Natural Gas Shipping Route to Asia 10 Years Away
From Insurance Journal
Tanker transport of Russian Arctic gas through the Bering Strait to Asian buyers is at least 10 years away because of ageing infrastructure, vessel shortages and growing disputes over waterway rights.
Thawing sea ice caused by global warming has attracted energy companies to drill in the Arctic Ocean, an area mostly north of Russia containing 25 percent of the world’s untapped hydrocarbons, according to estimates.
Russia plans to unlock those resources by reviving a Soviet-era trade link known as the Northern Sea Route (NSR), which avoids long trips via the Atlantic and the Suez Canal and makes its exports more competitive.
Russian and western companies are already moving to develop three new liquefied natural gas (LNG) production plants along its northern coast.
Russia cannot afford to miss opportunities to expand in the Chinese and Japanese markets as competition ramps up from LNG exporters in Australia, Qatar and possibly the United States, while its traditional European market offers little prospect of growth.
“The Russian state is very keen to develop the Arctic, because they see it as key to maintaining exports, which is in turn key to sustaining fiscal revenues and to keeping its geopolitical standing in the world,” said Charles Emmerson, senior research fellow at international think-tank Chatham House.
“For Russia, it is difficult to exaggerate the potential geopolitical and geo-economic importance of the Arctic,” he said.
Finnish crude oil tanker Uikku was the first non-Russian energy vessel to brave the harsh conditions of the NSR in 1997, followed by the first gas condensate shipment in 2011, sent by Russia’s second-biggest gas producer Novatek.
In November state export monopoly Gazprom made the first ever delivery of LNG through the NSR, shipped from Norway’s Snoehvit plant, currently the world’s most northern LNG export plant, to Japan.
Gazprom’s test of the route, normally open between July and November, shaved nearly 3,000 nautical miles [3,452 miles] off the alternative Suez Canal trip, raising hopes of future cost savings and boosting plans to build an LNG plant in the Arctic.
The first Russian LNG to traverse the new route is likely to come from a Novatek and Total project on the Yamal peninsula, which aims to start producing LNG in 2016.
Novatek and Gazprom recently launched plans to build a second LNG plant at another site on the Yamal peninsula. Another plant at Pechora is also in the works.
Although traffic through the NSR surged last year to around 1 million tons of various kinds of cargoes, it pales by comparison with the 1987 peak of 6.6 million tons.
Following the Soviet Union’s collapse, freight shipping decreased, ports and facilities serving the NSR fell into disrepair and expansion halted on Russia’s nuclear-powered ice-breaking fleet. Icebreakers are necessary to escort tankers crossing the Arctic.
DECADE OF NEGLECT
As part of a revamp, Russia plans to build 10 new emergency ports to resurrect the route as well as cut red tape and relax transit fees to encourage foreign shipping and investment.
But reversing more than a decade of neglect will require much heavier government investment in infrastructure on ports, satellite coverage, rescue services and expensive icebreakers and more ice-capable LNG vessels, experts say.
The existing fleet of 10 to 15 icebreakers faces retirement by 2015-17, while only a handful of these will be replaced before 2020. Each costs around $1 billion.
“The biggest obstacle right now is that there are very few suitable LNG vessels available,” Mikko Niini, managing director of Aker Arctic, a Finnish company that designs and builds ice-capable vessels.
Only three of the 359 LNG tankers in the global fleet hold the top tier ice-class. Another 12 to 16 vessels will be needed for Novatek’s Yamal LNG project due by 2016, Niini estimated.
Shipyards have yet to receive any orders from project developers for the ships.
“When the Arctic projects in Russia reach FID (final investment decision), that is when ice-class vessels will start to be ordered,” which could be by 2020, estimated Tony Lauritzen, commercial director at Greece-based LNG shipping firm Dynagas Ltd, which organized Gazprom’s shipment through the NSR last year.
No ship has yet been built that can transport gas year-round through the icy waters of the route.
Overall investment in the Arctic could reach $100 billion or more in the next decade, driven by the oil, gas, mining and shipping industries, a report by Chatham House and the Lloyd’s of London insurance market estimated in April.
“There’s a whole series of obstacles: legal deficiencies, the irregularity of sea ice, lack of search and rescue, poor access to ports, communications, deficiencies in satellite coverage,” said Tore Henriksen, a law professor at the University of Tromsoe in Norway who heads an interdisciplinary working group to study Arctic shipping regulation. “If you’re looking to sail through the Arctic, you shouldn’t be in a hurry,” he added.
The retreat of sea ice and the prospects for opening trade are also intensifying tensions between the main Arctic coastal states.
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