ARCTIC SHIPPING
COMMERCIAL VIABILITY
OF THE ARCTIC SEA ROUTES
BY
Badari Narayana Srinath
SUPERVISOR:
Dr Jacob Kronbak
(University of Southern Denmark)
A dissertation submitted in partial fulfilment of the Degree of MSc. in Maritime
Operations and Management.
City University London
School of Engineering and Mathematical Science
June 2010
DECLARATION
I certify that the dissertation that I have submitted is my own unaided work,
and that I have read and complied with the guidelines on plagiarism as set out
in the student handbook.
I understand that the University may make use of plagiarism detection
software and that my work may therefore be stored on a database which is
accessible to other users of the same software. I certify that the word count
declared is correct.
____________________________________ Student
Badari Narayana Srinath
____________________________________ Supervisor
Jacob Kronbak
Date: June 2010
i EXECUTIVE SUMMARY
Climate change and dwindling energy resources are the driving factors behind
the research being performed in the Arctic region. The climate change is being
caused by an increase in the greenhouse gases and this has disturbed the
natural balance. These greenhouse gases are causing the rapid retreat of the ice
in the Arctic region. This spells both bad news and good news. The bad news is
of course obvious that the retreating ice can cause drastic changes to the local
habitats and also the world. The good news is that the retreating sea ice, has
given hope of shipping in the Arctic region. It has also given the opportunity to
explore the vast resources buried deep in the Arctic region.
It is very well known that the East-West trade is very important for the world
economy. It has been important even in history. The current route being used for
the Far East to Northern Europe trade is the Suez Canal and the Cape of Good
Hope routes. In the Far East to USEC trades, the Panama Canal is being used
currently. Both these canals have limitations with respect to draft and beam of
the vessel respectively. The Arctic routes are the sought after routes by the
shipping community. This is because the distances through the Arctic region on
the same routes are much shorter compared to the traditional routes. This would
save a lot of money on the fuel costs. This would also result in lesser emissions.
There are several Arctic sea routes(ASR). The main ones are the Northern Sea
route (NSR), North western passage (NWP), Polar passage (PP) and Arctic
Bridge (AB). Some routes like the NSR will cause a reduction in the distance
from Far East ports to Northern European ports by about 25-35%. However, it is
not that simple to utilise the ASR, as it has several other issues related to
navigation, technological, sea ice extent, legal, political and environmental
concerns. This thesis discusses all these issues related to the Arctic sea routes.
Today, most of the high value manufactured and semi manufactured goods are
transported in containers. Container transport plays a major role in the Far East
to Europe trade. This study considers two important ports. In Far East, the port of
Shanghai is chosen and in Europe, the Rotterdam port is chosen for the study. It
is important to note that container vessels call on several ports and there is
usually more than one container vessel serving a particular leg. This study limits
ii itself to one container ship serving between these two ports. The traditional route
used by vessels on this voyage is the Suez Canal route or the Cape of Good
Hope route depending on the size of the vessels. This route is also known as the
Royal road or Silk route due to historical reasons. In this study, an economic
analysis of the Arctic sea routes to serve these ports has been carried out. The
Arctic routes chosen are NSR, NWP and PP. Voyage estimations are carried out
for a CAC3 ice classed container vessel carrying cargo from Shanghai to
Rotterdam on the NSR, NWP, PP and the Suez route. Then, this study carries
out a brief comparative analysis of the profit margins gained on these routes
under three different scenarios. The scenarios mainly relate to the trading
season length along the ASR. They are assumed to be open for all year trading,
4 month and finally 6 month trading period. All these voyage estimations and
other calculations are performed using Excel Spreadsheets.
After performing the comparative analysis, this study comments on certain future
trends which are going to affect Arctic shipping. The trends discussed are
container trade growth, bunker fuel prices, technological developments among
others. Then, this study identifies certain critical factors which are going to affect
Arctic shipping in a major way in the future. Qualitative route sensitivity has been
carried out with respect to these critical factors. Finally, this thesis attempts to
establish the advantages provided by the ASR and to prove that it can be a
viable maritime route in the future.
iii ACKNOWLEDGEMENTS
This thesis marks the end of a wonderful MSc program which has given the
author the opportunity to study in four different European countries and
experience a wide variety of cultures at the same time during 2008-2010.
The author would like to take this opportunity to heartily thank his supervisor Dr
Jacob Kronbak for all the support, regular and timely feedback which guided the
author in the right direction while pursuing this thesis. The author would also like
to thank Mrs Dorthe Rasmussen, for all her administrative support which has
made the time in Denmark really fruitful and enjoyable. The author is also
grateful to all the other faculty of the entire Maritime innovation and research
department who were supportive and provided all the necessary facilities and
entertainment.
This endeavour would have not been possible in the first place without the
support of Dr Laurie Boswell and Dr Marcel Stive, who made it possible for the
author to travel to Denmark to pursue this thesis. The author is immensely
grateful to Dr Boswell and Dr Stive for giving a future to this endeavour.
The author would also like to thank all the course instructors in City University
London which has given the author a strong foundation in Maritime Operations
and Management. These strong foundations have helped the author understand
many intricate details of the shipping industry while researching for this thesis.
The author would like to thank all his friends in the master program, in particular,
Danyl Dowding, Mahtab Moalemi, Sarah Marshman, Jimena Haza and Trinh
Dieu Huong for all the advice, help and support they gave during this period.
They have been the author’s pillars of his social life for the past two years.
Lastly, the author would like to thank his parents, Mr Srinath and Mrs Jayamala
for all the encouragement and advice given throughout the study period.
iv TABLE OF CONTENTS
DECLARATION ..................................................................................................... i
EXECUTIVE SUMMARY ...................................................................................... ii
ACKNOWLEDGEMENTS .................................................................................... iv
TABLE OF CONTENTS........................................................................................ v
LIST OF ABBREVIATIONS ................................................................................ vii
LIST OF TABLES ................................................................................................ ix
LIST OF FIGURES ............................................................................................... x
1
2
INTRODUCTION............................................................................................ 1
1.1
Research objectives ................................................................................ 5
1.2
Scope of Study ........................................................................................ 6
1.3
Structure of the report .............................................................................. 6
ARCTIC REGION OVERVIEW .................................................................... 10
2.1
History of Arctic transport ...................................................................... 12
2.2
Northern Sea Route............................................................................... 12
2.3
North West passage .............................................................................. 12
2.4
Economy and Development .................................................................. 13
2.5
Oil and Gas ........................................................................................... 14
2.5.1
Mineral ore deposits ........................................................................ 15
3
CLIMATE CHANGE: TRENDS AND CAUSES ............................................ 18
4
CHALLENGES FACED ALONG THE ARCTIC ROUTES ............................ 27
4.1
5
Navigational ........................................................................................... 27
4.1.1
Northern Sea route ......................................................................... 27
4.1.2
North West Passage ....................................................................... 29
4.2
Technical ............................................................................................... 31
4.3
Legal issues .......................................................................................... 35
COMMERCIAL VIABILITY CALCULATIONS ............................................... 42
5.1
Assumptions and data for calculations .................................................. 42
5.2
Cost Structure of shipping ..................................................................... 43
5.2.1
Operating costs ............................................................................... 43
5.2.2
Periodic maintenance ..................................................................... 45
v 6
5.2.3
Voyage Costs.................................................................................. 45
5.2.4
Cargo handling charges .................................................................. 47
5.2.5
Capital costs ................................................................................... 47
5.2.6
Earnings (Revenue) ........................................................................ 47
PERFORMANCE COMPARISON ................................................................ 49
6.1
Northern sea route:................................................................................ 50
6.2
North West passage .............................................................................. 52
6.3
Polar Passage ....................................................................................... 53
6.4
Traditional route through the Suez Canal .............................................. 53
7
FUTURE TRENDS AND SCENARIOS ........................................................ 55
7.1
Container trade forecast ........................................................................ 55
7.2
Bunker Fuel ........................................................................................... 58
7.3
Future Arctic technology ........................................................................ 61
7.4
China and Arctic .................................................................................... 64
8
ROUTE SENSITIVITY.................................................................................. 65
8.1
Climate change...................................................................................... 65
8.2
Bunker Fuel prices................................................................................. 65
8.3
Marine insurance costs .......................................................................... 65
8.4
Legal and Political issues ...................................................................... 66
8.5
Technological Developments ................................................................ 66
8.6
Marine infrastructure.............................................................................. 67
8.7
Transit Fees........................................................................................... 67
9
CONCLUSIONS AND RECOMMENDATIONS ............................................ 69
10
REFERENCES ......................................................................................... 72
11
APPENDICES........................................................................................... 78
11.1 Appendix A: Google Earth images of distances along the routes .......... 78
11.2 Appendix B: Gross product distribution in the Arctic region ................... 80
11.3 Appendix C: Navigation season forecast along the NSR....................... 81
11.4 Appendix D: Excel Spreadsheets of Calculations .................................. 82
11.5 Appendix E: Formula sheets of the calculations .................................... 84
11.6 Appendix F: Suez Canal toll calculator .................................................. 86
11.7 Appendix G: Sea distances calculator ................................................... 86 vi LIST OF ABBREVIATIONS
ABS
American Bureau of Shipping
AMSA
Arctic Marine Shipping Assessment
BAF
Bunker Adjustment Factor
CAC 3
Canadian Arctic Class 3 Vessel
CAF
Currency Adjustment Factor
CASPPR
Canadian Arctic Shipping Pollution Prevention Regulations
CDEM
Construction, Design, Equipment and Manning
DNV
Det Norske Veritas
EEZ
Exclusive Economic Zone
FSICR
Finnish Swedish Ice Class Rules
GLONASS
Global Navigation Satellite System
H&M
Hull and Machinery
IFO
Intermediate Fuel Oil
IMO
International Maritime Organisation
LIBOR
London Interbank Offered Rate
LNG
Liquefied Natural Gas
LR
Lloyd’s Register
MDO
Marine Diesel Oil
MGO
Marine Gas Oil
MOHQ
Marine Operations Headquarters
NK
Nippon Kaiji Kyokai
NSR
Northern Sea Route
NWP
North West Passage
PAME
Protection of the Arctic Marine Environment
PC
Polar Class
P&I
Personal and Indemnity
POWS
Prince of Wales Strait
PP
Polar Passage
RMR
Russian Maritime Register
SECA
Sulphur Emission Control Area
TEU
Twenty-foot Equivalent Unit
TR
Traditional Route
vii UNCLOS
United Nations Convention on the Law of the Sea
UN
United Nations
USA
United States of America
USCG
United States Coast Guard
USEC
United States East Coast
viii LIST OF TABLES
Title of table
Page
Table 1: Distance comparison table
3
Table 2: Classification of ice strengthened and ice breaking vessels
34
Table 3: Polar code classification of vessels
35
Table 4: Table showing ship particulars of a CAC3 class 4000 TEU
container vessel
43
Table 5: Table indicating single voyage costs on all routes
49
Table 6: Table showing annual profits gained on all routes for all year trading
49
Table 7: Table showing profits on all routes when ASR is open for 4 months
49
Table 8: Table showing profits on all routes when ASR is open for 6 months
50
Table 9: Table showing the number of trips completed in different scenarios
50
Table 10: Table showing the increase in freight charges with respect
to decrease in sulphur content
60
Table 11: Qualitative analysis of the sensitivity of the routes
67
ix LIST OF FIGURES
Title of figure
Page
Figure 1: Map showing the different Arctic routes
2
Figure 2: Map showing the extent of the Arctic region
10
Figure 3: Map showing potential oil and gas reserves in Arctic region
14
Figure 4: Map showing shipping route from Baffin Island to Rotterdam
16
Figure 5: Map showing western part of NSR along with resource export routes to
Northern Europe
18
Figure 6: Melt cycle comparison graph from Jul to Nov
19
Figure 7: Melt cycle comparison graph from Mar to Jul 2010
20
Figure 8: Sea ice extent projections
21
Figure 9: Observed sea ice extent and concentration 2007,2008 and 2009
23
Figure 10: Graph showing the decline of September sea ice extent from 1978
to 2008
24
Figure 11: Image showing the age of arctic sea ice from 1988 to 2005
25
Figure 12: Satellite image of navigable routes in September 2007
26
Figure 13: Map showing all possible routes through the NSR
27
Figure 14: Bathymetry of the Russian Arctic
28
Figure 15: Map showing the three major routes through the NWP
29
Figure 16: Schematic showing the ice belt on a ship
32
Figure 17: Schematic showing definition of EEZ
36
Figure 18: Map showing the extent of the Arctic countries EEZ
37
Figure 19: Map showing the various legally disputed zones
38
Figure 20: Map summarising all major disputes in the Arctic
41
Figure 21: Graph showing the bunker price variation over 2009
46
Figure 22: Graph showing the container trade growth and forecast
55
x Figure 23: Graph showing the imbalance in the peak leg box volumes on
different routes
56
Figure 24: Graph showing the fuel consumption and trade trends from 1970
to 2010
58
Figure 25: Map showing current SECA areas
59
Figure 26: Average distribution of costs by vessel type for vessels operating
between Finland and other countries
60
Figure 27: Photograph of the M/V Norliskiy nickel proceeding stern first in thick
icy conditions
62
Figure 28: Diagrams showing the working technique of oblique icebreakers
63
xi 1
INTRODUCTION
Global warming is a term which has been used in almost every household
worldwide. It has lead to tremendous changes in the climate patterns. Almost all
countries throughout the world are now paying attention to this effect. Many
countries have brought in environmental legislations to control the same. Energy
is another issue which basically controls and runs human life today. The energy
resources are dwindling throughout the world. As strange it may seem, the global
warming effects has given some hope of extracting new energy resources in the
Arctic region.
This thesis basically stems from the above two mentioned factors. The global
warming effects in the Arctic region and the dwindling energy resources have
recently led to many studies being performed in the various aspects of the Arctic
region. The researches range from climate change effects on the sea ice extent,
permafrost, treelines, hydrocarbon explorations, mineral ore deposits, and
shipping in the Arctic region. There are many different types of sea transport
being studied as the Arctic would require tankers, LNG carriers, ore carriers and
container ship among others. There would also be a need for a fleet of modern
icebreakers. The Arctic region contains the last known huge reserves of oil and
gas. It also contains several ores, and some like Nickel and Zinc are already
being extracted. As the commodities become scarce, extracting these Arctic ores
might become economical in the future. These are the main reasons for carrying
out intensive research in the Arctic region.
