A Quick Pair of Arctic Articles

I know I owe you dear readers my next installment of geoeducation but these two issues are a pretty big pair of end of 2017 Arctic news.

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A couple days ago this came across my newsfeed:

Foreign shipments of oil, natural gas and coal banned along Russia’s Northern Sea Route

I touched on this possibility a couple weeks ago on my own blog:

The NSR: What is going on there right now?

Basically, this move means If you want to move hydrocarbons or coal out of, or through, the Russian Arctic/Northern Sea Route (NSR) you will have to move it on a Russian flagged vessel. With a few exceptions such as Murmansk and Arkhangelsk are outside the zone this is required in. The law goes into effect February 1, 2018 but if you are contracted to carrying these items on a non Russian flagged vessel you will be allowed to continue.

Which is a relief for some of the large operations in the Russian Arctic like the Yamal LNG operation. Such as the Russian LNG producing company Novatek:

A fleet of 15 brand new ice-class LNG carriers are being built for the company’s Yamal LNG project, and these ships all carry foreign flags.

Russian legislators ban foreign shipments of oil, natural gas and coal along Northern Sea Route

And they are not alone:

Another three Yamalmax ships will be built for Dynagas. In addition, a consortium of Teekay and China LNG Shipping will get six ships of the class, and three are built for Mitsui OSK Lines and China Cosco Shipping, 24ri writes.

Teekay in January this year announced that its first ship of the class, the «Eduard Toll», had been launched.

However, none of the new ships will carry a Russian flag. Even Sovcomflot’s «Christophe de Margerie» has Limassol in Cyprus as its home port.

That is not in line with the increasingly protectionist line of the Kremlin.

Foreign flagged tankers chart course for Russia’s new Arctic LNG plant in conflict with Kremlin policy

This move also adds a wrinkle to the still relatively new Russian-Chinese commercial relationship in the Arctic

It is a potential serious challenge to Novatek and its Yamal LNG project, which has been carefully developed together with French and Chinese investors. The latter have strong interest in promoting their own national industries in the region and Chinese companies will ultimately carry a major share of the natural gas exported from the region.

From what I can tell it seems this may continue unabated since if the contracts are in place by Feb 1 this year even future expansion in transport should be covered by these stated exemptions. But what I do not know is if there is a sunset clause in this policy that permits Russian to close this loophole in the future either selectively or generally.

So what does this move mean?

For Russia this legislation is a balancing game where they hope the positives will outweigh any negatives. Because, by taking this step they can increases the number of Russian hulls moving hydrocarbons out of and through the region. By doing so, they have mostly exclusive rights to the fees they can charge for moving these fuels which they see as a economic boost on top of the benefits from extraction and sales.

The other side of the coin is this is a clearly non free trade move on Russia’s part and by loosely nationalizing the entire system price gouging is a possibility. But since the NSR is completely within Russian waters there is little anyone can do about it since no other country’s rights are violated with this crossing their borders.

So if Russia can make enough money from the rapidly increasing extraction of gas, oil, and coal from the Arctic by putting it mostly on their own boats for a energy hungry world whatever repercussions from those actions may be able to be ignored.

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Now the other big Arctic news: A fishing moratorium.

Arctic nations and fishing powers sign ‘historic’ agreement on fishery

In short, for at least the next 16 years there can be no commercial fishing in the central Arctic, which is probably the last untouched fishery on the planet, until research can show what are sustainable levels of fishing for all commercially interesting species.

Arctic nations and fishing powers sign ‘historic’ agreement on fishery

For reference, the specified area is the dark blue section above.

So who was involved?

Officials from the so-called Arctic Five – Canada, Norway, Russia, Denmark (Greenland and the Faroe Islands), the United States – reached the agreement with officials from the major fishing powers – Iceland, Japan, South Korea, China and the European Union – during the sixth round of negotiations in Washington D.C.

Inuit from Canada, Greenland, the Russian region of Chukotka and Alaska represented by the Inuit Circumpolar Council are also part of the agreement.

