gas are lost per 1 billion cubic metres of gas transported, which poses a considerable threat the region's ecology. Navigation risks: NSR will only be accessible for diesel-electric icebreaking ships July to September. Nuclear-powered icebreaker will be needed for the rest of the year to navigate ships. Daily allowance for a nuclear-powered icebreaker is estimated at 45-60 thousand US dollars (the beneficial ownership of the nuclear icebreakers belonging to the federal authorities was transferred to OAO Murmanskoe morskoe parokhodstvo (OAO Murmansk sea steamship company) and OAO Dalnevostochnoe morskoe parokhodstvo (OAO Far East sea steamship company; only Murmansk steamships operate in the Arctic region). Infrastructural risks: there is currently only one port in the north of Russia - the Murmansk sea port - which is capable of servicing heavy-tonnage vessels with a deadweight of over 140 thousand tones. In addition, there are issues of marine insurance and transport tariffs in the navigation, which are still to be solved.

Furthermore, Gazprom's increased activity on the Yamal peninsula is thought to be a sure sign for the revival of the Northern Sea Route. Back in 1998 Gazprom's design institutes considered the construction of a liquefied natural gas (LNG) plant in Yamal. It is assumed that the complex will incorporate an LNG plant and an isothermal storage facility - an export terminal. A fleet of liquefied gas tankers will deliver to the end users over 32 billion cubic metres of natural gas a year. The most suitable locations for building ports are thought to be cape Harasavey (port Harasavey) on the western coast of the Yamal peninsula, cape Krugly on the eastern coast of the Gulf of Ob (port Yasya) and cape Kamenny on the western coast of the Gulf of Ob (port Yunto).

Construction of an LNG plant on the Yamal has not yet started, but the construction of a sea port-terminal Harasaverey has been accelerated. This very port is used during the summer months to deliver the major part of cargo intended for the Bovanenkovo field, which Gazprom deems to be its top priority development target in Yamal. The commissioning of the first start-up facilities of the Bovanenkovo field and the main pipeline Bovanenkovo - Ukhta is scheduled for the third quarter of 2012. Construction materials for Gazprom are currently being delivered to Harasavey from Arkhangelsk by Murmansk sea steamship company and from Tyumen by Ob-Irtysh river steamship company. The volume of this cargo is constantly increasing.

High stakes are placed on oil and gas companies working in the Russian Arctic region, such as Gazprom, LUKOIL, RITEK and Norilsk Nickel, in terms of providing the Northern Sea Route with modern vessels. For example, Gazprom is planning to order construction of more than 60 ships and various buoyant technical devices for continental shelf exploration on the Yamal peninsula and up to 23 LNG tankers by 2020.

Foreign companies have recently been showing interest to using the Northern Sea Route. Not long ago Chandler GmbH, a German company, has transported generators and combustion gas turbines from the USA to Ugra by sea for the Surgut state district power plant, which is currently under construction. General Electric equipment weighing over 7,000 tones have been delivered using the Northern Sea Route from Antwerp to the Gulf of Ob, where it was reloaded to barges and transported into directly Surgut. It has been the largest amount of cargo ever transported into Russia thorough the Northern Sea Route.

The biggest challenge was to reload the equipment in the roadstead. Alexander Ekkart, project manager at Chandler GmbH  told RusBusinessNews that to transport smaller cargo it is better to use sea-river ships so that the cargo could be delivered directly to the destination point. Chandler GmbH has already delivered gas turbines from Antwerp to Surgut. The truth is, the river bed had to be cleaned and a port terminal had to be built to make this possible. However, it will allow for further transportation of cargo: to Omsk, Novosibirsk, Kemerovo, etc.

In order to deliver the cargo through the Northern Sea Route into the Ural region a combination of sea, railway and automobile transportation - i.e. intermodal transportation - is the most promising option. Construction of the Bovanenkovo - Harasavey railroad is planned to start in 2016 to allow the entrance to new port buildings of the Northern Sea Route. It should be noted that the construction of entrances to the Arctic ports is not planned to start before 2015. This means that proper ports of the Northern Sea Route are unlikely to be built in the short term.

Pavel Kober, Vladimir Terletsky