This thesis focuses on container shipping in the Arctic region. The arctic region is
receiving so much attention recently with regards to shipping mainly because the
distances through the Arctic, from Far East to Northern Europe and USA are
much shorter than the traditional routes through the Suez and Panama canals
which are currently being used. There are several routes possible through the
Arctic region. . They are the Northern Sea route (formerly known as the North
east passage), the North West passage, Arctic bridge and the Polar passage.
The figure 1 below shows these routes. The route through the poles seems
1 impractical at the moment due to permanent ice cover. However, several climate
studies have indicated that at the current rate of melting, the poles would be free
of permanent ice cover in about a century, during some months in the summer.
Figure 1: Map showing the different Arctic routes
Source: http://www.arcticbridge.com/arctic%20bridge.gif
Rotterdam
New York
Shanghai
Shanghai
Traditional
route
distance(nm)
Alternative route
Distance
(nm)
% change in
distance
w.r.t
traditional route
Suez-10525
Polar passage
7300
31% reduction
NSR
8200
22 % reduction
NWP
8900-9500
15 % reduction
Cape of Good Hope
14500
38% increase
Polar Passage
9800
8% reduction
Panama-
2 10582
NWP
9450
11% reduction
Suez
12370
17% increase
Cape of Good Hope
14468
36% increase
Cape Horn
16746
58% increase
Table 1: Distance comparison tables
Source: Arctic sea routes by author, Traditional routes from http://www.e-ships.net/dist.htm
The table 1 shows the reduction in the distances by using the Arctic sea routes
compared to the other maritime routes. Now, these shorter routes can provide
immense savings in the cost of fuel and also in fuel consumption in international
shipping. However, climate change is a major deciding factor in shipping through
the Arctic. The global warming today is causing the retreat of the sea ice extent
in the Arctic region. This means that the waters are ice free for extended periods
during the summer. This ice free water is suitable for ship navigation and
transport. Hence, the basic and fundamental factor for efficient ship transport
through the Arctic is the climate change effects on the sea ice extent. Assessing
this is of prime importance to many researchers today.
The Ottawa declaration in 1966 set up the Arctic council consisting of all the
Arctic member states. The member states are Russia, Canada, USA, Iceland,
Norway, Sweden, Finland and Denmark (through Greenland and Faroe Islands).
In order to carry out research in a more structured manner, this council has set
up six working groups. These working groups carry out research in varied fields
like pollution and emission control, preservation of flora and fauna, and
emergency and rescue procedures. These working groups produce detailed
reports. This thesis has drawn a lot of information from the Arctic Council 2009
report on Arctic Marine Shipping Assessment (AMSA) produced by the
Protection of the Arctic Marine Environment (PAME) Working Group. Apart from
the two important factors of climate change and dwindling energy resources, this
report has identified several other critical factors, which will decide the future of
the Arctic development. These factors are:
•
Sea ice extent: Climate change factors
•
Bunker fuel prices
3 •
Container trade development(especially between the Far east and Europe
and USA)
•
Marine insurance policies regarding navigation in ice infested waters
•
Political/legal disputes regarding boundaries and claims in Arctic waters
•
Development of marine infrastructure in the Arctic
•
Technological developments in icebreaking design
•
Emergency response methods(in cases of maritime disasters)
The Arctic Council 2009 report also calls for comprehensive economic analysis
of the Arctic sea routes and comparative analysis of the pipeline transport and
maritime transport. Though this study has considered the case of container
shipping, the Arctic is bound to see a huge increase in tanker transport and LNG
shipping because of the discovery of potential oil and gas reserves in the Arctic.
However, the principles of voyage estimations remain the same, though the
route and cost values for tankers are quite different compared to container ships.
The container and tanker shipping markets function differently and have different
characteristics. Hence, it is important to carry out a separate analysis for tanker
transport in the Arctic.
A single peak leg container trading route from the Far East to Northern Europe
has been considered in this study and it attempts to make voyage estimations
through the Arctic sea routes and the traditional Suez Canal route. Though
container shipping involves the vessel calling at several different ports in one leg
itself, this study has selected two main ports,i.e, Shanghai and Rotterdam. The
voyage estimations are carried out using Excel spreadsheets, and the Arctic
routes chosen are the Northern sea route (NSR), North West passage (NWP)
and Polar passage (PP). Then, a comparative analysis has been carried out
based on the data obtained in the voyage estimates of these routes. The Arctic
routes are compared to the Suez route first and then they are compared
amongst themselves as each Arctic route has its own characteristics. The Arctic
bridge route has not been considered in this study.
4 The author has made an effort to produce a balanced report paying attention to
all the factors mentioned in the Arctic Council (2009) report. However, this study
has focussed more on the economic viability of Arctic sea routes and its future as
viable maritime sea routes. An honest effort has been made to obtain the latest
market information. In cases where the market information was unavailable due
to company confidentiality matters or lack of membership benefits, this study has
drawn heavily from the information available in a similar report on viability of
shipping in the North West passage submitted by Pandey (2008). A summary of
each of the sections in this report has been provided in the next section.
1.1 Research objectives
This study, however, compares the three Arctic routes, that is, NSR, NWP and
PP amongst themselves to evaluate which Arctic route is best suited currently for
transits. Then, it compares the Arctic route with the traditional Suez Canal route.
Most studies previously carried out in this field focus on one type of Arctic route
and compare it to the traditional route used by ships for that particular voyage.
Apart from the main economical analysis, this study also discusses the technical,
legal and navigational implications of shipping in the Arctic region. The main
research areas discussed in this report are:
•
Navigational hazards faced by ships in the Arctic region
•
Technical problems faced by naval architects to design ice classed
vessels
•
The legal and political issues in the Arctic region
•
Economic potential of the Arctic region, particularly with respect to the oil
and gas reserves in the region
•
Economic Analysis of the viability of the various Arctic sea routes: This is
the main focus of this thesis. It considers a 4000 TEU CAC3 classed
vessel used for transport of goods from Shanghai to Rotterdam. The
routes used for the comparative economic analysis are the NSR, NWP,
PP and the Suez Canal route. There are three scenarios considered in
this study. First, the arctic routes are assumed to be open all year round.
Next, the Arctic routes are assumed to open for navigation only 4 months
a year and the rest of the year the CAC3 classed vessel uses the
traditional Suez route. In the last scenario, the Arctic routes are assumed
5 to be open for 6 months a year. This study attempts to verify if the Arctic
sea routes can be used as an economically attractive maritime route in
the future
•
Future container trade activity
•
A small inquest into the future bunker prices scenarios and trends
•
The technological developments in the field of ice classed ship building
•
Future rules and regulations in the Arctic region imposed by the Arctic
states
1.2 Scope of Study
This section outlines the scope of this study, which results in several
recommendations in the end of this study. The main limitations of this study are:
•
It is a comparative economic analysis; hence several absolute price
values might be inaccurate. The prices, especially with respect to marine
insurance, bunker prices and capital costs have been logically assumed.
•
Load line zones, BAF and CAF factors have not been considered in the
voyage estimations
•
This study only comments on the climate change studies and does not
undertake any modelling with respect to climate change
•
This study does not perform a technical feasibility study
•
Ice navigation involves several intricate details like ice numerals, and ice
zones. These aspects are not considered in great detail in navigational
issues
1.3 Structure of the report
In section 4 of this report, an overview of the Arctic region has been discussed. It
is important to define the Arctic before analysing the sea routes through it. The
latitude 66°33’N marks the Arctic Circle, and all the areas encompassed by this
circle are known as the Arctic region. The other definitions are based on the
treelines and permafrost extent. The Arctic region comprises of 8 nations.
Next, this study briefly discusses the history of Arctic transport to understand the
development of the Arctic sea routes. The Inuits were the first explorers and
settlers of the Arctic region. The NSR has seen operation since 1979 in the
Murmansk-Dudinka route. In 1991, the Soviet Union opened up the route for
6 international traffic. The NWP has been tougher to explore due to the complex
archipelago structure and several choke points. The idea of its existence dates
back to 1492, but it was transited completely only in 1902 by Roald Amundsen.
Both the Arctic routes had been used for community re supply initially and
gradually started being used for internal trade.
The Arctic region is currently inhabited by only about 4 million people. USA,
Canada, and Russia have significant indigenous populations. The economic
development in this region is going to affect the Arctic in several different ways.
The Arctic region is the last known source for energy resources like oil and gas.
With the dwindling energy resources, the extraction of oil from the Arctic might
economically viable in the near future. Apart from oil and gas, the Arctic has
several mineral deposits in the region. In the future, there will be mineral
extraction and transport, which will call for bulk carrier transport.
The next section discusses the major issue of climate change. This issue is the
backbone of Arctic shipping. Recently it has been observed that climate change
effects have resulted in the lengthening of the summer season. This has resulted
in ice free Arctic waters which can be navigated more easily. The greenhouse
effect and increased emissions of greenhouse gases are the principle causes to
this phenomenon. Scientists have formulated several models to determine the
ice extent for the next 100 years. Most of these models used modest projections,
and still it seems that the NWP and NSR will have extended ice free summer
months which will allow navigation. There are contradicting statements with
regards to the Central Arctic Ocean being ice free. However, the important point
to note that the retreat of ice extent in reality is more rapid than the predicted
model projections. The Arctic Council (2009) report discusses several models.
This thesis has picked only one of those models to demonstrate the ice extent in
the summer months till the end of this century.
The next section discusses the issues and challenges faced in Arctic shipping.
The issues are discussed under the headings; navigational, technological and
legal. Navigational issues vary slightly among the different Arctic routes due to
geography and bathymetry. The technological challenges of navigating through
7 ice infested water are common to all the Arctic routes. The main points to note
here are hull structure strength, hull form, and propulsion systems. The legal
issues in Arctic areas mainly revolve around two main topics: claim over
resources, and status of waters. The Arctic zone countries are all very close to
each other leading to an overlap of the EEZ zones in certain areas. This has led
to several problems resulting in conflicting claims over the Arctic zones. The next
legal problem is the status of the Arctic shipping lanes. This is an unfavourable
situation for all countries involved and also for international trade.
Section 7 covers the commercial viability calculations of using the Arctic sea
routes as an alternative to the traditional Suez Canal route. This study has
assumed a common ship size on all routes to give equal economies of scale.
The ship type is a 4000 TEU CAC 3 ice classed vessel, which will use the Suez
route during the winter periods when the Arctic is covered in ice. The various
cost headings have been discussed. In this study, the profit margin on each
route is more important in analysing the route’s economical viability as it is a
comparative study.
In section 8, the study aims to carry out a performance comparison of the routes.
The calculations are carried out in Excel and the tables indicating the costs
incurred and profits gained are listed in this section. Three scenarios have been
assumed in terms of trading period. The scenarios considered are all year
trading on Arctic routes and the other two scenarios being that, the Arctic routes
open for 4 and 6 months per year. Depending on the profit margins, the most
promising Arctic route is identified.
The next section 10 discusses the future scenarios with regards to container
trade, bunker fuel prices, arctic technology and shipping in the arctic on a
general perspective. An important factor is the bunker fuels. The bunker fuel
prices have a great effect on shipping in terms of route, and speed of the ship
which in turn affects several other factors like service. Bunker fuel price
forecasting has become harder recently due to the new regulations which aim at
reducing the sulphur content of the fuels in order to reduce the harmful
8 emissions. In these circumstances of a rise in fuel prices, it gives impetus to the
shipping companies to use the Arctic sea routes.
This study considers the peak leg from Shanghai to Rotterdam. This is because
China is a powerhouse and is one of the leading exporters and importers of
goods. The container shipping industry depends on China to a great extent.
Hence, it is important to see China’s strategy about Arctic shipping.
In section 11, the author attempts to perform a qualitative route sensitivity
analysis with respect to several critical factors identified from the study which are
going to affect the future of Arctic Shipping. Lastly, in section 12, the study draws
conclusions from the research performed and recommends further research
areas in the field of Arctic Shipping.
9 2
ARCTIC REGION OVERVIEW
The map below shows the definition of the Arctic:
Figure 2.Map showing the extent of the Arctic region
Source: Anker,M et al(2007)
The Arctic is the one of few places on earth which has not been tampered with
by humans. This is mainly because of the inhospitable conditions prevailing in
the region. The Arctic region as seen from the map has several countries
10 bordering the Arctic sea. The most important ones are Canada, Denmark
(through Greenland), Norway, Russia, USA (Alaska), Iceland, Finland, and
Sweden. These countries will have a great and responsible role in the future in
developing the Arctic region. With this view in mind, the Arctic council was set up
with the Ottawa declaration in 1966. The Council has set up several working
groups responsible for the research and development of the Arctic region. These
working groups make comprehensive reports which have been referred to in this
project.
There is an important latitude line which marks the Arctic region. This is known
as the Arctic Circle and is at 66°33’N. This the southern limit of the midnight sun.
North of this the sun does not set atleast one day in a year. But, there are other
ways to mark the Arctic region. The Arctic is also marked out by the treelines and
permafrost. The Arctic region is mainly occupied by the Arctic Sea. The Arctic
region today is populated by about 4 million people (Arctic Council 2004). The
entire Arctic region encompasses 8 nations. Greenland and North America have
significant amounts of indigenous populations. There are several immigrants as
well and this is growing in number due to many reasons. These people mainly
derive their food from hunting seals and other marine mammals.
The Arctic sea contains regions which have not been charted accurately. This is
partly due to lack of technology to sound through ice and also because of the
fact that the Arctic sea has not seen much of global maritime transport. But,
sounding and accurate hydrographic charts are very essential for maritime
transport. The Arctic sea is a relatively shallow sea with broad continental
shelves. The most important point in this region with respect to maritime
transport is the Bering Strait. The Bering Strait is in between Russia and USA
(Alaska). It is from here that vessels can take several routes to reach Western
Europe or North America. These are routes are the NWP, NSR or the PP. The
PP is the shortest. The distance from Bering strait to Fram strait (in between
Greenland and Svalbard) is 2100 Nm.
11 2.1 History of Arctic transport
The indigenous people settled in the arctic were the original explorers and have
been using the arctic for marine transport for many ages. However, arctic
transport till date has not become a major international maritime trade route due
to a variety of reasons. The NWP and NSR have slightly differing histories. The
NWP has been tougher to explore and has taken the lives of many explorers as
compared to the NSR. In the recent ages the Arctic has seen a rise in maritime
tourism activities. With advances in technology and increased purchasing power
parity of people, these high cost tourism activities in the arctic have been on the
rise. The history of NSR and NWP has been briefly discussed below.
2.2 Northern Sea Route
The NSR has been very important to Russia and erstwhile Soviet Union. Though
this route has not been exposed to international vessels for a long time due to
the Soviet Union, the NSR has played a major role in the maritime tradition of the
Soviet Union. The route between Murmansk and Dudinka has been maintained
for year long navigation since 1979. The nature of usage of the NSR has
developed over a period of time, from community and resupply of local
communities to transport of international cargo during summer time and recently
all year long. The NSR route has mostly been under the government control.