This means everyone who has a stake in fishing the Arctic for profit has come together and decided to do it the most right way barring never fishing there at all. Or they will once everyone signs it. From that point forward the Agreement holds for 16 years and automatically extending for 5 year increments until enough information has been gathered to produce an effective set of guidelines.

The agreement is fairly significant for 2 main reasons:

1. It does a great job showing that the Arctic can be and is a place where strong peaceful agreements can be created and fostered via diplomacy. Something that was recently shown in the Arctic Search and Rescue Agreement but this agreement reinforces that.
2. It also is a rare example of getting ahead of the curve. No one has yet fished the Arctic ocean commercially though there is a great deal of fishing in the area around it. By taking this step now it should be possible to avoid the fishery crashes that we’ve seen in other international waters.

That last line should also remind us that the area indicated in the map above is international waters and the EEZ’s that surround it are managed by national level rules or more local agreements. So there still is a great deal of the Arctic that will be fished sooner rather than later compared to the Central Arctic Ocean.

But it’s a big deal all the same. and the relative lack of publicity of it means it may slip through without too much protest from certain quarters.

The NSR: What is going on there right now?

Last time I introduced what the NSR is, so lets go over some of what is happening now.

The NSR as a shipping route has done fairly well for itself, especially compared to the Northwest Passage, and was heavily used for an Arctic shipping route until the sanctions of 2014 hit, which gutted traffic.

Shipping Traffic on Northern Sea Route Grows by 30 Percent

Edit: This set of graphs is now out of date and deeper contexts currently exist:

Annual freight traffic on the Northern Sea Route, in mln tonnes (Source: Atomflot)
https://www.kbnn.no/en/article/shipping-and-the-northern-searoute

And as we see, until those sanctions hit the NSR underwent a dramatic increase in transit shipping (more of a short term flatline according to the new data) and was in a position to step into the role of a significant shipping route. However, this is only the traffic that transits the Arctic fully which is not the same as purely local traffic or traffic that originates or ends in the Arctic.  To clarify:

• A Full transit is often defined as a voyage through the Arctic between the Atlantic and Pacific Oceans, entering one side and exiting the other ocean corridor. Some sources consider a voyage across a majority of the NWP to be a full transit.
• A Partial Transit is one that traverses part way through one of the passages, normally returning to the originating corridor.
• A Destination Transit originates or terminates in an Arctic port and voyaging to or from ports outside of the region.
• Local Transits represent vessels that travel exclusively within the passage without exiting to either the Atlantic or Pacific oceans.

Arctic Ocean Transits

This means what we see in the above graph are full transits going from the Atlantic to the Pacific or vice versa.  This only represents a fraction of the shipping on the route since the majority are the other three varieties that move material to warm water ports or supply communities in the Arctic.  It also ignores recreational and warship transits so we do not yet know how much traffic there really is using the NSR this year.  But there is a clue in the number of transit permits applied for crossing the NSR:

Shipping Traffic on Northern Sea Route Grows by 30 Percent

Which shows while there were 19 Transits in 2016, there also were 713 permits issued and 144 went to international operators.  This means up to 699 Russian flagged ships operated in the NSR region in 2016.  We can get hints of those numbers this year though no one has yet published transit or permit data for this year yet.  But we have a snapshot of two days in September this year:

According to the Northern Sea Route Administration, there were on 4th September 2017 a total of 94 ships in operation along the route. And that list does not include military vessels. A lion’s share of the ships are concentrated in the area around the Yamal Peninsula where companies Novatek and Gazprom Neft are developing their grand Yamal LNG and Novy Port projects.

However, there are also a number of ships in more eastern waters. Data from MarineTraffic, the shipping tracking service, show that there on 5th September were about fifty vessels in the area between the Vilkitsky Strait and the Bering Strait.

