From Russia with Love

Russia plans to revive a Soviet-era Arctic sea passage to service energy projects and provide a shorter supply route to Asia for carriers such as OAO Sovcomflot as the shipping line plans an initial share sale this year.
Opening the northern sea route may allow state-owned Sovcomflot to speed natural-gas deliveries to China and win cargos between Europe and Asia by offering a quicker alternative to the Suez Canal.

Sovcomflot, along with companies such as OAO Novatek, is sending test cargoes via the Arctic route, which Prime Minister Vladimir Putin has vowed to transform into a year-round passage. To make it work, Russia must revamp ports, install rescue systems and build icebreakers for as much as 30 billion rubles ($1.1 billion) each to provide safe passage for tankers.

The northern sea route dates to 1932, when the Soviet Union sent the first vessel from Arkhangelsk to the Bering Strait. The route, open from July to November, is about a third shorter than the almost 13,000-mile journey from Rotterdam to Yokohama via the Suez Canal, saving time and fuel.

It also may attract carriers seeking to avoid pirates in the waters of East Africa and “Arab Spring” revolutions in the region around the Egyptian waterway.

Russia hired Morgan Stanley (MS) on June 30 to manage the sale of a quarter of Moscow-based Sovcomflot. The deal may take place in October or November, Alexei Uvarov, head of the Economy Ministry’s property department, told reporters last month. Natural investors would either be Japanese or Korean shipbuilders.

Sovcomflot plans to expand its gas transportation business as energy producers gear up to bring Arctic projects on line later this decade. In 2010, it shipped 70,000 metric tons of gas condensate through the Arctic for Novatek, which plans to start producing liquefied natural gas for sale to European and Asian customers at a project on the Yamal peninsula in 2016.

“Demand for LNG has grown in the east over the past two to three years in China, Japan, South Korea and Singapore,” Babakhanov said. “As Asian demand rises, the northern sea route will become very important strategically.”

The OAO Gazprom-led Shtokman project in the Barents Sea, which may contain more than 3.9 trillion cubic meters (137.7 trillion cubic feet) of gas, may begin initial production in 2016. OAO Rosneft, Russia’s biggest oil producer, is developing fields in the Kara Sea that may hold as much as 35.8 billion barrels of potential resources. The Moscow-based company may drill its first well in 2015.

Icebreakers in Demand

In all, Russia’s Arctic shelf may hold more than 100 billion tons of oil equivalent, according to the Natural Resources Ministry.

Even before tests are completed, demand for the northern sea route is rising. Atomflot, the state operator of nuclear icebreakers that charges commercial shippers for passage, said it has received 15 applications this year, about three times as many as in 2010.

“Northern sea shipping will become a more profitable route than the Suez Canal,” Leonid Mikhelson, Novatek’s CEO told reporters June 17. Russia’s second-largest gas producer may export seven condensate or light crude cargoes via the Arctic to Asia this year, he said.

Moscow-based Eurochem isn’t saving money by using the northern sea route because it’s paying about $50 per ton of cargo for shipping and passage, the same as it would for the Suez Canal, Nechaev said. Still, it halves the time to 25 days and avoids risks stemming from Middle East unrest and pirates.