This route played a major role in the development of the superior ice breaking
fleet and ice navigational skills of the Soviet Union (Arctic Council 2009). The
route was opened for international traffic in 1991. However, the traffic through
the NSR dropped since 1987 because of the high tariff policy, and other political
reasons. Currently, the NSR is under the control of two Russian Marine
operations headquarters (MOHQ’s). The areas of jurisdiction of these two
MOHQ’s have been divided on the basis of the longitude (Liu & Kronbak 2010).
Traffics originating at the east or the west end of the NSR have to contact the
respective MOHQ for clearance and other administrative issues.
2.3 North West passage
The NWP has been more elusive than the NSR. The thought of the possibility of
existence of the NWP dates back to 1490, when the Europeans were looking for
a more lucrative route to Far East. However, it was only in 1902, that the
Norwegian explorer, Roald Amundsen , transited the NWP completely. The NWP
12 was considered a route important to national security during 1945-1949.
However, since 1969, the usage of the route has tilted towards economy and
development. Most of the voyages were directed at hydrocarbon exploration and
other bulk carriers carried ore from the mines in Strathcona sound. The factors
that caused so many difficulties for explorers in the past still pose challenges to
navigation of the NWP today. However, the intensity of the problems has
reduced. The major problems along the NWP are complex archipelago, choke
points, inadequate charting, and ice conditions.
In 1969, the American oil tanker SS Manhattan undertook a voyage along the
NWP and there were many conclusions derived from this voyage which basically
sum up the technical challenges faced by ships planning to transit the NWP
route even today. Most of these issues have been discussed under the section
which focuses on the technological issues faced in Arctic shipping.
2.4 Economy and Development
There is enormous potential for development of natural resources in these Arctic
regions. The Arctic region is under limelight mainly because of the presence of
hydrocarbon resources. Apart from these resources, the arctic also has many
mineral ores like copper, zinc, nickel, and iron ore. The Arctic region also has an
abundance of forest products. Fishing in the Arctic is being developed slowly as
conditions become more favourable for navigation. The potential developments
of these resources have been discussed.
13 2.5 Oil and Gas
The figure 3 below shows the potential reserves of oil and gas in the arctic
regions.
Figure 3: Map showing potential oil and gas reserves in Arctic region
Source: http://portal.inter-map.com/#mapID=26&groupID=94&z=1.0&up=700.7&left=0.0
As can be seen from the map, the Arctic will inevitably have a future in
hydrocarbon exploration and production. According the Arctic Council (2009)
report, the arctic contains 90 billion barrels of undiscovered oil and 47 trillion
cubic metres of gas. Also, the Arctic Council (2009) report quotes the following
with regards to the location of the resources;
14 Of the total for undiscovered oil reserves, more than half are estimated to occur
in geologic provinces in the Alaska Arctic (offshore and onshore), the Amerasian
Basin (offshore north of the Beaufort Sea) and in West and East
Greenland(offshore). More than 70 percent of the undiscovered natural gas is
estimated to be located in three areas: the West Siberian Basin
(Yamal Peninsula and offshore in the Kara Sea), the East Barents Basin
(location of the Russian Federation’s giant offshore Shtokman field) and the
Alaska Arctic (offshore and onshore)
Russia and Norway are already investing in developing the Arctic hydrocarbon
resources. The Shtokman gas fields in East Barents Sea have already received
attention from the Russian government and investments are underway to
develop this field. This field has a depth of 2000m. Many of these regions will
remain ice free throughout the year, but the production and working will have to
be carried out in freezing temperatures. Norway will have a big role to play in
developing these deep fields as it already has considerable experience in oil
exploration in the North sea areas under similar conditions. The development of
these fields calls for superior subsea exploration and ice technological
developments. However, with regards to gas transport, pipelines offer stiff
competition to maritime transport. In the future, Murmansk is going to be
developed into a major port for loading oil and gas. It already serves ore carriers
at the present. In North America, gas from Alaska is already being transported
via pipelines to the USA. Anchorage serves as a major port in this region for
tanker transport. The hydrocarbon resources in this region are less developed
compared to Russia. Hence, it is very clear that Russia will be the main area of
focus in hydrocarbon development in the near future.
2.5.1 Mineral ore deposits
There are two major deposits in the Arctic region with current production. One is
the Red Dog zinc mines in the Alaskan Arctic and the other is Norilsk Nickel
mine in Siberia. The red dog mines operate only during summers as shipment is
not possible during the severe winters. The Norilsk nickel mines operate on all
year round basis. However, another important development in the region is high
grade iron ore mines of Mary River on the Baffin Island. This mine is being
developed and the first shipments are expected to be sent out in September
2014 (Arctic Economics 2008).
15 The potential port is going to be developed along the Steensby inlet which will be
capable of handling ice ore carriers. This development calls for technological
advances in design of ore carriers for year round operation and transport of iron
ore from Mary River. The figure 4 below shows the location of the iron ore and
the shipping route to Rotterdam.
Figure 4: Map showing shipping route from Baffin Island to Rotterdam
Source: http://benmuse.typepad.com/.a/6a00d8341d9cb353ef00e553c2d5de8833-popup
The development of the land based infrastructure for such an endeavour will be
a challenge as the permafrost is already being affected due to global warming.
Due to this change in permafrost, the resources in Greenland can also be
extracted commercially in the future. Greenland has several rare mineral
resources like uranium among others. Hence, these mineral resources show a
promising future for the economic development of the Arctic region. (Arctic
Council 2009). There are a combination of factors which have led to notion of
exploiting the resources available in Greenland under hostile conditions. The
main factors are increasing commodity prices and the effects of permafrost
retreat due to global warming. The increasing commodity prices, makes it
economical for extracting the minerals even in hostile environments (Arctic
Economics 2008).
16 The next important resource in the region is timber. Russia is currently not
utilising its complete potential of timber available. Canada on the other hand is
the world’s leading exporter of forest products. With the growth of the world
economies, especially China and India, there will be an increased demand for
timber in the future. This is certainly a trade which Russia plans to expand in the
near future (Arctic Council 2009).
The east west trade is continuing to grow at a rapid pace. There are several
routes in operation currently which serve this trade. The main canals which serve
these routes are Panama and Suez canal. There are already plans in progress to
expand the Panama canal lock size. The Panama is mainly used on the USECAsia trade. Bigger ship sizes provide economies of scale and hence reduce the
unit cost. Hence, there is a lot of incentive to build bigger ships. However, there
are several logistics factors which are currently restricting the size one of them
being the lock sizes. These lock size expansion plans will be a major competition
to the Arctic routes in the future. Another disadvantage with the Arctic routes
currently is that there are no major ports located in the region. The region is quite
remote and in case of emergency situations, the relief operations could take a lot
of time. Also, disasters in this region are more environmentally harmful because
of the extreme cold conditions.
Another major development is the railway transportation system. Currently, the
only significant rail system that is serving this purpose is the Trans Siberian rail
which links the Baltic and the Pacific coast. There are plans by the EU to extend
this railway network and improve the infrastructure of the rail networks in order to
make intermodal transport more efficient and effective. China is already
developing its hinterland rail systems rapidly.
The developments related to trade flows, canal sizes, ship size, rail networks
play a big role in the future of the Arctic routes. The Arctic will definitely see a lot
of economic activity in the near future in the areas of hydrocarbon and mineral
ore development and transport.
17 The figure 5 shows the transport routes in the Russian region of the Arctic.
Figure 5: Map showing western part of NSR along with resource export routes to Northern Europe
Source: Arctic development and maritime transportation (2007)
3
CLIMATE CHANGE: TRENDS AND CAUSES
The climate change issue cannot be neglected and it certainly has a major role in
deciding the fate of the Arctic sea routes in future. The major concern in case of
Arctic sea routes is the ice thickness and ice extent.
The Arctic ice goes through a cycle every year in summer and winter. In the
summer the ice melts, whereas the in the winter it freezes all over again. This is
the melting and freezing cycle of the arctic ice. The navigational possibilities
depend a lot on this cycle. Hence, understanding and predicting the extent of
these cycles is very important for shipping. Next, another question that comes to
mind is the reason for the melting of the ice and retreating ice extent in the
Arctic. The greenhouse effect has to play a major role in this phenomenon. The
earth surface reflects heat, which is trapped by greenhouse gases such as
Carbon di oxide (CO2). This keeps the earth warm and hospitable. However,
ever since the industrial revolution the natural balance of CO2 in the atmosphere
18 has changed. Burning of fuels and many other activities emit greenhouse gases.
As a result, the CO2 content in the atmosphere has exceeded. This has resulted
in the earth becoming a ‘hotter’. The ice is melting so fast because of two
reasons, one is the positive feedback effect and the other is the meltwater effect.
The sea water absorbs heat, while the ice sheets reflect the sunlight being white.
However, with the increase in temperature and melting of ice, the sea water
content is increasing. This has resulted in more heat being absorbed rather than
reflected. This phenomenon accelerates the process of the melting of these ice
sheets. Secondly, the meltwater flows through the holes in the ice sheets below
them. This water acts as a lubricant and promotes easier slippage of the ice
sheet into the sea. (National Maritime Musuem n.d)
The figure 6 below shows the melt cycle through 2009.
Figure 6: Melt cycle comparison graph from Jul to Nov
Source: http://nsidc.org/images/arcticseaicenews/20091005_Figure2.png
19 The figure 7 below shows the Arctic melt cycle for the year 2010.
Figure 7: Melt cycle comparison graph from Mar to Jul 2010
Source: http://nsidc.org/data/seaice_index/images/daily_images/N_stddev_timeseries.png
It is very clear from the graph that compared to the 2007 levels, the extent of ice
was much more this year and during April it also came very close the 1979-2000
average levels. However, as the melt season begins, the real issue comes to
light. The sea ice is melting much faster than 2007 levels. The graph shows a
steep downward slope from May 2010 onwards.
There have been various studies predicting the ice extent in the future. Most of
these models use modest projections of the sea ice extent. But, the reality
seems to be different. The sea ice is retreating at a faster rate than predicted by
those models. The figure 8 below from the Arctic Council (2009) review
illustrates projections about the sea ice extent in the future:
20 Figure 8: Sea ice extent projections
Source: Arctic Council 2009
If these projections are analysed, then it is possible to deduce that the navigation
will not be possible during the winter months. However, there may be an
extension of the summer months. From 2010-2030 in September, NSR will be
almost totally free of the sea ice, whereas the NWP still has some routes blocked
by ice. The western part of NWP is relatively free of ice. This is a longer route to
Europe, but nevertheless lesser than the traditional routes.
But, by 2100, in September, both the NWP and NSR will be totally ice free. This
is an interesting scenario and will play a big role in rewriting maritime traffic
routes. The route directly through the North Pole is still not possible even after a
century. But, considering the fact that these are modest projections and so far
21 the observed sea ice extent is retreating faster than projected, it is assumed that
the North Pole too will be relatively ice free during the summer months by 2100.
It is now important to discuss the different kinds of ice present in the Arctic as
these are the main concerns for shipping and also for future climate model
predictions. The classification of the ice are as follows :
•
Young ice: These pose little danger to ice strengthened ships. They are
just about 30 cms thick and start forming when the autumn season starts
and temperatures start dropping below the freezing point.
•
First year ice: This ice is soft and attains upto 2m thickness. The ice
strengthened ships can navigate through this ice without much danger.
However, when under pressure from winds, currents care must be taken
to avoid damages to the vessel. This ice has brine pockets within it, which
give it its softness.
•
Multi year ice: If the first year ice survives the summer melt season, it
leads to the formation of multi year ice. It is this multiyear ice which poses
a major threat to ships. They can damage ice strengthened vessels and
under pressure can also impede the icebreakers. The brine within the first
year ice flows out, leaving behind a thick strong ice mass. The ice
thickness can range upto about 5 m.
•
Icebergs: These are ice masses which break off glaciers. They pose a
significant threat to ships as they are mobile and under pressure can
impose high pressures on the vessel structure. Bergy bits and growlers
are variants of this which break off from the coast and are dangerous
because they are hard to detect in the sea. (Arctic Council 2009)
Some studies have indicated that the central Arctic Ocean might be free of multi
year ice. This has enormous implications for design and technology in shipping.
It is also important for stakeholders to note that the model predictions used in
Arctic council (2009) report does not indicate the ice conditions in the NWP
accurately. The NWP has a complex geographical archipelago consisting of
many straits and narrow channels. For the purpose of a better forecast of the ice
conditions in the NWP, the Canadian ice services have started a project of
producing accurate sea ice data in the NWP. In the future, companies intending
22 to use the NWP must refer to these Canadian ice charts for more accurate
predictions of climate change in the NWP. The figure 3 below illustrates the
observed sea ice extent and concentration in Sept 2007, 2008 and 2009.
Figure 9: Observed sea ice extent and concentration 2007, 2008 and 2009
Source:
http://nsidc.org/cgibin/bist/bist.pl?annot=1&legend=1&scale=100&tab_cols=2&tab_rows=3&config=s
eaice_index&submit=Refresh&mo0=09&hemis0=N&img0=extn&mo1=09&hemis1=N&img1=conc&ye
ar0=2009&year1=2008&year2=2007
23 The image
es above indicate that the ice extent hass been inccreasing sliightly overr
the last 2 years. Itt is still much
m
lowe
er than the 1979-20
000 average levels.
However, the distribution of th
he concentration of icce has nott remained the same
e
in all the three ye
ears. The NWP ha
as remaine
ed open for past two
t
yearss
completelyy in September. Thiss is first in
n its record
ded historyy (Pandey 2008). Ass
seen in the
e figure 9, both the NSR
N
and NWP
N
have been rela
atively ice free
f
during
g
these months. Thou
ugh, some
e routes along
a
the NWP rem
main ice infested in
n
er 2009.
Septembe
The graph
h below shows
s
the September sea ice
e extent ffrom 1979
9 to 2009.
According to the Na
ational sno
ow and ice
e data cen
ntre, the September decline off
sea ice ha
as increase
ed to 11.2%
% per deca
ade. The sea
s ice covver consistted of 49%
%
first year or
o youngerr ice. This is the ice cover
c
which
h is more vvulnerable to melting
g
during the summer months.
m
(National Snow and Ice
e Data cen
ntre 2009)
Figu
ure 10: Graph showing the
e decline of September sea
a ice extent ffrom 1978 to 2008
2
Source: Nattional Snow and
a Ice data centre
c
2009
24
4 The figure 11 below shows the age of ice from 1988 to 2005. It is very clear from
the figure that the age of the ice the Arctic region is decreasing. Majority of the
ice extent covering the Arctic region is between 0-4 years. This ice is relatively
easier to break compared to ice which is 6-10 years old. Hence, it is evident that
navigation too will become easier in the future.
