Is global warming always bad news? Arctic shipping industry proves otherwise.

Sovcomflot, Russia's state-owned shipping company, leads the industry trend of entering trans-Arctic sea shipping, taking advantage of acceleration of melting Arctic ice.

Due to global warming, arctic has been warming twice as fast as the global average. As shown in the figure below, scientists from Arctic Institute even projected that there will be ice-free summers in North Pole as early as 2030. [1]

Projection of Melting of Arctic Ice [1]

In the midst of prevalent concerns over global climate impacts of dramatic melting of arctic ice, shipping industries in the countries that border the Arctic Circle has discovered new business opportunities for trans-Arctic shipping, anticipating how climate change is opening up Northern sea route all-year-around. Arctic shipping can contribute to vitalize oil trading by bringing Asia closer to Europe while saving significant amount of transit times and fuel costs. The melting Artic ice would also eliminate vessels’ need of having an escort of nuclear icebreakers, which also saves a great deal of cost for the shipping companies [2]. Embarking on pioneering trans-Arctic shipping, Sovcomflot, the Russia’s state-owned shipping firm, successfully set the world record on March 30, 2017 when its vessel, Christophe de Margerie, has travelled through the Northern sea route in record speed and without an icebreaker escort for the first time.

Northern sea route saved about 30% of transit times compared to the transit times using the conventional southern shipping route through the Suez Canal. [3]

Christophe de Margerie was a prototype that Sovcomflot built as the company began serving the Yamal LNG (Liquefied Natural Gas) project, an integrated project for natural gas production on Yamal Peninsula, liquefaction and marketing that involves Novatek, Total, CNPC and the Silk Road Fund as shareholders[4]. As oil and gas productions from many of Siberian fields are growing old, oil and gas exploration in the Arctic have appeared promising to Russia who is heavily dependent on oil and gas exports[5]. Sovcomflot’s two main objectives were to deliver gas from a new $27m facility on the Yamal Peninsula and to enter Arctic shipping as a first mover while taking advantage of the diminishing Arctic sea ice.

In order to pioneer trans-Arctic shipping, Sovcomflot’s short-term commitment for this project was to design the vessels so they can transport LNG all year round. Sovcomflot optimized the specification of its prototype vessel with enhanced hull and reinforced propellers, enabling the vessel to sail independently through ice up to 2.1 m thick[5]. This new enhanced design powered Christophe de Margerie to pass along the Northern Sea Route all year round, extending the navigation window for the northern sea route from four months with an expensive icebreaker during summer to all year round in a westerly direction.

Additionally, Sovcomflot’s mid-term commitment is to construct a series of 15 shipping vessels for the Yamal LNG project, following the remarkable success of its prototype, Christophe de Margerie [5]. In preparation of Yamal plant reaching its full capacity, Novatek, one of stakeholders for Yamal project, is currently evaluating whether to build another LNG plant, Arctic LNG-2, with capacity comparable to Yamal or higher and first production in around 2023[6].

For Sovcomflot to sustain operational excellence over time, I would recommend the company thoroughly assess possible risks of entering Arctic shipping. There are two risks that I suggest Sovcomflot to address: adverse ecological impact of increased traffic in Northern sea route and environmental impact of possible issues caused by leaky engine and emission gases. According to environmentalists, possible adverse impact of increased ship traffic in Arctic’s ecology has not been fully understood [5]. I strongly recommend the company invest in long-term study to closely monitor any possible disruptions for wildlife such as walruses and whales as shipping traffic continues to increase. I also strongly urge the company to evaluate its current preventive measure of oil leaks from the engine and improve mechanical design of the engine to mitigate the risk. Although expedited shipping speed from the application of Arctic shipping can significantly reduce emission of carbon dioxide, the company needs to make sure to eliminate any risk of incomplete combustion of fuel that can eventually contribute to a significant portion of the region’s ice melting by depositing black carbon on ice and snow[6].

According to Simon Boxall, an oceanographer at the University of Southampton, dramatic melting of Arctic ice is unlikely to be reversed even if greenhouse emissions stopped tomorrow[4]. However, is it safe for Sovcomflot to make a significant up-front investment in vessel construction, taking advantage of acceleration in the loss of Arctic ice? Or should Sovcomflot be prepared to modify its level of commitment on LNG project in anticipation of new shipping laws addressing navigational safety and global warming, possibly imposed by international organizations such as International Maritime Organization (IMO)?[6]

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[1] “Climate Change.” The Arctic Institute. https://www.thearcticinstitute.org/projects/climate-change/

[2]  Carrington, Damian. “Arctic ice falls to record winter low after polar ‘heatwaves’” The Guardian. 22 March.  2017. https://www.theguardian.com/environment/2017/mar/22/arctic-ice-falls-record-winter-low-polar-heatwaves

[3]  Barkham, Patrick. “Russian tanker sails through Arctic without icebreaker for first time” The Guardian. 24 August. 2017. https://www.theguardian.com/environment/2017/aug/24/russian-tanker-sails-arctic-without-icebreaker-first-time