Northern Sea Route is free of ice, Arctic shipping thrives

Which indicates that while the NSR is still reeling from the sanctions in relation to foreign transits, local and destinational traffic still seems to be very active. However, once some data is released it may be able to get a more accurate view of the current state of the NSR and see how much of this traffic is from the Yamal Peninsula projects and the Murmansk expansion.  However, the Russian government may be soon changing how shipping in the NSR works.

Russia plans to shut its Northern Sea Route to foreign vessels

Specifically, the Russian government looks to limit haulage of hydrocarbon products to Russian flagged vessels only with the idea that such a restriction will reap great rewards for Russia.

Russian President Vladimir Putin has announced that vessels under the Russian flag may receive exclusive right to transport hydrocarbons along the Route. The relevant bill is now being considered in the State Duma.

The Russian president said the move “will increase the volume of sea transportation, strengthen the positions of domestic shipping companies, and create opportunities for the renewal of their fleet.”

Though this restriction depends on the current hydrocarbon exploration in the Russian Arctic to increase severely and that is not without risk.

“Other gas and oil production projects are under consideration but may never be realised, especially given the high cost of producing hydrocarbons in the Arctic, and the situation with oil and gas prices in the world markets is rather unstable,” he added.

Analysts note that the era of high prices for hydrocarbons is a thing of the past and the world will gradually give up oil and gas.

“If this forecast is correct, the oil and gas reserves in the Arctic will be largely unclaimed, and, therefore, there will be no expected demand for hydrocarbon transportation services,” Lukin said.

Now this possible change runs afoul of international trade rules though at the same time it reminds me a bit of the US Jones act.  That manages to slip through international trade rules but the circumstances are wildly different.

“Any monopoly inevitably causes discontent and questions. For example, how does granting exclusive rights to Russians correspond with the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO), of which Russia is a member? Not all countries agree that Russia has the right to exclusive jurisdiction over the Northern Sea Route,” Lukin added.

However, he noted that Russia is de-facto controlling the Northern Sea Route and “if Moscow wants to provide ships with the Russian flag exclusive rights, it is unlikely that anyone will be able to effectively prevent it.”

The takeaway from this is even if it goes forward and the Duma approves and bumps it up to be approved by Putin it needs both the Arctic hydrocarbon extraction to dramatically increase from current levels and pricing to stay at reasonable level to ensure that it does dramatically increase. That is a tall order without some fairly major geopolitical shifts to ensure those things happen.  But they could happen all the same.

Plus, the Chinese are interested in the region:

Six centuries later, China rekindles its Arctic ambitions

China’s interest in the Arctic is fourfold: as a new trade route, a future source of minerals, an environmental concern and a strategic option. This interest has become more immediate with the faster-than-expected melting of the Arctic ice. Scientists now think a large part of the Arctic will be ice-free during the summer by 2050.

Sailing from Shanghai to the Dutch city of Rotterdam through this northern passage would be 6,100 nautical miles shorter than the traditional route through the Strait of Malacca and the Suez Canal. If not slowed by icebergs, ship owners potentially can shave a week off of travel time, cutting costs by $600,000 per vessel.

It helps to see that this is how some Chinese officials see the Arctic when it comes to trade routes:

So a possible restriction may not sit well with Russia’s economically powerful neighbor that also happens to be assisting in the funding and construction of the Yamal Peninsula projects.  Specifically to the tune of $12 billion and with great expectations that this will help some of China’s energy needs.

In the end, Russia seems to be partly working around sanctions by both exploiting hydrocarbon resources in the Arctic and trying to restrict who can carry those resources.  This may get complicated if China takes exception to this since they helped fund the project but transport costs may drop since self icebreaking tankers are now operating in the region and that would cut icebreaker fees possibly easing their concerns.

First Unescorted LNG Ship Transits Northern Sea Route

As of now it is up to the Russian government to decide whether to make this restriction a reality or not.  If they go forward with the policy, tensions will increase in the region but so will profits and maybe nothing will come of it.  If they do not, they lose those transport fees but put themselves in the position to make more money by encouraging foreign investment and operations.

We will see.