Figure 11: Image showing the age of arctic sea ice from 1988 to 2005
Source:http://maps.grida.no/go/graphic/change-in-the-age-of-ice-on-the-arctic-ocean-comparingseptember-ice-ages-in-1988-1990-2001-and-2005
25 The satellite image below from the European Space agency shows the routes
which were navigable through the Arctic during September 2007.
Figure 12: Satellite image of navigable routes in September 2007
Source: http://www.nmm.ac.uk/explore/sea-and-ships/in-depth/north-west-passage/the-science-ofarctic-melting/
The blue line indicates the Northern sea route, while the orange line indicates the
route through the North western passage.
However, the retreating of sea ice and ice thickness extent does not necessarily
bring good news. The permafrost on the land too is getting affected. The
permafrost on the land is also declining which is causing several problems to
current infrastructure on the land. This would pose several problems related to
land based marine infrastructure like docks, roads, and railways. With the
environmental concerns growing, many countries are bringing about new climate
policies with regards to emissions. Hence, there are many factors which are
going to determine shipping in the future and this is even more important to the
Arctic region because of the delicate natural balance.
26 4
CHALLENGES FACED ALONG THE ARCTIC ROUTES
4.1 Navigational
4.1.1 Northern Sea route
Figure 13: Map showing all possible routes through the NSR
Source: Mulherin,D.N (1996)
The navigational challenges along the NSR mainly revolve around the issues
related to ice conditions, bathymetry and weather conditions in the Arctic.
•
Ice conditions: This is the foremost concern for navigation along the NSR.
The first year ice starts forming during the start of the winter. The
unpredictability of these ice conditions is major factor in hampering the
navigation along this route. For the purpose of safer navigation, the
vessels
have
to
contact
the
agency
called
Marine
operations
headquarters (MOHQ) set up by Russia which provide current and
forecasted ice conditions. With their wealth of experience of shipping
along the NSR, the advise given by these agencies are of high value and
must be obtained before embarking along the NSR. The MOHQ not only
provide weather forecasts, and navigational advice, but, they are the
authority over the NSR and it is necessary to inform them of the vessel’s
schedule and transit. It is the MOHQ which grant permission to transit the
27 NSR. There are two MOHQ’s located along the NSR. They have divided
their respective areas of control based on the longitude (Liu & Kronbak
2010).
•
Bathymetry: This is another major concern along the NSR, as in many
areas there are shoals and many of the straits have shallow depths. This
will not allow deep draft vessels to use the NSR. They run a high risk of
running aground in shallow depths. If the figure 14 below is analysed, then
it is clear that for using the shorter coastal NSR route, the draft limitations
will be lower. This will not allow large vessels along the coastal NSR
route. The deep draft vessels will either have to use the transit route along
the northerly NSR route. Another possibility is to use the central Arctic
Ocean, but issues concerning this have been discussed later in this
section.
Figure 14: Bathymetry of the Russian Arctic
Source: Mulherin,D.N (1996)
•
Weather conditions: Satellite communication plays a major role in modern
shipping.
Due
to
inadequate
satellite
support
along
the
NSR,
communication problems can arise which is a major issue in shipping. The
28 Arctic nights are long and can lead to visibility problems. Another issue is
with the usage of the compass. With the ships passing close to the North
Pole, the mariners will face problems of using the compass However, this
can be solved by using the GPS systems. But, currently the system is not
compatible with all international ships. Hence, at the moment only
Russian ships can accept the signals from the system called GLONAS.
This system will have to be made compatible with international ships if the
NSR has to be developed as a viable maritime route (Ship and Ocean
Foundation 2001)
4.1.2 North West Passage
Figure 15: Map showing the three major routes through the NWP
Source: Wilson et al (n.d)
There are seven possible routes through the NWP (Pharand & LeGault 1984). In
this study, only three major routes have been considered. Due to the complex
archipelago structure, small deviations and alternations to the above mentioned
routes are possible which give rise to a total of seven feasible routes. There are
29 several choke points identified by Falkingham et al (2003) in the NWP. These
choke points have been marked on the figure 15 above. The choke points occur
when multi year ice conditions prevail in the region and also when this sea ice is
pressed up against the coastlines creating immense pressure zones which can
cause severe damage to the vessels. The maximum draft allowed for ships
transiting the NWP depend on the routes chosen as the bathymetry of each of
these routes is different. Before choosing any of these routes, all vessels have to
navigate the Beaufort Sea. Hence, analysing the Beaufort Sea comes first in
navigational issues of the NWP. Another major issue in the NWP is the presence
of pack ice both in the Beaufort Sea and also in the straits. This is ice which has
detached itself from the land and is mobile. This pack ice can cause damage and
impede vessel navigation. Another common zone for all routes is the Lancaster
Sound. Lancaster Sound has been surveyed well and there are no problems for
deep draft ships to navigate the sound. There are also no problems with respect
to severe ice conditions, though occasionally there could be some old ice blown
into the sound as the arrow marks indicate in the above figure 15. However, for
most part of the summer this region can be used for navigation. Now, the main
possible routes have been discussed below.
•
Route 1: Route 1 is the route through the Prince of Wales strait (POWS).
The ships through this route have to pass through Lancaster Sound,
Barrow strait, Viscount Meville Sound and Prince of Wales strait. The
maximum draft along the Prince of Wales strait is 60 m. Though, there are
many shoals near the Bank and the Victoria islands on either side of the
strait. The ships have to be careful in navigating this strait. The Barrow
strait too has the same problems as faced by the POWS. Though it allows
navigation of deep draft ships, there are several shoals near the island
coasts which can be dangerous. Most of the ice in these straits is first
year ice and these straits are relatively ice free during the summer
months. The only major choke point in this route as indicated in the figure
15 is the Viscount Meville sound. This is a channel between the Victoria
Island in the south and the Meville Island in the North as seen in the figure
15. This region can contain multi year ice which can impede navigation.
The draft in this region however is deep enough for larger vessels.
(Pharand & LeGault 1984)
30 •
Route 2: The next route is through Peel sound and Victoria strait. This
route also involves numerous other straits as can be seen in the figure 15.
However, it is important to focus on the choke point of this route which is
the Victoria strait. This region again contains hard multi year ice and has
there are several areas with water depths less than 10m . The other
zones in the route, allow deep draft ships with ease. Hence, accurate
sounding of the Victoria strait are necessary for safe navigation. Also,
considering the distance, this is the longest route among all of them. But,
it is the easiest of the three routes to navigate. Hence, this study has
considered this route for distance calculations. (Pharand & LeGault 1984)
•
Route 3: This route is the shortest route among all three. It is the route
through the M’Clure strait. There is a major choke point at the entrance to
the M’Clure strait. This receives the old multiyear ice from the Arctic
ocean. Hence, it is very difficult to navigate this strait and it has not been
used for regular navigation. In the near future too, this strait is likely to be
covered in multiyear ice, hence it will not see considerable shipping traffic.
Another important issue is that accurate bathymetry of the region is
unavailable.( Pharand & LeGault 1984)
The route chosen ultimately depends on several key factors like ice cover extent,
nature and type of ice, draft of the ships, and the classification level of ships.
4.2 Technical
The most important challenge faced in the Arctic waters on any route is the sea
ice and the freezing sub zero temperatures. At those temperatures, lubes and
fuels have the tendency to freeze, the working efficiency of the mariners is
affected and the ice freezes and sticks to the ship’s hull structure. This changes
the stability criterion of the ship due to the added weight. Considering sea ice,
contact with sea ice puts enormous stress on the ship structure. The technical
challenges faced are common to all the Arctic routes and hence are discussed
under one heading. The important areas which are subject to sea ice challenges
are:
31 •
Ship hull structure:
When traversing through ice, the first main concern that comes into the
mind is if the hull structure is durable and strong enough to withstand the
forces acting on it due to the impact with the ice. Sufficient factors of
safety need to be incorporated in ice design. The ice belt shown in the
figure 16 below, takes the brunt of the impact of the ship with ice.
Figure 16: Schematic showing the ice belt on a ship
Source: Ship and Ocean Foundation (2001)
Hence, it is obvious that the ice belt is the important zone in the ship. The
ice forces should not be underestimated and they have the capability to
severely damage and even sink large vessels. There is an extra protective
layer along the ice belt to provide strength to this region.
•
Hull form: Ice navigation is not the same as open water navigation. The
vessel could get stuck in the ice sheets several times. This causes
tremendous amount of forces on the hull structure of the vessel. The
shape of the hull is a very important design factor for these ships. The
correct hull form must be chosen in order to ensure optimal navigational
abilities.
•
Propulsion systems and propeller: The main issues related to the
propulsion systems are its dynamic operational capabilities. The vessel
must have an ability of going from full ahead to full astern as quickly as
possible. The navigational conditions in the ice demand this capability. It
is not possible to navigate continuously and smoothly in ice. The vessel
often requires to break through the ice or proceeds through it by moving
ahead and astern alternatively. Another issue with propulsion systems is
that it should be able to deliver high powers at very low speeds to break
through the ice. This puts an enormous amount of strain on the propulsion
32 systems. Also, depending on the ice conditions, the vessel will require to
change its speed frequently. Nuclear power is used as a prime mover in
many ice breakers. The use of nuclear power raises several issues such
as safety, security and environmental damage. The third main issue is the
propeller damage. Navigation through ice will invariably produce some
amount of propeller damage. Sufficient amount of protection needs to be
provided to prevent the damage to the propellers. The propellers must be
able to withstand the impact of ice forces on the blades. There have been
several developments with regards to propulsion systems, especially the
double acting capacity which has been discussed later in this report. (Ship
and Ocean Foundation 2001)
•
Special ice paints: When considering navigation through the Arctic, the
issue of paints may seem unimportant. However, hull paints are very
important to protect it from the wear and tear and corrosion. Many special
paints have been developed for this purpose. The high concentration of
oxygen in the ice accelerates corrosion, and this becomes worse when
there is wear and tear of the hull structure. Corrosion can also lead to
eventual sinking of the vessel if neglected. (Ship and Ocean Foundation
2001)
•
Width of ships: There are several straits in the NWP and NSR which will
not allow a wide beam for ships. This restricts the vessel size and hence
also affecting the economies of scale. This is mainly because the vessels
cannot be wider than the path set out by the ice breakers. Since
icebreakers are not specifically designed to carry large amounts of cargo,
they will obviously have a lesser beam compared to large cargo ships.
(Ragner 2008)
It is important to note here that there are two main types of ships allowed to ply
on ice infested water. They are the “ice strengthened ships” and “icebreaker”
ships. Ice strengthened ships mainly transit through the icy waters. They have
different classes amongst themselves depending on their amount of durability.
Icebreaker ships, on the other hand, break ice and are mainly used to support
and assist the ice strengthened ships transit through the icy waters. However,
33 these are not absolute distinctions. Sometimes, an ice strengthened vessel might
also have ice breaking capabilities (Ship and Ocean Foundation 2001).
The table 2 below shows the classification of the two main types of ships
mentioned above.
Table 2.Classification of ice strengthened and ice breaking vessels
Source: Ship and Ocean Foundation 2001
Safety is paramount while navigating the Arctic seas. Hence, to avoid the
confusion over the classifications, some countries submitted the ‘International
code of safety for ships in Polar waters’ (Polar Code) to the IMO in 1998. This
code divides the ships into Polar class and they make no distinction between ice
strengthened and ice breaking ships. This description is based on navigable
season of the ships. However, it can be deduced that PC1 to PC5 are ice
breakers mainly because it allows year round navigation which means it will have
to break through the ice during the winters. PC6 and PC7 are ice strengthened
ships. Once these rules are in place, it will be a great benefit to shipping as it will
34 lead to a reduction in uncertainties in classification equivalence and hence a
reduction in the insurance premiums. The IACS has been assigned the task of
coming up with a common set of rules under the polar code for the construction
standards of these ice transiting vessels.
The table 3 below shows the classification according to the Polar code.
Table 3: Polar code classification of vessels
Source: Ship and Ocean Foundation 2001
4.3 Legal issues
The Arctic sea routes currently have several gaps with regards to the laws
imposed for ships using these routes. The IMO has several committees dealing
with marine safety, security and environment. The article Molenaar & Corell
(2009) has quoted the following gaps in the law of the Arctic:
•
no special IMO discharge, emission or ballast water exchange standards
for the Arctic marine area;
•
no comprehensive mandatory or voluntary IMO ships’ routeing system for
the Arctic marine area in its entirety or a large part thereof; and
•
no legally binding special CDEM (including fuel content and ballast water
treatment) standards for the Arctic marine area
With regards to pollution and safety the various Arctic states have passed their
own regional laws. However, since these routes are set to become international
it is very important that a common set of international laws be drafted. Also, there
is the issue of enforcing these regional laws. In the current day situation, it is
unclear as to how these regional safety and pollution laws are being enforced.
Recently, Russia has passed a law with respect to environmental pollution. NSR
35 has been a matter off national security
s
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d recently it has also
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he next ma
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ssue, the concept
c
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e
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S
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are bound to lead to
o
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es. Howev
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o all coasstal states are
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nd some may
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Figure 17: Schematic
S
sh
howing definiition of EEZ
Source: htttp://www.eoe
earth.org/artic
cle/Exclusive_
_economic_zzone_(EEZ)
36
6 This figure 18 indicates the extent of the Exclusive Economic Zones of various
Arctic countries. It is obvious with such close proximity to each other in the Arctic
zone, there is bound to be some disputes over claims. This is mainly because of
the dwindling world energy resources worldwide is pushing the Arctic states into
a rush for the black gold buried beneath the North Pole. The figure 19 shows the
extent of claims made by the Arctic countries. If a state is able to prove that the
continental shelf extends beyond the EEZ, then it can claim an additional 150 n
miles (Sevunts 2005). This has already led to some uncomfortable issues which
have been discussed in the next paragraph.
