1. Route London - Yokohama Equal speed (same number of days at sea) Days at sea (same speeds) Via NSR7 200 18 days32 days 15 knots9 knots Via Suez Canal 11 400 32 days 15 knots China tends to participate in the development of oil & gas fields in Russian Arctic (on the Yamal Peninsula). Furthermore, China sees particular gains in the NSR as in potential large transit route: by 2020, according to some estimates, the route may service 5-15% of all China’s trade turnover [8]. The main incentives for that are: (1) possible economic saving, (2) challenges of the Malacca strait (congestion problems and risks of piracy attacks), China's dependence on which (in terms of both fuel imports and industrial exports) is dramatically high, (3) access to the Arctic hydrocarbon resources as the source of additional energy supply and its diversification. Hamburg Yokohama 6920 NM 9730 NM Suez Canal Malacca Strait The functioning of the Norilsk mining and metallurgical plant is hardly possible without the NSR. In the near future the NSR will become a key factor to ensure the operation of gas projects on the Yamal Peninsula. Moreover, in the mid-term more intensive development of mineral resources in the fields of the Northern Urals, Taimyr and the Russian Arctic shelf are mapped out. All these projects will undoubtedly require further development of the NSR. The NSR is supposed to serve for transit purposes as well. Russia considers its main benefits in providing icebreaking services, in developing Arctic ports and infrastructure facilities (including high- tech infrastructure), as well as in exercising the overall control over the route. The Northern Sea Route Development: Economic and Political Implications. NSR Cost efficiency compared to Suez Canal route (SCR) Strategic interests of various states Main outcomes Route Destination – from Hamburg to: YokohamaHong KongSingapore NSR 6 920 8 370 9 730 Suez Canal 11 073 9 360 8 377 Cape of Good Hope 14 542 13 109 11 846 Panama Canal 12 420 12 920 15 208 Source: Schoyen H., Brеthen S. The Northern Sea Route versus the Suez Canal: cases from bulk shipping // Journal of Transport Geography, Vol. 19, 2011. The past decade has shown a substantial growth of interest in the Arctic region. Technological development, emerging information on huge resource potential of the Arctic shelf made the world draw special attention to the Arctic as potentially the world’s largest resource storehouse. At the same time, melting ice of the Arctic Ocean and the shift of global center of economic activity towards Asia increased the region’s transit capabilities. These capabilities are tied to the renewed exploitation of the Northern Sea Route (NSR), development of which will be, on the one hand, triggered by the strategic interests of both Arctic and non-Arctic states, problems existing on traditional routes and, on the other hand, hindered by harsh navigation conditions, infrastructure and institutional barriers, Russia needs to overcome, as well as by the transformation of Asian socio-economic model and the gradual development of the alternative international transport routes. Transit turnover and number of vessels navigated trough the NSR ? 2010 2011 20122013 2014 2015 4 vessels; 0.11 mln t 41 vessels; 0.83 mln t 46 vessels; 1.2 mln t 71 vessels; 1.4 mln t 53 vessels; 0.22 mln t Source: The Northern Sea Route Administration Office After gradual growth during 2010-2013, both the turnover and the number of vessels dropped in 2014 to 220 thousand tons and 53 vessels respectively. This decrease happened primarily due to harsh navigation conditions, rising political risks and the slowing down of the development of Arctic resources because of decreasing oil prices and sanctions imposed on Russian energy companies. 2015 is expected to follow up this negative tendency. Source: Ragner C.L. Northern Sea Route Cargo Flows and Infrastructure – Present State and Future Potential. Fridtjof Nansen Institute, FNI Report 13, 2000. The NSR is the maritime area between the Cape Zhelaniya (at the Novaya Zemlya archipelago) and the Bering Strait, along the north coast of the Russian Federation Insura nce costs Fuel costs Transit fees Port dues Capital costs Crew costs Higher for the NSR Lower for the NSR On the one hand, these costs decrease due to time saving. On the other hand, severe weather conditions and higher qualification requirements lead to higher crew costs in comparison to alternative routes. Some estimates use 10% premium to the Suez Canal route crew costs for the same amount of days in the sea [4]. Hard to compare Higher for the NSR The special feature of ice-classed ships compared to ordinary ones consists in some