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Feature: Despite Russian aspirations, international shippers cool on Arctic trade routes

Moscow — * No hydrocarbons transit cargoes in 2014, 2015
* Dramatic drop in transit comes as internal shipping up 37% on year
* Arctic oil deliveries are set to grow

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While Russia is considering boosting cargo turnover via the Northern Sea Route (NSR) that runs across Arctic waters along the Russian coast linking Europe and Asia, a sharp decline in transit shipping via the path in the past two years indicates a loss of interest from international shippers.

International shipping via the passage started rapidly shrinking in 2014, falling by three-quarters year on year to 274,103 mt and coinciding with a dramatic cooling of relationships between Russia and western countries over Ukraine, when anti-Moscow sanctions cast doubts over development of hydrocarbons projects in Russia's Arctic.

Northern Sea Route

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In 2015, transited cargoes fell by a further 86% to just 39,586 mt, a six-year low, with market players attributing the reduction to a number of different factors.

Russia is actively developing the passage as it plans to transport crude and LNG to be produced in the Russian Arctic area to international markets.

It also hopes to turn the NSR into a major international trading route, including for energy cargoes, which offers a number of advantages over the traditional route from northern Europe to the Asia-Pacific region via the Suez Canal and the Strait of Malacca.

These plans were initially supported by rising interest from international companies, with transit cargoes hitting a record high of 1.262 million mt in 2012, and accounting for around 30% of total cargo shipments in the NSR area in 2011-13.

Since then, though, transit cargoes dropped to account for just 7% of total shipments in 2014 and below 1% in 2015, with the past two years seeing no hydrocarbons cargoes transiting the path at all.

NSR drawbacks

Navigation via the NSR -- which allows vessels to travel east from the Barents Sea through the Bering Strait and then down to the Pacific Ocean -- has been growing rapidly since 2010, when Novatek sent an Aframax tanker with stable condensate from Murmansk to China's Ningbo Port in 22 days, in the first ever voyage of the large vessel via the path. It took around half the time of the traditional route through the Suez Canal.

Navigation in the Arctic became possible in what is generally seen as a consequence of global warming which allowed ice-free shipping four months a year, from July till November. Commercial viability of the route, however, has always been in question as climate conditions in the area remain harsh and the ice situation changes quickly.

Novatek, which actively tested the route in previous years in anticipation of the launch of its Yamal LNG plant, has said the NSR was commercially attractive even though it involved the services of mighty ice-breakers as the shorter distance allowed it to save fuel and ship team allowances.

Other market participants, however, pointed to multiple challenges of the route, including harsh and unpredictable climate conditions and high ecological risks, among others.

Norway's Statoil, for example, seems to have lost interest in the route, after sending several tankers, including cargoes of naphtha and LNG, to Japan in previous years.

"Statoil has not used the Northern route since 2013 and we currently have no plans to use it," a company spokeswoman told Platts.

She declined to say what considerations were behind this but said that a decision on which route to sail depends on a number of factors.

"Firstly, the waters need to be safe both as far as the vessel, the cargo and the environment are concerned. Secondly, any route we use needs to be commercially attractive and competitive against the alternatives," she said.

"The attractiveness of a route depends on direct costs, and sailing time as well as the market characteristics of the respective commodities at the time of sailing," she added without elaborating further.

Russia's Gazprom Neft, which is developing two oil greenfields in the Arctic and also tested the route in 2012, said the limited navigation period as well as the need to use the ice-breaking escort and convoys offset the route's advantages such as cheaper freight payments and shorter delivery time.

Anti-Russian sanctions are also contributing to the drop in cargoes' transit, said Vladimir Mikhaylichenko, vice-president of non-commercial Partnership for Coordinated Use of the NSR.

Delays in shipping because a vessel needs to wait for an ice-breaker to navigate through the route as well as relatively high and complicated ice-breakers' tariffs are among other drawbacks that caused a drop in the sailing via the route, Mikhaylichenko said.

Domestic shipments up

The dramatic drop in transit sailing via the NSR does not spell an end to the ambitious project to develop the NSR into a well-established shipping route.

Domestic cargo turnover in the area jumped 37% year on year to 5.3 million mt in 2015, supported by accelerated work on the construction of the Yamal LNG plant and the nearby port of Sabetta.

Growing crude production from Gazprom Neft's onshore Novy Port and offshore Prirazlomnoye oil greenfields in the Arctic also added to the 2015 traffic rise and is to play an increasing role in the future.

Gazprom Neft expects crude output at Prirazlomnoye to more than double year on year to around 42,000 b/d in 2016 and rise gradually further to peak at over 100,000 b/d in 2021.

Novy Port's output is forecast to jump nearly six-fold to around 40,000 b/d on average this year, from around 7,000 b/d in 2015, after the launch of an export terminal in the Gulf of Ob this year allows the transport of increasing volumes from Russia's northernmost onshore oil producing fields. Production is expected to peak at around 110,500 b/d after 2018.

Earlier this month, Gazprom Neft received its first Arc7 class tanker with a deadweight of 38,000 mt, capable of navigating through 1.8 meter-thick ice without ice-breakers.

The company plans to build a total of six such tankers, together with the Sovcomflot shipper, to secure year-round delivery of around 450,000 mt/month of crude (or 110,50 b/d on average) from Novy Port, according to Gazprom Neft's deputy general director on logistics, Anatoly Cherner. Gazprom Neft currently uses 16,000 dwt Arc5 tankers.

As part of the Arctic logistic scheme, Gazprom Neft in February launched a 300,000 mt floating storage vessel Umba in the Kola Bay, capable of loading two tankers simultaneously. It allows the delivery of Novy Port and Prirazlomnoye crude to international markets in standard export batches.

The expected launch of the first 5.5 million mt/year train at Yamal LNG in 2017 will also help to boost hydrocarbons cargo delivery through the NSR, with the cargoes expected to travel both east- and westward from Sabetta. The plans envisage the launch of the second and third similar LNG trains in 2018 and 2019.

Local authorities of the Yamal-Nenets Autonomous Region hope Arctic crude deliveries could grow even more significantly in the future, suggesting developing a major hub near the port of Sabetta, capable of exporting up to 40 million mt/year of crude.

To make this possible, a new pipeline Zapolyarye-Purpe, to be launched at the end of this year to link greenfields in northern Siberia with the country's trunk pipeline network, could be extended to the port area, said Vitaly Karaganov, an adviser to the region's governor.

The oil terminal could be built on the right bank of the Gulf of Ob, which has a deeper sea bottom than the left bank where Sabetta is located and could serve large tankers with a deadweight of up to 130,000 mt, Karaganov said.

It is worth noting though that national oil pipeline operator Transneft, is skeptical over the plan as there is no resource base for such new volumes, seeing the redirecting of expected volumes from the ESPO as hardly rational.

Cargoes turnover via NSR* (mt):

*Data from the Administration of the NSR

--Nadia Rodova,
--Edited by Maurice Geller,