Figure 18: Map showing the extent of the Arctic countries EEZ
Source: http://portal.inter map.com/#mapID=26&groupID=115&z=1.0&up=700.7&left=0.0
37 Figure 19: Map showing the various legally disputed zones
Source: International boundaries research unit 2009
38 The figure 19 above clearly indicates a maze of confusion about the maritime
boundaries. Future claims over the resources will be inevitable. The only
problem is some countries might be tempted to use military force. This will lead
to unprecedented consequences. However, this study does not consider the
implications of the use of military power. It is important to mention here that
Russia recently launched two mini submarines to plant the Russian flag on the
seabed on the North Pole to claim its rights over the potential oil resources. Also,
the UNCLOS III convention on EEZ is not concrete and binding. It is open to
appeal and has led to many disputes among maritime states. Russia in this case
claims that the Lomonosov ridge passing through the North pole belongs to its
continental shelves. In the future, it depends on the stance taken by UN in this
matter and also on the evidence provided. (Parfitt 2007)
Jensen (2007) quotes Arcticle 234 of the UNCLOS which specifically deals with
ice covered waters under the heading called “Ice covered areas”. Under this, it
states that
Coastal states have the right to adopt and enforce non-discriminatory laws and
regulations for the prevention, reduction and control of marine pollution from
vessels in ice-covered areas within the limits of the exclusive economic zone,
where particularly severe climatic conditions and the presence of ice covering
such areas for most of the year create obstructions or exceptional hazards to
navigation, and pollution of the marine environment could cause major harm to
or irreversible disturbance of the ecological balance. Such laws and regulations
shall have due regard to navigation and the protection and preservation of the
marine environment based on the best available scientific evidence.
This article allows coastal states to pass laws in their respective EEZ’s. This
article is ambiguous because of the current EEZ boundary disputes.
The other major legal issue with regards to the Arctic routes is their status of
internal waters or international straits. Though this issue exists for both the NWP
and NSR, it is more prominent in the NWP due to the complex archipelago
structure. This issue is not a problem for the Polar passage as it is defined as
international waters and has been accepted by all Arctic states. The NWP legal
issue mainly involves the USA and Canada. However, any other nation
interested in using this route in the future, will get involved in this debate as well.
The laws in UNCLOS, some of which are vague as already mentioned above
39 give rise to these debates. This problem arose in 1985 when USA sent a USCG
ice breaker ‘The Polar Sea’ to transit the NWP without prior authorisation from
the Canadians. The Canadians claim the NWP to be internal waters, whereas
the USA asserts that these are international straits. Both have compelling
arguments. Canada initially claimed NWP as ‘historic’ internal waters. However,
the UN did not recognise the usage of ‘historic’ internal waters. There are two
main criterions for a waterway to be defined as an International strait. These are:
a) Geographic criterion: “An international strait must connect two bodies of
the high seas. In this case the Atlantic and Pacific oceans.”(Carnaghan &
Goody 2006). The NWP meets this criterion perfectly.
b) Functional criterion: The strait must have had a history of being a useful
maritime trading route. The NWP fails to meet this criterion as the number
of transits along the NWP has been scarce and it cannot be qualified as a
useful maritime trading route. However, if the number of vessels transiting
the NWP increases in the future, then it could be regarded as being a
useful maritime trading route and be declared an international strait,
thereby restricting Canadian jurisdiction over it.
There are several other disputes in the Arctic, the other famous one being the
claim of sovereignty over the Hans Island by Denmark and Canada.
Figure 20: Map summarising all major disputes in the Arctic
Source: Anker,M. et al (2007)
40 The figure 20 above summarises the most important legal disputes present in the
Arctic region. It is clear that these legal disputes will only get murkier once the
Arctic seas have lesser ice content. These legal disputes have raised more
concerns due to the race for energy resources rather than a control over the
transit shipping. However, these issues could also bother ships seeking transit
through the Arctic regions in the future.
41 5
COMMERCIAL VIABILITY CALCULATIONS
5.1 Assumptions and data for calculations
The basis of any comparative analysis is common assumptions and similar data
on all the routes planned. This will help in eliminating absolute errors committed
as one is looking only at the relative perspective. The assumptions below hold
good for all the routes:
¾ Ship Size: This is a major factor which has to be invariably taken to be
common on all routes if a fair comparison is to be made. Similar ship sizes
give equal economies of scale on all routes. In this project, the ship size is
determined by mainly the draft of the NSR and the canal width/draught
restrictions. The NWP does not have any draft restrictions except on some
of its routes. (Pandey 2008). The least draft allowed on the NSR is 8 m in
Proliv Dm.Lapteva. Most of the NSR southern routes does allow a draft of
around 20 m. The most northern routes do not have any draft limitations ,
but have more ice cover (Liu & Jacob 2010) The Panama canal at present
cannot handle more than 5000 TEU container ships. However, by 2015
the capacity will be raised to allow 12000 TEU container ships.
(Laulajainen 2009). In this analysis, the transit through Panama Canal is
not considered. However, the limiting factor is the NSR draft. The average
ship size in the industry is between 4000-5000 TEU. In this study, a ship
size of 4000 TEU is chosen based on both the average mentioned above
and also on limitations posed by the NSR maximum draft allowed.
¾ Ship Type: The ship type chosen must be such that it can transit the Arctic
second year ice conditions. Higher Arctic class ships exist, which can
navigate all year round through multi year ice. However, these would also
increase the capital costs to a great extent. Hence, for this study, it is
assumed that the vessel is a Canadian Arctic Class 3 classed vessel. This
roughly is equivalent to LL3 in the Russian class register according to
table 2. This is higher than the minimum 1B class allowed to transit the
NSR (Liu and Jacob 2008). Once the IACS Polar rules on classification
are completely in place, this problem of equivalency would not arise.
There would be one uniform set of classification rules. The CAC3 vessel is
assumed to cost about 40% higher than the blue water vessel.
42 The ship particulars are as follows:
Length
Breadth
Design Draft
Maximum Draft
Engine rating
Design Deadweight
Max rated speed
Economical speed
Safe speed-Ice
Fuel Consumption
Fuel Price(Rotterdam)
Total TEU capacity
Load Factor(Shanghai-Rdm)
Load Factor(Rdm-Shanghai)
Average Load factor
Suez Canal Toll
NSR Transit fees
NWP Transit fees
PP Transit fees
280.00 Meters
32.20
Meters
11.8
Meters
13.52
Meters
36.1
MW
48000
Tonnes
23.5
Knots
21
Knots
11
Knots
130
MT/day
600
USD/ton
4000
TEU
70%
50%
2400(60%) TEU
$250,000 per transit
$4,000,000 per transit
Not applicable
Not applicable
Table 4: Table showing ship particulars of a CAC3 class 4000 TEU container vessel
Source: MAN B&W Diesel A/S (n.d)
The main ship particulars are obtained from MAN B&W Diesel A/S (n.d). Some of
the particulars were logically assumed referring Pandey (2008) because of lack
of the author’s access to market information especially with repect to the capital
and the insurance costs of the ice classed vessel.
5.2 Cost Structure of shipping
Shipping in general involves five main types of costs. Each of these costs has its
own contribution to the total costs. The five main types of costs are:
•
Operating Costs
•
Periodic Maintenance
•
Voyage Costs
•
Cargo Handling costs
•
Capital costs
5.2.1 Operating costs
The main subdivisions under these are:
A) Manning costs: Now, on the NSR and NWP, the quality of the crew needs
to be significantly better than blue seas as ice navigation is not easy and
requires special training. Hence, the manning costs for the arctic routes
43 are higher than that for the blue seas as the wages paid will be higher for
the arctic sea routes. Other elements in manning costs are repatriation
expenses, victuals. (Pandey 2008)
B) Stores and Lubes: This is the same for all the Arctic routes and also for
the open seas. Although, special care will have to be taken along the
Arctic routes, as the stores and lubes will freeze due to extremely low
temperatures.
C) Repairs and maintenance: The Arctic sea routes are most likely to have
more repair and maintenance costs due to tougher navigational
conditions. These costs tend to increase with the age of the ship. In this
study, the vessel under consideration is new. Hence, these costs form a
small percentage. However, as the vessel ages, this portion cannot be
neglected. Also, preventive maintenance measure costs also need to be
taken into consideration. In this study, the maintenance costs are
assumed to be 50% higher on the arctic sea routes. However, it is to be
noted that these costs will change with the age of the ship.
D) Insurance (P&I and H&M): This cost part forms a considerable expense in
the arctic sea routes. This is particularly important for the Hull and
machinery costs. This is mainly because, there is very little international
experience in underwriting insurance for ice classed ships undertaking
Trans arctic voyages. The H&M insurance usually takes up two third of the
total insurance costs, whereas the P&I insurance forms the remaining one
third of the costs (Stopford 2009a). In this study, it is assumed that the ice
class vessel’s H&M insurance is double the amount of the normal open
water H&M insurance. This is mainly because the arctic routes involve
more difficult navigation conditions and dangers to the ship are much
more than on the traditional routes. The P&I insurance for the NSR and
NWP are assumed to be 43% higher than the traditional routes. However,
for the polar passage the author has assumed the P&I insurance to be
50% higher, as the polar passage is even more risky and damage caused
by ships to the environment here are even more difficult to solve. Hence, it
is reasonable to assume a higher P&I insurance on this route. (Pandey
2008)
44 E) General costs: This includes a registration fee which is paid to the flag
state. Also, other shore based expenses have to be taken into account.
Small companies have relatively lesser expenses in this area. However,
large tanker or liner companies need to pay special attention to these
costs as they can be considerable. The administration expenses fall under
this category.
5.2.2 Periodic maintenance
These include the dry docking costs. The dry docking is carried out every 2
years with a special survey every 4 years (Stopford 2009c). In older ship, dry
docking can involve considerable expense to maintain the ships in class. In
this study, a 14 day dry docking has been assumed for ice class vessel.
5.2.3 Voyage Costs
This forms a large part of the variable costs of any shipping company. The main
costs under these:
A) Fuel oil costs:
Fuel oil is the most significant part of the voyage costs. This highlights the
importance of this cost heading. In this study, it is assumed that the vessel
consumes 130tpd of IFO380. The rate of IFO380 is assumed to be 600
USD/ton based on the graph below. The graph indicates that the fuel
prices have gone up over the past few years. Though, currently the fuel
prices are steady, this value of 600 USD/ton is assumed with the view of
the future prices.
45 Figure 21: Graph showing the bunker price variation over 2009
Source: http://www.sea-bunkering.com/Global-Oil-09.html
B) Diesel oil:
While at port and also at sea the ship burns another type of oil called the
diesel oil which is necessary to provide the auxiliary power supply of the
vessel. This diesel oil is very expensive, though its consumption is lower
than the fuel oil. New designs to improve fuel efficiency have made it
possible to reduce the consumption of this diesel oil. However, in this
case study, these new innovations have not been taken into account. It is
assumed that the vessel consumes 10tpd of MDO at the rate of
1000USD/ton. The highest price for MDO is currently around 792 USD/ton
(Wilhelmsen Premier Marine Fuels 2010). Hence, this assumption is
based on an increase in this rate.
C) Canal dues:
The Suez Canal transit fees for a 4000 TEU vessel is about $250000 per
transit. These canal dues are calculated on the basis of the Suez Canal
net tonnage.
D) Ice breaking assistance:
This is a major cost factor on the NSR route. The Russian administration
insists on providing ice breaking assistance in all seasons. This is a
mandatory rule. Hence, all ships transiting the NSR need to pay a hefty
ice breaking assistance fee (Liu & Jacob 2010). It is assumed to be
46 $4,000,000 per transit. However, on the NWP, this fee is not mandatory.
It depends only on conditions of the sea at the time of transit. (Pandey
2008).
5.2.4 Cargo handling charges
This forms an important part of the liner business. However, in this case study
we are undertaking a comparative study. The departure and arrival ports are
same for all. Also, the volume and size of the vessel is same for all. Hence, it is
logical to assume that the cargo handling charges will be same in all the cases.
Hence, this cost heading does not require special depth analysis in this case
study and has not been included.
5.2.5 Capital costs
There is a significant difference in the capital costs of an ice classed vessel and
a normal blue water vessel. This is mainly because the ice classed vessel has to
be built strong enough to withstand the severe Arctic routes. The capital costs of
vessels plying the NWP and NSR will be the same, but will be different to the
capital costs of the vessels plying on the traditional routes. It is also important to
note that ice strengthened vessels have a slightly lower capital costs than
compared to ice breaking vessels. In this case study, the capital costs of the ice
classed vessel is assumed to be about 40% higher than the blue water ships
(Pandey 2008). Hence, with 70% debt financed, 7 year period at the yearly pay
out comes out to be $8.5 million for a blue water ship and $12 million for an ice
classed ship. It should be noted that these values of capital costs are adapted
mainly from Pandey(2008) and Liu & Kronbak 2010. The main reason for this is
the author’s inability to secure the latest capital costs of ice classed container
vessels from shipping companies due to confidentiality issues. The interest rates
are based on the current LIBOR rates. (Stopford 2009b)
5.2.6 Earnings (Revenue)
With the market crashing in 2009, the container trade volumes and freight rates
fell as well. However, currently the container trade is in the recovery process and
so is its freight index. The trade volumes on the westbound Asia-Europe are up
by 25%. The westbound traffic growth has considerably slowed to 7%. (Porter
2010)
47 For this case study, the load factors are assumed to be 70% for the Shanghai
Rotterdam leg and 50% for the Rotterdam Shanghai leg. For calculation
purposes, the average load factor of 60% has been used. The freight rate per
TEU is assumed to be $1600. Since this study is a comparative study, it is more
interesting to note the margins of profit gained on each route, rather than the
absolute profit itself. Hence, the freight rate assumption is justified and it is
applicable to all routes if the freight rate applied is uniform across all of them.
However, in reality this may not be the case. The shipowners using the Arctic
routes are bound to face more uncertainties and higher capital costs, will charge
a higher freight rate compared to the traditional Suez routes. All this depends on
the profit margins attained on these routes. This study considers uniform freight
rates with the aim of carrying out a comparative analysis.
48 6
PERFORMANCE COMPARISON
The single voyage costs for the various routes are as follows (assuming all year
round operation on each route):
Voyage cost
Operating cost
Capital cost
Total cost
NSR
$5,785,143
$323,255
$920,548
$7,031,764
NWP
$2,145,873
$280,660
$802,192
$3,228,229
PP
$1,806,270
$295,763
$835,068
$2,937,127
TR
$2,392,468
$194,973
$565,890
$3,491,054
Table 5: Table indicating single voyage costs on all routes
Source: Author
The traditional route via the Suez Canal is still an economically attractive option
compared to the arctic sea routes, especially the NSR. The total costs on the
NWP and the PP are economically comparable to that of the TR. However, it is
to be noted that though the PP has an overall low cost, the delays caused on this
route can be severe due to the unpredictable weather conditions. The very factor
of delays can increase the daily operating and capital costs to a great extent to
render this route unprofitable. Also, since, not many vessels have used this route
to complete this voyage; the insurance costs will be definitely higher.