principal structure and strength, hull form, propulsion system etc. It results in additional building costs, estimates of which vary greatly from study to study (from 10 to 30%) [4]. Bulk shipping Liner shipping Lower for the NSR raw materials transportation – oil, coal, iron ore, grain minimal infrastructure is necessary no need in strict schedule average number of ports: 2 more suitable for the NSR transportation of final and semi- final industrial products advanced infrastructure required need for strict schedule average number of ports: 10 more suitable for the SCR Current NSR fees are a serious constraint, especially for container shipping (1048 RUR = $18 per ton). Maximum fee for bulk cargo is set at 707 RUR ($10.9), for LNG – 530 RUR ($8.15) per ton [1]. 2-fold Suez Canal fee to assess the NSR fee is used in some research papers [9]. Moreover, Suez Canal fees are determined according to special rebate system (especially for large- capacity vessels) – that makes navigation via Suez even more profitable. Number of pirate attacks Source: International Maritime Bureau (IMB) Fuel consumption has one of the largest share in total transportation costs (from 30 to 60%). It is considered that the amount of fuel consumed is directly proportional to the square of vessel speed. Daily fuel consumption at a speed of 9 knots is about 22% of its consumption at 15 knots. Thus, with the same number of days at sea on both routes (through the Suez Canal and along the NSR), the savings in fuel consumption can be relatively higher than the distance reduction [10]. Thus, even in terms of huge distance reduction in case of the NSR, the factor of bunker fuel price is with no doubt important, but not always decisive. Its importance grows with the increasing share of the segment along the NSR (in the total distance) which the vessel runs at a lower speed. What is more, fuel cost calculations require consideration of both the type of fuel and its consumption rate. For navigation in the Arctic unlike through southern seas the consumption rate can be, on the one hand, lower because of lower vessel speed and, on the other hand, higher due to the fact that Arctic ice requires more propulsion power and, consequently, more fuel. Some studies point out 10% increase in fuel consumption per kilometer, primarily, due to additional weight of the vessel as a result of icebreaking rigging [2]. Furthermore, fuel for southern routes (IFO380) is not suitable for navigation at low temperatures of the Arctic winter. For example, the Canadian Coast Guard uses naval distillate fuel (F75) in their operations in summer, while in winter they switch on P50, as its freezing point is significantly lower. Price for one gallon of naval distillate is about 30% higher than for IFO380 [4]. Norway's main interest lies in the transformation of its geopolitical position. The NSR may make the port of Hammerfest one of the key points on the busy route, providing Norway with the unique role to control the maritime gate from the Northern Europe to Asia. Besides that, the NSR will contribute to the development of new oil & gas fields on the Norway’s shelf and to the further exports of state Norwegian company Statoil. The key issue underlying the Norwegian northern strategy is the strengthening of the Norwegian presence in the Asian markets by taking advantage of the NSR. Furthermore, the development of the NSR is urgent for Norway in terms of competition. Shifting the focus of Russian Arctic offshore oil & gas projects towards the Asian markets will reduce the competitive pressure on the Norwegian offshore projects aimed at the European market. China Japan’s national interests in the NSR’s development are close to these of China. They are primarily related to the potential gains from access to new energy sources. Politically, the country is interested in maintaining security and stability in the region and providing favorable conditions for the companies engaged in shipping along the NSR. Republic of Korea is interested in providing transportation services, building and maintenance of vessels suitable for Arctic conditions. Korea has the largest shipbuilding industry and is the world leader in LNG tanker production, and, therefore, is the main prospective supplier of Arctic vessels[5]. References For Russia, the NSR is both domestic and export transport route intended to facilitate the development of Arctic resources and to foster economic growth in the northern regions. The NSR is to play a vital role in integrating Russian Arctic territories, rich in natural resources, into the global economy. Hard to compare To measure the NSR cost efficiency, it is necessary to consider six main cost components. The components depend on the set of inputs (cargo type, port of arrival and port of departure, navigation season, frequency of supplies, type of vessel etc.). Larger share in total transportation costs is taken by three major cost components: fuel costs, capital costs and transit fees. 1.Federal State Institution Northern Sea Route Administration (available at: http://www.nsra.ru/en/).http://www.nsra.ru/en/ 2.Furuichi M. Otsuka N. (2015) “Proposing a common platform of shipping cost analysis of the Northern Sea Route and the Suez Canal Route”, Maritime Economics and Logistics, vol. 17(1), 9-31. 