Thawing Potential

New Frontier Boom for Project Cargoes

By David Whitehouse

The melting of Arctic ice and the rich untapped natural resources in the region are leading to a redefinition of shipping routes as fundamental as that heralded by the construction of the Suez Canal.

The Northern Sea Route, which goes from northeastern Asia over Russia to Rotterdam, is 40 percent shorter than the traditional route through the Suez Canal. This joins other Arctic trade routes including the Northwest Passage – along the northern coast of Canada – and the Transpolar Sea Route, which goes directly through the Arctic.

The Arctic houses an estimated 13 percent of the world’s undiscovered oil, 30 percent of its undiscovered gas, and a potential abundance of uranium, rare earth minerals, gold and diamonds. U.S. Secretary of State Mike Pompeo in May said that a new age of strategic engagement in the Arctic has now opened.

Pompeo raised the prospect of the time it takes to transport cargoes between Asia and the West being slashed by as much as 20 days. In the short term, that means there is likely to be large demand for project cargoes to create the necessary ports and infrastructure in Arctic waters, notes Lawrence B. Brennan, a former U.S. Navy captain who is now adjunct professor in international law at Fordham Law School in the U.S.

Equipment will be needed, such as piers, container cranes, submarine pipelines, submarine electrical transmission and communications cables, electrical generation systems, warehousing, oil tanks and pipes, he said. Brennan expected that while container shipping will mainly continue to use the Suez route, bulk shipping will show a more marked shift to the Arctic due to oil production and mining potential.

But these new opportunities bring new risks. The Arctic, Brennan said, has “multiple physical, political and legal barriers to maritime traffic and security including a lack of governance, inadequate crisis response and a fragile environment.” There are no facilities to repair vessels in the Arctic and emergency work would be difficult at best, Brennan said. Planning, training and experience are essential for successful operations.

Experience is Priceless

An increase in Arctic breakbulk activity is already noticeable. Jean-Philippe Paquin, general manager of the Port of Valleyfield near Montreal, has reported publicly of growing volumes of domestic Arctic cargo that were pushing port limits. A new bulk terminal was built in 2018, yet additional space is already needed. Valleyfield plans to double gate capacity to accommodate traffic, with more gates and an automated check-in process for breakbulk deliveries.

Tim Keane, senior manager, Arctic operations and projects at Fednav in Quebec, was on board the Nunavik, when in 2014 it became the first cargo ship to cross the Northwest Passage unescorted, as it delivered nickel from Quebec to China. He anticipates a gradual increase in Arctic project cargoes, albeit starting from a low base. Arctic projects must be completely self-sufficient in terms of sea and land-based infrastructure, he said.
The six decades during which the U.S. Navy submarine force has operated in Arctic waters prove the value of experience. “Meticulous training, planning, and material preparation are essential,” Brennan said, adding that charterer and shippers should insist that the shipowner and crew demonstrate specific experience with polar operations and the types of cargoes to be carried.

Since the start of 2017, the International Maritime Organization’s Polar Code has sought to ensure crew safety and environmental protection in the Arctic and Antarctic regions. Researchers led by Laurent Fedi at the Kedge Business School in Marseille argued in a research paper that while the code is a key step in improving ship insurability, it has only limited capacity to assist underwriters in assessing risks. Marine insurers still face a lack of data and a high level of uncertainty, which has led to “extreme caution” in Arctic risk appraisal.

Helle Hammer, managing director of the Nordic Association of Marine Insurers, known as Cefor, in Olso, stressed the need to use operators who are experienced in the Arctic. There are many uncertainties including the Arctic weather, which can change very quickly, she said.

Communications during the trip are crucial, and there must be a plan in case something goes wrong on board, including for vessel salvage. Engine failures can happen anywhere, but remoteness worsens their impact. In some areas there will be no possibility of nearby help. Cefor provides lists of questions that prospective shipowners should be asked to answer.

One-off projects in the Arctic by operators who are not experienced in the region should be treated with caution, Hammer said. “A simple engine breakdown can escalate very quickly and become very expensive.” The Polar Code, Keane added, “puts the onus back on the shipowner to prove they have done their homework. There’s more to it than having the manual on board.”

‘Polar Silk Road’

According to the CPB Netherlands Bureau for Economic Policy Analysis, full commercial viability of the Northern Sea Route, or NSR, is still some way away. Issues hampering viability include slower speeds, Russian fees and Customs clearance, limited commercial weather forecasts, patchy search-and-rescue capabilities, the scarcity of relief ports and the need to use icebreakers. Those are powerful deterrents to project cargoes, which rely on predictability, punctuality and economies of scale. The bureau forecasts 2030 as its base scenario for the NSR to be fully operational.

China, which needs to secure energy access, can afford to disregard short-term commercial logic. The opening of the Arctic has prompted China to seek to reposition itself as an Arctic power. Beijing in January 2018 outlined its ambitions to extend its Belt and Road Initiative to the Arctic. China, which has gained observer status on the Arctic Council, has a stake in Russia’s Yamal liquefied natural gas, or LNG, project, which is expected to supply China with 4 million tonnes of LNG a year.

In September 2018, a ship belonging to Chinese shipowner COSCO Shipping, transporting wind power equipment, reached a French port via the Arctic route for the first time. The project was organized by French port logistics and shipping group SeaLogis. Zhang Li, deputy general manager of COSCO Shipping Specialized Carriers, spoke of the need to create a “green Polar Silk Road” after the 33-day voyage. COSCO planned 14 transit voyages along Russia’s Northern Sea Route between July and October – nearly double the number of 2018.

The CPB estimates that in the future, 15 percent of Chinese trade will use the NSR, resulting in a massive redistribution of shipping tonnage. Roughly 8 percent of world trade is transported through the Suez Canal, the CPB said, estimating that two-thirds of this volume will be rerouted via the Arctic.

Pollution Insurance

A poll carried out by Safety4Sea in January 2019 found that 74 percent of respondents did not believe that the Polar Code as it stands is sufficient to ensure crew protection and environmental safety. Brennan agreed that there is a need to strengthen the code’s safety provisions. He said that the code’s rules on ship structures, including the requirement that a ship must be able to withstand flooding resulting from hull penetration due to ice impact, should be applied to all ships in Arctic waters, not just those built since January 2017.

Redundant fire safety appliances should also be mandatory, he said, as should requirements for experience in sailing in polar waters. Polar Code requirements on the ability to receive and display current information on ice conditions should also be extended to pre-2017 ships, he said. Revisions to the Polar Code are being considered for adoption in 2022.

Further, the Polar Code recommends ship operators “not to use or carry heavy fuel oil in the Arctic,” but this is not binding. Brennan argued that there is an “obvious need” to establish comprehensive rule of law governing environmental concerns in the Arctic. Safety measures taken to reduce the probability of an accident will help protect the environment, he says. One way forward, he suggests, lies in the combination of stiffer requirements for liability insurance, particularly for environmental damage claims, and jurisdiction and venue provisions for resolution of the claims against ships and their pollution and liability insurers.

But despite the challenges, there is great potential in the region for project cargo demand, not only to supply infrastructure to support salvage, but also in support of improved emergency environmental responses and in the port infrastructure to service the inhospitable region. The need may not be immediate, but stakeholders should start positioning themselves soon if they don’t want to be given the cold shoulder when it comes to future polar logistics. 

David Whitehouse is a journalist who spent 18 years with Bloomberg, before turning to a career as a freelancer. He has written for The Financial Times, the World Economic Forum, Deutsche Bank, Germany Trade & Invest, and UBS Asset Management, among many others.

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