The annual costs and profits for the routes are as follows:
Total cost
Revenue
Total profits
NSR
$91,384,316
$49,904,374
$-41,479,942
NWP
$48,321,000
$57,478,145
$9,157,145
PP
$42,205,429
$55,179,378
$12,973,949
TR
$46,553,792
$51,207,052
$4,653,259
Table 6: Table showing annual profits gained on all routes for all year trading
Source: Author
Now, two more scenarios are considered where the Arctic routes are assumed to
be open for 4 and 6 months during a year and the rest of the year the ice classed
vessel operates on the traditional route.
The costs if the arctic sea routes are open for 4 months work out to be
Total cost
Revenue
Total profits
NSR
$61,292,595
$50,778,774
-10,513,821
NWP
$47,134,792
$53,268781
$6,133,989
PP
$45,124,193
$52,513,022
$7,388,829
TR
$46,553,792
$51,207,052
$4,653,259
Table 7: Table showing profits on all routes when ASR is open for 4 months
49 Source: Author
The costs if the arctic sea routes are open for 6 months a year work out to be
Total cost
Revenues
Total profits
NSR
$68,661,996
$50,564,636
$18,097,361
NWP
$47,425,292
$54,299,646
$6,874,354
PP
$44,409,394
$53,166,007
$8,756,613
TR
$46,553,792
$51,207,052
$4,653,259
Table 8: Table showing profits on all routes when ASR is open for 4 months
Source: Author
The number of trips completed on each of the routes is tabulated below
NSR
NWP
PP
TR
Trips(4 months)
4
5
5
9
Trips(6 months)
6
7
7
7
Trips(12 months)
13
15
14
13
Table 9: Table showing the number of trips completed in different scenarios
Source: Author
After the tabulation and general discussion of the costs above, a more detailed
discussion of each of these routes is undertaken in order to examine the
possibility of using the routes as a maritime route in the future.
6.1 Northern sea route:
In table 6, the NSR posts a huge annual cost of $91,384,316, which is $40
million more than the other arctic routes itself. This is a big drawback of the NSR
route. Referring to table 6, this high cost seems a bit odd considering that the
distance along the NSR route is lesser than the NWP and Suez route. The
climate and ice thickness along the NSR is considerably thinning faster than the
NWP ice. This would imply that navigational risks and delays should be lesser
than the NWP route. There have been more transits along the NSR as compared
to the NWP due to this reason. If the cost factors are analysed, one cost heading
clearly sticks out as the major contributing cost to this high overall costs. It is the
icebreaking cost of $4,000,000 per voyage. The paper by Liu & Jacob (2010),
clearly states that the ice breaking department charges a fee of $979.2 per TEU
carried on the NSR. Also, pilotage is compulsory along this route. There are
several other fees along with this fee which could be incurred by using the NSR.
Apart from this fee, another factor which contributes to the costs is the waiting
period. The NSR route has extra administration and evaluations which leads up
50 to a waiting period of approximately 8 days (Liu & Kronbak 2010). From the
shipping cost model, it is clear that the operating and capital costs taken up by
the vessel per voyage increases. In this case, the capital costs are more
sensitive mainly because ice classed vessels cost more than ordinary blue water
ships. Hence, it only makes economical sense that these ice classed ships must
be subjected to lower waiting periods in order to compensate for the higher
capital costs. This way, the routes can become profitable and the shipowner is
able to pay off the higher capital costs.
Now, looking at table 7 and 8, where the NSR is assumed to be open for 4 and 6
months respectively during the year for trading. This means that the ice classed
vessel uses the traditional Suez route during the time the NSR is closed. This of
course has technical problems as an ice classed vessel is not as efficient as a
blue water ship in blue water. This study does not consider this issue in detail
and assumes almost equal efficiency in order to perform a comparative cost
analysis. It is clearly seen that the difference between overall costs on the NSR
and other routes drop to a great extent. The difference drops from a staggering
amount of $43,000,000(all year trading) to an amount of $14,000,000(4 month
operation). This is mainly due to a fall in the contribution of the ice breaking
assistance fees. The ice breaking fee is a major factor in deciding whether the
NSR will become a competitive maritime route in the future. Liu & Kronbak
(2010) carries out a sensitivity analysis of the NSR route based on the ice
breaking fees and the bunker prices. Though the route considered in this paper
is slightly shorter than this study, the ice breaking fees remains the same. If the
Russian government reduces the ice breaking fees in the future to more
affordable amounts, then the NSR can be a serious competitor to the Suez route.
But, right now, it is quite unable to compete even with the NWP, let alone the
Suez route.
Now, analysing the profit margins gained on the NSR, it can be clearly said that
at the current scenario, it is an uneconomical route. The profit margin improves
when the trading period drops from 12 months to seasonal operation of 4 and 6
months. This improvement is mainly because of the drop in the costs. The
revenue does not depend on the trading period. The shorter distance on the
51 NSR compared to other routes, is currently not being utilised to make the route
commercially viable.
6.2 North West passage
The NWP seems to be a promising route for the future. If the NWP is considered
to be open for 4 and 6 months, then the costs incurred are comparable to the
traditional route. It is to be noted that the distance through the NWP is 12% more
than the NSR. However, there are several other factors which are beneficial in
this route which overcome this increase in distance. The first factor is that there
is no draft restriction along the NWP like the NSR along some of its routes. In
this study, similar sized vessels have been considered, for the sake of
comparative analysis. The NWP can easily offer shipping companies great
economies of scale by allowing bigger ships to sail through its waters. Next,
there are no compulsory ice breaking fees and no administration waiting times
along the NWP. Also, there is no necessity for compulsory pilotage. The ice
breaking assistance can be requested if needed. This would add to the costs, but
this does not occur on every trip. During the summer especially with the ice
thinning rapidly, ice breaking assistance is not needed very often.
Along the NWP it is possible to make one extra trip as compared to the NSR or
the TR when the route is opened for 4 and 6 months. When it is open for a year,
then it is possible to make 2 extra trips along this route. However, NWP will not
be ice free all year round, hence it would be practical to assume the other two
scenarios. The extra trip would convert to extra earnings for the ship which can
be seen in the profit margins obtained. This extra trip also compensates for the
higher capital costs of the ice classed vessel. The NWP seems to be a promising
route when compared to the traditional route. In all scenarios, higher profit
margins are obtained compared to the Suez route. Of course, this profit margin is
slightly variable because ice breaking assistance might be needed on NWP,
which will cut down the profits. However, this can be planned earlier by close
monitoring of the sea conditions. The only route which is better than the NWP is
the PP with higher profit margins.
52 6.3 Polar Passage
From the distance table 1 it can be clearly seen that the route through the poles
is the shortest distance compared to any other route. However, currently there is
permanent ice cover in the poles with thick multi layer ice. The only ships to visit
the poles are research vessels and tourist cruises. It is very expensive to carry
out commercial shipping along this route. However, this route has been included
in this analysis mainly because the modest projections of ice reduction in the
arctic eventually predict that the permanent ice cover in the poles too could
disappear after this century. In all possible scenarios, the polar passage costs
turn out to be lesser than any other route for the obvious reasons of shorter
distance. This study has not taken many factors into consideration mainly
because commercial shipping right through the poles has many uncertainties.
The insurance premiums could be much higher compared to what is assumed in
this study. This study provides only a basic picture of the possibility of using the
maritime route through the poles for commercial shipping.
Now, the PP has the shortest distance, but yet, the number of trips on this route
are one lesser than the NWP. This can be attributed to the fact that the ship will
have to transit through more icy waters in the PP. This slows down the ship
considerably. However, this combination of shorter distance and slower average
speed compared to the NWP, gives it a higher profit margin compared to the
NWP despite the one less trip. However, it should be borne in mind that this
route is the most unpredictable of all and will most definitely require ice breaking
assistance. This will cut down the profits by a great margin.
6.4 Traditional route through the Suez Canal
The traditional route through the Suez Canal is also known as the Royal road.
This route has been used for several years. The restrictions on the Canal are
mainly imposed by the draft. The pricing system of the Suez Canal is slightly
different. The tolls are based on Suez Canal net tonnage. The toll calculator is
available on the Suez Canal authority website.
Based on the calculations, the Suez Canal is still an economically attractive
option for the current voyage. This depends heavily on the Suez Canal tolls and
the bunker prices in the future. The distance through the Suez Canal is more
53 than the other routes. Apart from the congestion issues at the canal transit, the
route costs and delays are very predictable. This is favoured by ship owners who
do not want to take the risk of exploring the relatively unused arctic sea routes.
However, this may change in the future as more shipping companies are
ordering ice classed vessels, to operate in the arctic waters. Recently, Scorpio
took delivery of two ice classed tankers for $92 million. (Joshi 2010). Also, the
Suez route is recently being dogged by the issues of piracy. Piracy issues have
led many vessels to take alternative routes. This is because; insurance
premiums are becoming higher on the Suez route if the shipowner wants to take
an insurance against piracy. This is contributing to the higher operating costs of
the vessel. However, one cannot expect that this piracy issue will continue
contributing to higher costs. An international delegation of navies is already
patrolling the waters along the Suez Canal. The issue is raising concern among
all states and recently Saudi Arabia even went to the extent of allowing crew on
vessels to carry firearms in their waters. This is a big step up in terms of the fight
against piracy (Osler 2010). Piracy issues will end in the near future. It cannot be
assumed that piracy will go continue on a large scale for a long time into the
future. This study does not consider the extra marine insurance costs due to
piracy along the Suez routes mainly because of the lack of accurate information.
54 7
FUTURE TRENDS AND SCENARIOS
7.1 Container trade forecast
The container trade is one which is closely linked to the economic growth of the
nations. Last year due to the economic crisis, the box trades fell to a great
extent. The container trades depend on the so called peak leg routes. The health
of the trade is determined by trade volumes on these peak leg routes.
The container trade forecast are done in a number of ways. They are mostly
based on the economic growth forecasts. The graph below shows the container
trade forecast.
Figure 22: Graph showing the container trade growth and forecast
Source: Pandey (2008)
According to the graph above from Clarkson research services and obtained
from Pandey(2008), there is a steep upward curve in the container trade
volumes in the future. The cargo volumes in 2023 are three times more than
2003 levels.
Now, focussing on the trade progress in 2009 and 2010, it is estimated that the
box volumes fell by 9% in 2009. The fall in peak leg volumes contributes to this
overall drop in volumes. The graph below shows the imbalance ratios for the
important routes.
55 Figure 23: Graph showing the imbalance in the peak leg box volumes on different routes
Source: Pylypiw 2010
The imbalance in the trade on all routes fell during 2009. The container trade
traffic also fell during the same period. Although, the volumes improved over the
beginning of 2010, it has not returned to pre crisis levels. There has also been a
steady growth in the eastbound traffic. This could be attributed to increased
economic strength and growth of the east especially countries like China, India.
(Plylypiw 2010). The westbound traffic too has seen an increase in volumes by
25%. These levels are still less than the corresponding 2008 levels, but this still
shows a good sign as to the recovery of the container volumes.
It is important to discuss the Suez Canal developments with regard to container
traffic in the past year and in the near future. The traffic through the Suez Canal
dropped considerably during 2009, due to a drop in the traffic. The Suez
authorities froze the prices during this period. Hence, many shipping lines went
around the Cape of Good Hope to circumvent the higher prices during the crisis.
However, with the improvement in trade volumes and container volumes, the
traffic through the Suez Canal has increased in 2010. The authorities might
eventually un-freeze the prices. (Business monitor international 2010). This is an
56 important issue to note when compared to the Arctic routes. While along the
NSR, an economic crisis can well affect the ice breaking fees levied, the NWP
has not levied any compulsory fees. Hence, the companies will be at an
advantage by using the NWP during economic crisis, which will save fuel and
avoid higher prices of using the canals.
However, there are several advantages of using the Suez compared to the Arctic
routes. The Suez route has several trans-shipment ports and intermediate ports
along the way, which is lacking in all of the Arctic routes. There are no major
economic hubs along any of the Arctic routes which can serve as an
intermediate port to pick up goods. At the current moment, the arctic is more
suited for bulk carriers rather than containers. Also, another important
development along the Suez is the expansion of the Suez Canal container
terminal. This expansion is scheduled to be finished in 2012. With this
expansion, the SCCT will be able to handle the largest of the container ships.
This would provide large economies of scale to the shipping companies. On the
Arctic, it is still a little farfetched to deploy large container vessels. These
expansion plans of the Suez, not only compete with the Arctic routes, but it
competes with the Panama Canal as well. The Panama Canal is currently
restricted by its lock size. There are plans underway for the expansion of the
locks. This expansion program will be completed by 2014. With this completed,
both the Panama and the Suez will provide immense competition to the Arctic
sea routes.
It is a very hard task to forecast the Suez Canal pricing regime. One report
suggests that the there will be a two tier increase in the rates, one in 2015 and
the other in 2025. The overall increase will be about 3% over these years. (The
Autoridad Del Canal de Panama 2005).However, the current crisis has proved
that such forecasting is not very accurate mainly because the pricing regime is
determined by the container volumes which in turn depend on the world trade.
Hence, it is quite difficult to forecast accurately in this matter. However, it is safe
to assume there will be an increase in the tolls in the near future. This follows
from the recent freezing of prices. With the trade volumes going up, the
authorities might want to recover their lost revenues during the crisis.
57 7.2 Bunker Fuel
Figu
ure 24 : Graph
h showing the
e fuel consum
mption and trrade trends frrom 1970 to 2010
2
So
ource: Corbettt & Eyring 20
007
One of the
e key facto
ors driving this and many
m
other studies to
oday is the fuel costss
prices. The environm
mental cha
anges rece
ently may have been
n responsib
ble for the
e
retreating ice caps. At the sam
me time, th
he IMO too
o has passsed new regulations
r
s
ect to the use of fue
els in the future. Th
here are sspecial SECA zoness
with respe
where the
e sulphur content
c
mu
ust be red
duced to le
ess than 0
0.1% by 20
015. On a
global sca
ale, the sulphur conte
ent in fuels
s must dro
op to 3.5 % by 2012 and 0.5%
%
by 2020. This
T
drop of 1% in sulphur
s
con
ntent mean
ns that soo
on the ships will nott
be able to use heavyy fuel oils which are cheaper. This
T
implie
es, the ship
ps have to
o
switch to MDO
M
and MGO. Also
o, by 2020
0, they eventually mu
ust switch to
t MGO to
o
keep the sulphur
s
con
ntent less than
t
0.5%. MGO and
d MDO are
e far more expensive
e
than heavy fuel oils due to the
e manufactturing proccess. This higher fue
el prices in
n
the future will definittely be refflected in the
t
higher sea freigh
ht rates. Also,
A
these
e
changes make
m
pred
dictions in fuel prices
s more un
ncertain an
nd inaccura
ate. There
e
are severa
al factors which
w
need
d to be co
onsidered while
w
foreccasting fue
el prices in
n
the future. The ma
ap below shows
s
the SECA are
ea which is in effectt from thiss
year onwa
ards. Currrently, thesse fuel pric
ce changess affect bo
oth the Sue
ez and the
e
Arctic routtes equallyy. Howeve
er, once the
e global re
egulations ccome into effect, the
e
Arctic routtes will ha
ave an upp
per hand due
d
to the shorter diistance wh
hich would
d
58
8 imply lesser fuel consumption. (Finland Ministry of transport and communications
2009)
Figure 25: Map showing current SECA areas
Source: Finland Ministry of Transport and communications 2009
Now, from the graph below, it is clear that the fuel costs form a major part of the
overall costs especially for the container ships. Though the costs below are for
routes from Finland to other countries, this figure 26 indicates the importance of
fuel costs and it is true for any given route.