3.ICC International Maritime Bureau (2014), “Piracy and armed robbery against ships”. 4.Lasserre F. (2014), “Case studies of shipping along Arctic routes. Analysis and profitability perspectives for the container sector”, Transportation Research Part A: Policy and Practice 66, pp. 144-161. 5.Lim C. (2013), “Northern Sea Route – Korea’s perspective”, Paper presented at the Inaugural conference Developing Asia Pacific’s Last Frontier: Fostering International Cooperation in the Development of Russia’s Siberia and Far East, Singapore. 6.Makarov I., Sokolova A. and Stepanov I. (2015), “Prospects for Development of the Northern Sea Route: interests of Russia's and other countries' stakeholders” // International Journal of Transport Economics (in print) Northern Sea Route Informational Office (available at: http://arctic-lio.com/)Makarov I.Prospects for Development of the Northern Sea Route: interests of Russia's and other countries' stakeholders 7.Pettersen T. (2013), “China starts commercial use of Northern Sea Route”, Barents Observer 14. 8.Ragner C.L. (2000) “Northern Sea Route Cargo Flows and Infrastructure – Present State and Future Potential”, Fridtjof Nansen Institute, FNI Report 13. 9.Schøyen H. and Bråthen S. (2011), “The Northern Sea Route versus the Suez Canal: cases from bulk shipping”, Journal of Transport Geography 19, pp. 977-983. 10.Ship & Ocean Foundation. (2000), “The Northern Sea Route - The Shortest sea route linking East Asia and Europe”. For container shipping the average number of ports visited by the vessel navigating between East Asia and North- West Europe is 10. Moreover, container handling charge is added to the port dues for loading and discharging at the both end ports. Advantages: distance reduction, absence of piracy risks and traffic problems, potential for economies of scale Disadvantages: lack of infrastructure, administrative barriers, high transit fees The NSR is more attractive for bulk shipping, which is less sensitive to deliveries schedule and are taxable at lower tariff rates for icebreaking service. The container shipping has much less chances to be commercially viable on the NSR. The larger the share of the segment along the NSR (which the vessel can run at a lower speed) in total distance, the more economically viable it is. At the moment, the NSR development does not look optimistic in the short run. Slowdown of the Euro- Asian trade growth, western sanctions against Russian energy companies in the Arctic, decrease in oil prices and, as a consequence, in bunker fuel prices are not favorable for the NSR development. However, in the long run the development of the NSR will be triggered by strategic national interests both of Arctic and Asian states. This implies that at the initial stage the project can develop (considering governmental support from different states) even with the negative net income of transporters. Navigation via the NSR imposes additional risks which should be considered in the insurance premium. Factors determining its value are crew qualification to navigate in Arctic waters, the proximity of rescue units and ports in case of the accident, icebreaking ship rigging, natural factors (mistiness, ice cover over the route). According to some estimates, total insurance costs for the NSR navigation are 50% higher than those for southern sea routes [4]. Other estimates point out the absolute value of $10 per (gross tonnage) GT/year as an insurance premium for transportation via the NSR [11]. However, the insurance costs for cargo transportation through the Suez Canal increase due to risks of piracy attacks in the regions of Gulf of Aden and the East Coast of Africa, Malacca and Singapore straits. The insurance premium for the Suez Canal route equals $40 per TEU (Aden Emergency Charge) [2]. Russia Norway S. Korea Japan Stepanov Ilya, Center for Comprehensive European and International Studies, National Research University Higher School of Economics, Moscow, Russia; e-mail: iastepanov@hse.ru; mob.: +7 916 939 95 03iastepanov@hse.ru 1. 2. 3. 4. 5.