[4] “Yamal LNG (Russia).” SCF. Sovcomflot, http://sovcomflot.ru/en/fleet/business_scope/projects/item1658.html

[5]  Astakhova, Olesya. “Russian tanker forges path for Arctic shipping super-highway.” Reuters. 30 March. 2017. https://www.reuters.com/article/us-novatek-lng-putin/russian-tanker-forges-path-for-arctic-shipping-super-highway-idUSKBN1712K6

[6]  Dasgupta, Soumyajit. “How the ice melting in the Arctic has affected the shipping industry?” Marine Insight. 21 July. 2017. https://www.marineinsight.com/environment/how-the-ice-melting-in-the-arctic-has-affected-the-shipping-industry/

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6 thoughts on “Is global warming always bad news? Arctic shipping industry proves otherwise.

  1. Interesting read! I share your concern about the impact of Arctic shipping on the arctic ecosystem, and agree that Sovcomflot should definitely assess the long-term implications. Another thing I would think of: what about the regulatory aspect? What rules will countries and international organizations develop to regulate this new space, and how will they affect Sovcomflot’s plans and the industry as a whole?

  2. The questions you pose at the end encapsulate what I think is the crux of the future of Artic shipping: international politics and regulations. If I were Sovcomflot, I’d be wary of doubling down on investing in vessel production. The opportunity to increasingly use the Artic as a shipping route is being noticed by many nations, including China and the US, in addition to Russia.

    Scientists and the Arctic indigenous communities have pushed back that the increased use of Artic shipping routes will require good governance, detailed navigation charts, sufficient ports, effective oil spill cleanup technology, and timely search and rescue responses. They note that cleaning up oil spills in waters partially covered by ice is more complex than open water spills.

    It seems likely that as commercial interest increases, organizations such as the United Nations, NATO, and the aforementioned International Maritime Organization will impose governance structures and regulations. In additional to international governance, shipping companies may be subject to environmental regulations of individual countries. With Russia, China, and the US in the mix, we can expect negotiations around these issues to be heated and there is a high degree of uncertainty in terms of how the resulting regulations will impact companies hoping to exploit this new opportunity.

    Potential fallout: https://e360.yale.edu/features/cargo_shipping_in_the_arctic_declining_sea_ice

  3. Very interesting read. The main concern I see with arctic shipping are the environmental impacts mentioned in the article. In order to tackle these, Sovcomflot should push for an agreement on common playing rules among the arctic countries. The main forum for agreeing on this in my opinion would be the Arctic Council including Canada, Denmark, Finland, Iceland, Norway, Russia, Sweden and United States. Before making long-term investments in their ships, I would advice Sovcomflot to lobby for the Russian government to agree with the other arctic nations on what the boundaries for arctic shipping in the future should be. By doing this, they would be more sure to not make investments that would need to be reversed in the future.

  4. Is it safe for Sovcomflot to make a significant up-front investment in vessel construction, taking advantage of acceleration in the loss of Arctic ice?

    Based upon the information in the text and sources you have referenced, I believe that the Sovcomflot should undertake the up-front investment in vessel construction. However, I would recommend, given the long lead times to build LNG capable carriers that the investment should be scaled back from the 15 vessels it is currently undergoing. In addition, I should note that I assume that the Russian government will be rational about this investment, instead of plowing billions of dollars of government funding with non-traditional/industry operating motives.

    Or should Sovcomflot be prepared to modify its level of commitment on LNG project in anticipation of new shipping laws addressing navigational safety and global warming, possibly imposed by international organizations such as International Maritime Organization (IMO)?

    I think that the vessels should be outfitted with the ability to adapt to potential changes in shipping laws. While adding in this functionality may be difficult, I would recommend that Sovcomflot conduct full diligence on expected changes in the industry and invest in providing fitting capabilities for any potential changes that can be expected within a 30 year window (assuming that is the useful life of the vessels).

  5. What’s the real benefit to Sovcomflot of pursuing the Arctic shipping strategy? Is it that they can transport faster/cheaper, or rather does it give them access to regions that they previously didn’t have access to? If the former, I wonder how much of the benefit they’ll pass through to their customers. If they don’t pass through much of the benefits, their customers will probably be indifferent between this route and prior routes, although they may take issue with all of the environmental/regulatory risks that other people have outlined. I don’t think that Sovcomflot should pursue this strategy, without having more information on the situation, it just seems like too much headline risk potential for them and their customers.

  6. Sovcomflot should proceed with extreme caution. The Arctic shipping business lives and dies with government regulations. As non-profits, think tanks, governments, and voters look for places to stop any negative environmental consequences, Arctic shipping is sure to be surrounded by regulations like a carcass surrounded by hungry vultures. Although they may be able to squeeze out profits while the human businesses catch up, I’d hesitate to commit too much to the project. On just one piece of legislation, the limb they’re out on could be severed from the tree, plummeting them to the ground.

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