59 Figure 26: Average distribution of costs by vessel type for vessels operating between
Finland and other countries
Source: Finland Ministry of transport and communications 2009
The ships use two kinds of fuels. The Intermediate fuel oil (IFO) which is also
known as heavy fuel oil is used on the main engines, while the auxiliaries run on
MDO or MGO (also known as light distillates). With, the current SECA rules and
also the global reduction of sulphur content in fuels by 1%, will lead to gradual
switching of the type of fuel used. One of the methods used right now to reduce
the sulphur content is to mix the heavy oils with the lighter distillates. But, by
2020, the global levels are to drop to 0.5%. This would mean an inevitable
switching to light oils. This scenario would give a great impetus to use the Arctic
routes mainly because of their much shorter distances. This would offer
considerable savings in the cost structure of the company.
The table 10 below shows the respective changes in each type of shipping
sector due to the changes in the fuel type.
60 Table 10: Table showing the increase in freight charges with respect to decrease in sulphur content
Source: Finland Ministry of transport and communications
It can be seen that the container industry will be most affected. Shipping
companies predict an increase in the freight charges in the future due to the
increased fuel costs. Arctic routes can provide competition to the traditional
routes, if it is able to offset these increased fuels costs. If the shorter distance is
used efficiently, the freight rate increase along the Arctic routes can be lesser
than the increase on the traditional routes. In this way, the shipping companies
will prefer using the Arctic routes.
The changes with respect to usage of types of fuels in ships must be closely
followed by companies planning to use the Arctic routes. The timeframe for the
change in the type of fuels used and the retreating of ice match each other.
According to predictions, the ice would have also retreated sufficiently by 2020 to
make way for a navigable route. Hence, an in depth analysis into fuel price
predictions must be carried considering all possible factors in order to correctly
predict the cost savings obtained by using the Arctic routes in the future.
7.3 Future Arctic technology
There have been several developments in the field of Arctic shipping technology.
To match the severe environmental conditions, ship builders have to come up
with better design solutions. One of the most recent technological advances in
this field is the Double acting ships developed by Aker yards (Finland). This ship
has azimuth podded propulsion systems. This system enables the ship to turn
180 degrees. When the ice thickness is about 1.5m or greater, the ship travels
stern first, thereby reducing power requirements and increasing durability during
61 ice navigation. While the ship travels stern first, the propellers aid in the ice
breaking process.
This stern first approach enables the ship through break
through the thick ice. In open waters and icy conditions where the ice thickness
is less than 1m, the ship travels bow first. This optimises the performance of the
vessel in both icy and blue waters. The first container/cargo ship of this kind was
developed to transport nickel from the Norilsk mines. The ship is named
‘Norilskiy Nikel’. This ship is both a general cargo/container vessel capable of
carrying 650 TEU.(Norilsk Nickel 2008). This technology has proved that is
possible to navigate the Northern Sea route all year round under optimal
conditions.
Figure 27: Photograph of the M/V Norliskiy nickel proceeding stern first in thick icy conditions
Source: http://www.usni.org/assets/stories/large/Brigham-F2-May-09.jpg
Recently, another approach has been adapted to icebreaking. They are the
oblique icebreakers. Instead of breaking ice bow or stern first, these icebreakers
have azimuth propulsion which allow to rotate and break the ice sideways. This
has great implications for navigation, as these oblique icebreakers can make
way for wider channels. Hence, a small icebreaker can assist large cargo
vessels with bigger beams. This reduces the investment in the greater number of
icebreakers needed for assisting large beam cargo or container vessels. (Marine
Log n.d). The figure 28 clearly explains the oblique icebreaker functions.
62 Figure 28: Diagrams showing the working technique of oblique icebreakers
Source: http://www.akerarctic.fi/picturesetvideos.htm
Another important development with regards to Arctic shipping is the recent
announcement by ABS and RMR to jointly develop a new set of common
classification rules for LNG carriers. LNG shipping from Alaska does not seem
very feasible due to the shallow depths off the Alaskan coastline. Russia is very
interested in developing LNG shipping in the Arctic to transport gas from the
Yamal fields and the Shtokman gas fields. The plan is to extend the double
acting technology developed by Aker yards to LNG carriers. However, LNG
63 carriers have more safety issues compared to normal cargo/container vessels.
Hence, efforts are underway to improve the safety standards and classification
rules of Arctic LNG shipping. (Petroleum news 2008). Double acting Arctic
tankers are already in operation in the NSR transporting the Russian oil offshore
to the Murmansk port.
7.4 China and Arctic
China which is a global powerhouse in the field of shipping will have a lot at
stake regarding the operation policies of the Arctic sea routes. China has several
disadvantages when it comes to Arctic shipping. The main issue is that it does
not border any of the Arctic seas and is not located in the Arctic region. Hence, it
has been excluded in the policy making issues and other legal factors. But, this
did not hamper its polar research. China has a well established polar research
program. This program did not consider the commercial aspects of shipping in
Arctic region. Hence, there have been suggestions recently to look into this
matter as the sea ice is melting rapidly in the Arctic region. China being a major
importer and exporter in world trade will have to a lot to benefit from the
operation of the shorter Arctic routes. China has been taking more interest in the
arctic policies and has been attending the Arctic council meetings with an
observer status. The arctic council is a set of Arctic nations which deal with
various aspects of Arctic shipping. There could be tensions with the ice melting
and claims being made over the abundant Arctic resources and waterways. The
arctic countries must approach this problem with an international outlook rather
than on a regional basis. Also, only two countries, that is, Canada and Norway
have had bi lateral talks with China with regards to the Arctic development.
There could be some tensions between Russia and China, with regards to
Russian claims in the region and also the exorbitant fees charged by Russia
rendering the passage uneconomical. It seems that China will approach the
Arctic issue with more impetus on the commercial issues in the future five year
plans. Polar research will, as always, hold importance in Chinese Arctic
programs (Spears 2009).
64 8 ROUTE SENSITIVITY
Several key factors can be identified from this study which would affect the
choice and the future of the routes. This section aims to identify the sensitivity of
these routes based on the changes in these factors. It should be noted that this
only a qualitative analysis which anticipates the future of these and identifies the
factors on which they are more dependent. The main factors identified are as
follows:
•
Climate change
•
Bunker fuel prices
•
Marine insurance costs
•
Legal and political issues
•
Technological developments
•
Marine infrastructure
•
Transit fees
8.1 Climate change
All Arctic routes are heavily dependent on climate change. The future sea ice
extent holds the key to the future of the Arctic routes. The traditional routes are
not affected to a great extent by the climate change. Of course, with the melting
sea ice, they might lose out on some traffic, but on an overall basis these routes
will have to be used for a major part of the year.
8.2 Bunker Fuel prices
All routes are sensitive to the bunker fuel prices. The way they influence the
choice of the routes is dependent on the increase or decrease of the bunker fuel
prices. While a decrease, which is highly unlikely, will favour the use of traditional
open water routes, the increase in prices, will heavily favour the use of the Arctic
routes. But, due to the considerably longer distance, the Suez Canal route will be
more sensitive to increases in bunker fuel prices. Shipping companies will try
even more desperately to use shorter routes if they foresee a considerable
increase in the bunker fuel prices.
8.3 Marine insurance costs
The Arctic routes are more sensitive to these costs as the uncertainties in
navigation of the Arctic are way higher than the traditional Suez Canal route.
65 However, recently piracy off the coast of Somalia near the Suez Canal has
added a new dimension to this issue. According to some reports the cost of
insurance against piracy has increased between five to tenfold. Apart from these
insurance costs, the owners or charterers have to still bear the daily running
costs of the vessel which has been held for a ransom. There is still a cloud of
secrecy among companies regarding the amount paid as ransom and also the
insurance costs regarding piracy issues. Hence, in the future, piracy will have a
major role to play in route choices. The arctic routes might be preferred if piracy
is not controlled in the future. Though, Arctic sea routes might have higher
insurance costs, these routes are safe and will not cause any delays.(except due
to weather and repair issues). In conclusion, the Suez route is more sensitive to
marine insurance issues mainly because of the piracy issues, whereas the Arctic
sea routes are slightly less sensitive to the marine insurance issues. However,
once there is a solid and final solution to these piracy issues, then the marine
insurance costs will have greater effects on the Arctic sea routes. Currently, the
uncertainty might be greater with the Suez canal route rather than the Arctic sea
routes (Holahan,C 2009).
8.4 Legal and Political issues
The Suez Canal clearly does not have any legal or political issues involved at the
moment and also it is unlikely that it will be involved in any legal disputes in the
future. However, the Arctic routes on the other hand have a quite a lot of legal
issues with regards to claims and boundaries. The Arctic council member states
are in the process of dialogue to sort these issues out. In the future, these legal
and political issues will have a considerable effect on the Arctic sea routes. The
passage through the Central Arctic Ocean is less sensitive to this issue mainly
because they are international waters. But, in case of resource exploration in the
Polar region, there are some problems related to claims by the different
countries. For transit shipping, the polar passages do not pose any problem now
or in the future.
8.5 Technological Developments
The Arctic sea routes are bound to be more sensitive to technological
developments in ship design and navigation. These technological developments
could affect the capital costs and running costs of the ships which in turn will
66 decide on the choice of routes. The route through the polar passage is more
sensitive to this factor, mainly because the ice conditions faced along this route
are much higher compared to the other Arctic sea routes. The Suez canal route
on the other hand is not going to be affected much, as this route has been well
established and the technology has been developed for open water navigation.
Any future developments in this area will be minimal and will not affect the Suez
canal route.
8.6 Marine infrastructure
The development of marine infrastructure is absolutely necessary for the Arctic
region. The sea routes in this region are very sensitive to these infrastructure
developments, both land based and offshore. A shipping route requires lot of
infrastructure support both from land and offshore. This is more the case for the
Arctic region because of the remoteness and inhospitable conditions.
8.7 Transit Fees
This is one factor where the Arctic sea routes split amongst themselves. The
NSR’s future is heavily dependent on this factor. As a matter of fact, this factor
could become a critical factor for the NSR. The increase or decrease of these
fees will greatly affect the traffic through the NSR. The NWP does not face the
same problem as the NSR regarding transit fees, as the NWP does not charge
any compulsory transit fees. The only charges are for the use of icebreaking
services when required. Hence, the NWP is less sensitive to the changes in
transit fees. The Polar passage is also resilient to transit fee changes because it
falls under international waters and there cannot be any fees levied for the use of
this passage. The Suez Canal is sensitive to transit fee charges. If there are
increases in the Canal transit fees in the future, then the traffic through the Suez
might decrease, when coupled with other problems it is currently facing.
The table 11 below summarises the route sensitivities to the issues discussed
above
Factors
/
Route
NS
R
NWP
PP
Suez
Canal
Climate change
Bunker Fuel prices
Marine insurance costs
Legal and political issues
67 Technological developments
Marine infrastructure
Transit Fees
Table 11: Qualitative analysis of the sensitivity of the routes
Source: Author
The two stars above indicate higher sensitivity to the factors, whereas one star
indicates relatively lesser sensitivity to the factor. No star indicates that the
particular factor is not a major influence on that route.
68 9
CONCLUSIONS AND RECOMMENDATIONS
The main aim of this study was to carry out an economic analysis of the viability
of the Arctic sea routes and compare them amongst themselves and the
traditional Suez Canal route.
Shipping in the Arctic encompasses a wide variety of issues and most of them
have been discussed in this study as they all affect the future of Arctic shipping.
There are several conclusions which can be drawn from this study:
•
From the wealth of information available on this topic of Arctic shipping
and based on this study, it is very clear that climate change has a big role
to play in the future of Arctic shipping. The decreasing extent of sea ice in
the Arctic has increased navigation periods significantly. This factor
combined with the advantage of shorter distance from Far East to Europe
and USA, makes it very attractive for shipping. The shorter distance would
definitely reduce the amount of fuel consumed by the ships, which would
result in cost savings.
•
The dwindling oil and gas reserves are another major factor for the
increased interest in the Arctic region. The Arctic region contains the huge
reserves of oil and gas. It is evident that the Arctic will see huge
developments in hydrocarbon exploration and production. Russia has
already started developing several of its gas fields. The other Arctic
nations too will soon start offshore exploration in the Arctic ocean.
•
The NSR ice breaking fees are currently unreasonable and too high for
ships to use this route as a passage to Northern Europe. These fees
clearly outweigh the advantages provided by the shorter distance. There
are some predictions that these fees might be reviewed and changed in
the future. Hence, it is interesting to watch the Russian government’s
decision on the NSR fees. These fees are the critical factor which will
decide the future of NSR.
•
Though the NWP does not have severe draft restrictions like the NSR, it is
important to note that the NWP consists of several routes. There are
seven routes possible through the NWP. Each of these routes has
channels, and straits with their distinct weather and geographical
69 conditions. The draft conditions on the NWP can be restricted depending
on the route chosen. Some parts of the NWP are not accurately charted.
For shipping companies it is important to remember that the shortest route
through the NWP is not necessarily the best. Currently, it is the longest
route through the Peel Sound which is feasible for navigation in the
summer months. Also, the NWP does not charge any compulsory
icebreaking or pilotage fees which are an advantage over the NSR.
•
Considering economical and current practical conditions, the NWP seems
to be the best Arctic sea route which can be used instead of the Suez
route from Shanghai to Rotterdam. It has considerably less waiting time
for administrative issues, no compulsory ice breaker fees and allows deep
draft on some of its passages. It allows the ship to make one extra trip
compared to the NSR in both scenarios where the routes are open for 4
and 6 months. This translates into higher earnings. The PP has higher
cost earnings than any of the sea routes. But, this route is not feasible
practically even in the summer currently. But, in the future, depending on
the ice conditions, this route can become a busy shipping lane. Hence, in
conclusion, the NWP offers competition to the Suez route in the very near
future.
