Risk and Rewards
Lloyd’s of London has published research by think-tank Chatham House into the “unprecedented and disruptive change” currently underway in the Arctic region and its implications for shipping, as well as the industries and communities it serves.
Balancing Arctic risk and rewards
By Neville Smith
Lloyd’s of London has published research by think-tank Chatham House into the “unprecedented and disruptive change” currently underway in the Arctic region and its implications for shipping, as well as the industries and communities it serves. It suggests that the region is at point of departure and the impact on shipping is an interesting combination of risk and reward.
In overview, the report finds that the rapid change in climate and rising temperatures in the Arctic imply a reassessment of economic and development potential which in turn gives rise to a set of far-reaching political developments. This new Arctic will reflect the development of a natural resource base beyond fisheries and into minerals, oil and gas.
At the same time, economic value is beginning to be attached to the Arctic’s natural environment, both for its role in regulating global climate and for its biodiversity. This is giving rise to the potential to harness wind and hydro-power as well as attracting a growing number of tourists. International shipping activity has expanded and despite being several decades away from major traffic, is a developing commercial reality.
The report notes a range of possible future trajectories for Arctic development, based on different regional and global economic scenarios and the range of variables is broad. These include uncertainties over future environmental conditions, the scale and accessibility of natural resources, pace of technological development, global energy prices, future global economic demand and the political choices of Arctic states.
It also notes that an environmental disaster, either from a single spill or as the result of cumulative degradation, could rapidly and significantly change the Arctic’s political and economic dynamics. More acutely than elsewhere in the world, economic development and environmental sustainability in the Arctic are co-dependent, it concludes.
However, if current patterns continue investment in the Arctic could potentially reach USD 100 billion or more over the next 10 years, largely in the development of non-renewable natural resources and in infrastructure construction and renewal. Clearly a substantial business opportunity, it also brings a unique and complex set of risks, and raises significant policy dilemmas for Arctic governments.
As the report notes, environmental conditions, geological prospects, physical accessibility, population levels, economic development and political salience vary widely across the region, making broad conclusions difficult. But what is clear is that shipping in the Arctic has come a long way and has much further to go.
Traffic in the Arctic is already considerable, with the 2009 Arctic Marine Shipping Assessment reporting 6,000 vessels active in the region. Year-round navigation has been maintained on the western part of the Russian Northern Sea Route since the late 1970s. Though seasonal conditions vary, ice conditions are not necessarily worse in the Arctic than elsewhere in the North.
Traffic levels are expected increase in coming years as the shipping season lengthens, costs will fall and point-to-point/trans-Arctic demand will increase. Indeed, the system is already dynamic and growing. In 2011, the Sovcomflot-owned Suezmax Vladimir Tikhonov carrying 120,000 tonnes of gas condensate, became the largest tanker to sail the Northern Sea Route. Later that Summer, Sanko Odyssey became the largest-ever bulk carrier to cross the NSR carrying 66,000 tonnes of iron ore concentrate from the Russian Kola Peninsula to Jingtang in China. This Summer, the Norwegian-owned Ribera del Duero Knutsen is expected to become the first LNG carrier to complete the transit from Norway to Japan.
Each of these voyages relies on expensive icebreaker support, despite relatively little ice being encountered in 2010 and 2011. Charter rates for these high-end vessels vary, but the average cost for escort through the Northern Sea route is around USD 200,000.
As sea ice retreats and thins there is far greater prospect of Arctic shipping without icebreaker support for longer periods of the year and ultimately all year round, in some parts of the Arctic. However, this increase in traffic will put additional pressure on search and rescue and hydrographic services. As is so often the case, the regulatory framework is a patchwork of national administration requirements, supplemented by International Maritime Organization (IMO) rules for international shipping.
The IMO has issued guidelines for Arctic operations which are being developed into what will ultimately become the compulsory Polar Code. Across the region, considerable investment is being made in hydrographic services to improve charting for shipping and by national governments into improved surveillance and other capabilities.
The potential increase in traffic could also provide opportunities for specialised ship designers and builders, both in the Arctic countries and in the centres of ship construction in North Asia. Ships able to travel through ice of up to 1.5 metres without icebreaker support have been developed by Aker Arctic in Finland while Norilsk Nickel has invested heavily in ice-capable vessels to ship minerals from Russia to both Europe and China without icebreaker support.
Though most Arctic shipping is currently limited to re-supply and point-to-point missions rather than international voyages, because the cost of ice-breaking with its associated lower speeds and higher fuel costs undermine the economics, this will not be the case forever. As offshore oil and gas development increases, so will point-to-point traffic. Beyond that, the emergence of the NSR as a large-scale, bulk carrier, tanker and even containership corridor is a real, longer-term prospect.
In 2011, the NSR alone saw 34 voyages carrying more than 820,000 tonnes of cargo, a figure likely to rise in 1 million tonnes in 2012 and the route holds out the prospect of faster transit between Northern Europe and North Asia/Alaska, cutting the journey time on a typical Europe-Asia voyage from 34 days to 22 days.
As the report points out, though distance is important, it is not the only consideration. Navigability and local knowledge, the availability of suitable ships and the associated risks are all factors. In addition, the existence and location of transhipment ports may shape maritime logistics in the future.
At present, cost-competitiveness of Arctic routes such as the NSR, relative to conventional alternatives is constrained by a combination of factors, including the time taken to obtain permits and their cost, the relatively slow speed of ice-breaking transport vessels and the challenge of full tonnage utilisation in both directions.
Owners will certainly incur additional insurance costs and will have to winterise their vessels, installing ice navigation radar systems, heating for pipes, on-board ice removal equipment and ensuring the ship’s bridge is fully enclosed.
From the critical safety point of view, the infrastructure, surveillance and management of Arctic sea-lanes needs further development. Practical considerations include the lack of navigation charts in English and a language barrier.
Nonetheless, political support from Russia suggests that the NSR is likely to be subject to large scale development over the next 10–20 years, thanks not only to projected ice conditions, as well as development of onshore and offshore mineral resources and their proximity to the demand centres on North Asia.
But from reading the report it quickly becomes clear that the pace of change will only accelerate. By the middle of the coming century, it concludes, Arctic conditions may have changed so much that a shipping route across the North Pole itself, bypassing the Northern Sea Route and the Northwest Passage, could become commercially viable.
Arctic Opening: Risk and Opportunity in the High North can be downloaded free of charge from: http://www.lloyds.com/~/media/Files/News%20and%20Insight/360%20Risk%20Insight/Arctic_Risk_Report_20120412.pdf
Editor’s Note: Neville Smith is director of Mariner Communications Ltd.