•
The Arctic region is currently dogged with several legal and political
issues. It is important to solve these issues by dialogue at the earliest ,
because once the resource exploration begins, these unsolved issues
could lead to bad relations between countries. Recently, Norway and
Russia, reached a solution on their 40 year old dispute in the Barents sea.
This has opened up the doors to peaceful and profitable oil and gas
exploration in the region (Gibbs 2010). This sets a good example to all
other Arctic nations to solve their problems amicably by dialogues and
negotiations in the immediate future.
•
The rules set by the IMO recently to reduce emissions will definitely have
effects on bunker prices. The considerably higher costs of the bunker
fuels will push shipping companies to use the Arctic routes in about 20
year’s time.
70 •
The world economy has a major role to play in the future of shipping. For
Arctic transit shipping, the Chinese economy will be the major influence. It
is important for shipping companies to watch the imports and exports
trends of China in the years to come. This will decide the shipping traffic
and the profitability of the voyages.
There are several recommendations for future research:
•
The Arctic region will see significant amount of tanker transport in the
future. Hence, it is important to carry out studies regarding the various
aspects of tanker transport with a focus on the Arctic region.
•
Feasibility studies into the technological considerations of building a 40005000 TEU ice classed container vessel capable of transiting the Arctic
region.
•
A more detailed economic analysis of the Arctic sea routes. Most studies
including this one have logically assumed several cost heading data for
calculation purposes. It is necessary to obtain market information for all
the cost headings, though some like marine insurance might be difficult to
obtain. Also, there are several issues of company confidentiality policies
which do not reveal all the data about the cost headings of the ice classed
vessels.
•
More comprehensive voyage estimations which include load line zones,
BAF, and CAF factors. Most studies currently assume these factors or
neglect them which can lead to inaccurate results
•
A forecast report on the bunker prices in the future taking into
considerations the new rules and regulations being imposed by the IMO
•
Detailed legal analysis and predictions of the current disputes in the Arctic
•
Accurate charting and common communication systems to all vessels
transiting the Arctic.
Arctic shipping is a vast subject. Research should be carried out in every
possible area of Arctic shipping in order to ensure that Arctic shipping is a
success in the future.
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77 11 APPENDICES
11.1 Appendix A: Google Earth images of distances along the routes
78 79 11.2 Appendix B: Gross product distribution in the Arctic region
Source: UNEP/GRID-Arendal
80 11.3 Appendix C: Navigation season forecast along the NSR
Source: Arctic Council (2004)
81 11.4 Appendix D: Excel Spreadsheets of Calculations
Cost calculations per voyage
COST HEADING
NSR
NWP
PP
SUEZ
$ 138,505
$ 120,254
$ 125,264
$ 89,988
$ 1,400,000
$ 1,001,000
$ 184,750
$ 1,400,000
$ 1,001,000
$ 160,406
$ 1,400,000
$ 1,050,000
$ 170,498
$ 700,000
$ 700,000
$ 104,986
TOTAL OPERATING COSTS
$ 323,255.03
$ 280,660.42
$ 295,763
$ 194,973
( B ) VOYAGE COSTS
FUEL OIL
DIESEL OIL
FEES LEVIED/CANAL DUES
TOTAL VOYAGE COSTS
$ 1,504,285.71
$ 280,857.14
$ 4,000,000
$ 5,785,142.86
$ 1,902,023.81
$ 243,849.21
$ 1,552,261.90
$ 254,007.94
$ 2,145,873.02
$ 1,806,269.84
$ 2,134,955.95
$ 273,712.30
$ 250,000
$ 2,658,668.25
(C) CAPITAL COSTS(per voyage)
$ 923,366
$ 801,696
$ 835,095
$637,412
$ 7,031,764
$ 3,228,229
$ 2,937,127
$ 3,491,054
(A) OPERATING COSTS
Repairs and maintanance
Insurance
Hull & Machinery(annual)
Personal & Indemnity(annual) Total insurance/voyage
(D)MISCELLANEOUS COSTS OVERALL COSTS Sea time and Fuel cost calculations
SEA TIME
Distance(nm)
NSR(Shanghai‐Rotterdam)
Speed(nm) Time(days)
Ice water
Blue water
Waiting time(for administration purposes)
Total NSR travel time(summer)(with 10% margin)
NSR Trips in one year NSR Trips(4 months)
NSR Trips(6 months)
700
7500
11
21
3
15
8
28
13
4
6
NWP(Shanghai‐Rotterdam)
2500
6400
11
21
9.5
13
Ice water
Blue water
Waiting time
Total NWP time(summer)(with 10% margin)
NWP Trips in one year
NWP Trips(4 months)
NWP Trips(6 months)
Polar passage(Shanghai‐Rdm) Ice water
Blue water
Waiting time(navigation, weather problems)
Total PP time(summer)(with 10% margin)
PP trips in one year
PP trip(4 months)
PP trips(6 months)
Traditional route
Shanghai‐Rotterdam(via Suez)
Suez Transit
Total TR time(all yr round)(with 10% margin)
TR Trips in one year
TR Triips(when arctic open for 4 months)
TR Trips(when arctic open for 6 months)
24.4
15
5
7
2000
5300
11
21
8
11
5
25
14
5
7
10525
21
21
4
27.4
13
9
7
FUEL COSTS
NSR
NWP
PP
TR
$ 1,902,023.81 $ 1,552,261.90 $ 2,134,955.95
280,857.14
$ 243,849.21 $ 254,007.94 $ 273,712.30
IFO 380
$ 1,504,285.71
DIESEL OIL
$
82 Annual cost calculations for all scenarios on the different routes
NSR NWP PP
TR
VOYAGE COST(SH‐RT) TRIPS(4 Months) TRIPS(6 Months)
$ 7,031,764
4
6
$ 3,228,229
5
7
$ 2,937,127
5
7
$ 3,491,054
9
7
ANNUAL COSTS WHEN ARCTIC ROUTES ARE OPEN FOR 4 MONTHS(120 DAYS)
NSR $ 61,292,595
NWP $ 47,134,792
PP
$ 45,124,193
TR
$ 46,553,792
ANNUAL COSTS WHEN ARCTIC ROUTES ARE OPEN FOR 6 MONTHS(180 DAYS)
NSR $ 68,661,996
NWP $ 47,425,292
PP
$ 44,409,394
TR
$ 46,553,792
ANNUAL COSTS WHEN ARCTIC ROUTES ARE OPEN FOR 12 MONTHS(365 DAYS)
NSR $ 91,384,316
NWP $ 48,321,000
PP
$ 42,205,429
TR
$ 46,553,792
Profit margins for all scenarios on the different routes
PROFIT MARGINS WHEN ARCTIC ROUTES OPEN FOR 4 MONTHS
NSR
NWP
PP
COSTS
$ 61,292,595 $ 47,134,792 $ 45,124,193
REVENUE $ 50,778,774 $ 53,268,781 $ 52,513,022
PROFIT
$ (10,513,821) $ 6,133,989 $ 7,388,829
Suez
$ 46,553,792
$ 51,207,052
$ 4,653,259
PROFIT MARGINS WHEN ARCTIC ROUTES OPEN FOR 6 MONTHS
COSTS
$ 68,661,996 $ 47,425,292 $ 44,409,394 $ 46,553,792
REVENUE $ 50,564,636 $ 54,299,646 $ 53,166,007 $ 51,207,052
PROFIT
$ (18,097,361) $ 6,874,354 $ 8,756,613 $ 4,653,259
PROFIT MARGINS WHEN ARCTIC ROUTES OPEN FOR 12 MONTHS
COSTS
$ 91,384,316 $ 48,321,000 $ 42,205,429 $ 46,553,792
REVENUE $ 49,904,374 $ 57,478,145 $ 55,179,378 $ 51,207,052
PROFIT
$ (41,479,942) $ 9,157,145 $ 12,973,949 $ 4,653,259 83 11.5 Appendix E: Formula sheets of the calculations
Formula sheet for cost calculations per voyage
COST HEADING
NSR
NWP
PP
SUEZ
(A) OPERATING COSTS
Repairs and maintanance
Insurance
=(((0.5*1200000)+1200000)*Sheet2!E8)/365
=(((0.5*1200000)+1200000)*Sheet2!E1
=(((0.5*1200000)+1200000)*Sheet2!E2
=(1200000*Sheet2!E32)/365
=L7*2
=(0.43*L8)+L8
=((F7+F8)*Sheet2!E8)/365
=F7
=F8
=((H7+H8)*Sheet2!E16)/365
=F7
=(0.5*L8)+L8
=((J7+J8)*Sheet2!E24)/365
700000
700000
=((L7+L8)*Sheet2!E32)/365
TOTAL OPERATING COSTS
=F5+F9
=H5+H9
=J5+J9
=L5+L9
( B ) VOYAGE COSTS
FUEL OIL
DIESEL OIL
FEES LEVIED/CANAL DUES
TOTAL VOYAGE COSTS
=Sheet2!D39
=Sheet2!D40
4000000
=F17+F18+F19
=Sheet2!E39
=Sheet2!E40
=Sheet2!F39
=Sheet2!F40
=H17+H18+H19
=J17+J18+J19
=Sheet2!G39
=Sheet2!G40
250000
=L17+L18+L19
(C) CAPITAL COSTS(per voyage)
=(12000000*Sheet2!E8)/365
=(12000000*Sheet2!E16)/365
=(12000000*Sheet2!E24)/365
=(8500000*Sheet2!E32)/365
=F11+F20+F22
=H11+H20+H22
=J11+J20+J22
=L11+L20+L22
Hull & Machinery(annual)
Personal & Indemnity(annual) Total insurance/voyage
(D)MISCELLANEOUS COSTS OVERALL COSTS Formula sheet for sea time and fuel costs calculations
SEA TIME
NSR(Shanghai‐Rotterdam)
Distance(nm)
Speed(nm) Time(days)
Ice water
Blue water
700
7500
11
21
=(C5/D5)/24
=(C6/D6)/24
8
=(E5+E6+E7)*1.1
=365/E8
=120/E8
=180/E8
Ice water
Blue water
2500
6400
11
21
=(C13/D13)/24
=(C14/D14)/24
Waiting time(for administration purposes)
Total NSR travel time(summer)(with 10% margin)
NSR Trips in one year NSR Trips(4 months)
NSR Trips(6 months)
NWP(Shanghai‐Rotterdam)
Waiting time
Total NWP time(summer)(with 10% margin)
NWP Trips in one year
NWP Trips(4 months)
NWP Trips(6 months)
Polar passage(Shanghai‐Rdm)
=(E13+E14)*1.1
=365/E16
=120/E16
=180/E16
Ice water
Blue water
2000
5300
11
21
=(C21/D21)/24
=(C22/D22)/24
5
=(E21+E22+E23)*1.1
=365/E24
=120/E24
=180/E24
10525
21
=(C30/D30)/24
4
=(E31+E30)*1.1
=365/E32
=(365‐120)/E32
=(365‐180)/E32
NSR
NWP
=E16*130*600
=E16*10*1000
Waiting time(navigation, weather problems)
Total PP time(summer)(with 10% margin)
PP trips in one year
PP trip(4 months)
PP trips(6 months)
Traditional route
Shanghai‐Rotterdam(via Suez)
Suez Transit
Total TR time(all yr round)(with 10% margin)
TR Trips in one year
TR Triips(when arctic open for 4 months)
TR Trips(when arctic open for 6 months)
FUEL COSTS
IFO 380
=(E5+E6)*1.1*130*600
DIESEL OIL
=(E8*10*1000)
PP
=(E21+E22)*1.1*130*600
=(E24*10*1000)
TR
=(E32*130*600)
=(E32*10*1000)
84 Formula sheet for annual cost calculations
NSR NWP PP
TR
VOYAGE COST(SH‐RT)
=Sheet1!F26
=Sheet1!H26
=Sheet1!J26
=Sheet1!L26
TRIPS(4 Months)
=Sheet2!E10
=Sheet2!E18
=Sheet2!E26
=Sheet2!E34
TRIPS(6 Months)
=Sheet2!E11
=Sheet2!E19
=Sheet2!E27
=Sheet2!E35
ANNUAL COSTS WHE
NSR =(B2*C2)+(B5*C5)
NWP =(B3*C3)+(B5*C5)
PP
=(B4*C4)+(B5*C5)
TR
=B5*Sheet2!E33
ANNUAL COSTS WHE
NSR =(B2*D2)+(B5*D5)
NWP =(B3*D3)+(B5*D5)
PP
=(B4*D4)+(B5*D5)
TR
=B11
ANNUAL COSTS WHE
NSR =B2*Sheet2!E9
NWP =B3*Sheet2!E17
PP
=B4*Sheet2!E25
TR
=B5*Sheet2!E33
Formula sheet for profit margin calculations
PROFIT MARGINS WH
NSR
NWP
PP
Suez
COSTS
=Sheet3!B8
=Sheet3!B9
=Sheet3!B10
=Sheet3!B11
REVENUE
=(0.6*4000)*1600*(Sheet3!C2+Shee=(0.6*4000)*1600*(Sheet3!C3+Shee=(0.6*4000)*1600*(Sheet3!C4+Shee=(0.6*4000)*1600*(Sheet2!E33)
PROFIT
=B5‐B4
=C5‐C4
=D5‐D4
=E5‐E4
PROFIT MARGINS WH
COSTS
=Sheet3!B14
=Sheet3!B15
=Sheet3!B16
=Sheet3!B17
REVENUE
=(0.6*4000)*1600*(Sheet3!D2+She =(0.6*4000)*1600*(Sheet3!D3+She =(0.6*4000)*1600*(Sheet3!D4+She =(0.6*4000)*1600*(Sheet2!E33)
PROFIT
=B10‐B9
=C10‐C9
=D10‐D9
=E10‐E9
PROFIT MARGINS WH
COSTS
=Sheet3!B20
REVENUE
=(0.6*4000)*1600*Sheet2!E9
PROFIT
=B15‐B14
=Sheet3!B21
=(0.6*4000)*1600*Sheet2!E17
=C15‐C14
=Sheet3!B22
=(0.6*4000)*1600*Sheet2!E25
=D15‐D14
=Sheet3!B23
=(0.6*4000)*1600*Sheet2!E33
=E15‐E14
85 11.6 Appendix F: Suez Canal toll calculator
Source: http://www.suezcanal.gov.eg/calc.aspx
11.7 Appendix G: Sea distances calculator
Source: http://e-ships.net/dist.htm
86