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New Arctic routes in the tracks of climate change

Figure 1. The trip difference between ANSR and traditional routes. (NSR Final Report)
Photo: .

Although it is commonly known that climate change has some cons, it may also carry some benefits. Opening the Northern sea routes in the Arctic Ocean for navigation may be one of the consequences of climate change that may increase the possibilities of using it in navigation for longer periods without ice breaking assistance.

Reducing trip distance has always been an attractive practice for the stakeholders of the shipping industry to reduce voyage time and increase profits. Interestingly enough, climate change may be the key to shorter shipping routes. Due to increasing temperature and melting of the Arctic sea ice the climate change increases the hope of using the Arctic sea routes for navigation between the Far East and Europe. The Northeast passage connects Northwest Europe with the Far East over top of Russia, while the Northwest passage crosses through Northern Canada. The Arctic Northern Sea Route (ANSR) can save about 35 to 60 per cent of commercial voyages between Far East and Europe, compared with passing through either the Suez or the Panama Canal, as shown on Figure 1. In fact, it is predicted that the shipping industry may benefit from climate change as it increases the possibility of using the ANSR in shipping traffic which will significantly reduce the operating costs and hence increase the revenues.

The Northeast passage
At the moment the focus is on the Northeast passage, as it is the first to be ready for longer periods of navigation resulting from climate change. Shipping traffic is expected to increase as Russia, Norway and most of the North West Europe countries are expected to benefit from using that route in trading with the Far East. In addition, Japan and most of its neighbouring countries are also expected to benefit using the route in the container and other types of trades. Petroleum trade between Norway and Japan is also expected to grow if the route is properly used. Even the passenger traffic (cruise vessels) is expected to grow. Figure 2 shows both the Northeast and Northwest passages with the summer sea ice extent in 2004. At least the Northeast passage’s readiness for navigation is easily seen from the figure.

Figure 2. The Arctic Northeast and Northwest Sea Passages with the ice extent in 2004.
(Arctic Marine Transport Workshop 28–30 September 2004)

The commercial importance
of the ANSR
The commercial importance of the ANSR can be shown by a comparison of an imaginary trip between Norway, the oil exporter, and Japan, a major oil importer, using both the ordinary and the North East passage route. The saved distance will be 6,607 nm, which means a saving of 43.2 per cent in distance (Veson Nautical distance 2004). Table 1 shows the differences detailed in the distances and sailing periods between using the ordinary convenient Suez Canal route and ANSR on presumed 14 knots speed. There will be a savings of about 15 sailing days, and the shipping stakeholders consider the effect of the climate change on the ANSR as a great attraction to the shipping industry.

Table 1. Distances differences between the ANSR and the route via the Suez canal. (Based on Veson Nautical distance 2004 & Shipping routes)

The effect of climate change
on the ANSR
In fact, there is plenty of evidence of the warming of the Arctic sea area. The Arctic ice cap is decreasing in thickness and area. Ships and aircrafts operating in the Arctic have reported on the diminished summer ice coverage and regional warming. More-over, scientific models strongly suggest that seasonal sea lanes may appear as soon as 2015 through the usually ice-locked Arctic. If this trend continues, disappearance of the summertime ice cap could be possible by 2050. Over the next 20 years, the volume of Arctic sea ice will decrease by approximately 40 per cent, and the sea ice lateral extent will be sharply reduced by at least 20 per cent in summer (Whitney, Bradley, & Brown, 2001). Figure 3 shows the Arctic sea ice in 1999, the anticipated extent in 2030 and in 2095. The model predicts significant reduction of sea ice in the 21st century, with complete loss in summer ice by 2095. The estimated reduction in Arctic sea ice would of course increase the possibility to use the route in shipping, which would reflect less trip distances and hence a reduction in the operation cost.

Figure 3. Projected extent of sea ice melting. (Chalecki, n.d. as retrieved from USGCRP 1999)

Types of shipping costs
The operational costs in shipping are always a subject of interest, although the capital costs also take a significant part in running shipping companies. Capital costs in shipping are mainly the costs to own a ship, new or second hand, while the operational costs are related to the technical needs, manning and insurance. Although the capital costs seem to be fixed for a single ship, the prices of ships fluctuate greatly over time and they vary enormously according to the ship’s type and size.
  Similarly, the operating costs are also varied. For example, the insurance premiums priced on statistical probability of losing a ship is based on the vessel age, size, previous claims record, equipment type, inter alia. In addition to the capital and operational costs, there are also the voyage costs that are needed to keep the vessel in service such as the fuel, and port costs.
  Accordingly, shipping stakeholders are considering the best economical aspect in building and managing both ships and cargo handing in ports, following the basic shipping economical concepts.

Figure 4. Marginal and average costs. Graph Key: ATC = Average Total cost, P = Price, Q = Output Quantity, D = Demand. (Ma Shuo, 2007)

Economics of scale
In fact, profit maximization is the objective of each commercial company; based on this fundamental desire, shipping companies are simply trying to find all available options to reduce costs and to increase the revenue. Yet, commercially, it is better to find the best operational way to equalize the marginal revenue (MR) with the marginal cost (MC). At that time the profits will be maximized (see Figure 4). In other words, if the MR is higher than the MC it means there would be a possibility to increase profits by increasing the output. On the contrary, if the MC is greater than the MR, it simply means less profit for the higher added value of cost or what is called diseconomy of scale.

Table 2. Productivity evolution in shipping, Europe-Asia Trade. (Ma Shuo, 2007)

Diminishing return
Based upon the marginal product concept, a diminishing return phenomenon appears after a certain limit of the escalated input where the added value of cost is not resulting in the same rate of output revenue. In other words, after a certain value of the inputs, the resulted outputs will not be with the same proportion as per Figure 5, where the profit curve increases with the increase in ships speed until it reaches approximately 19 knots. Then the profit starts to reduce with the more speed as the total cost curve goes very high.

The economics of speed
Maritime stakeholders are always trying to avoid this diminishing return when deciding to build bigger and faster ships and when optimizing the operating speed, or accelerating the cargo handling operations in ports. For example, a shipping company may decide to reduce the sailing speed of its ships depending on low freights and high bunker price, and vice versa. E.g. the super tankers in early 1986 were operating on only ten knots, but when the freight rates rose in 1988–1989 their speed escalated to twelve knots. Accordingly, high freight value cargo, such as containers, will be transported with faster ships to increase the amount of cargo delivered during a certain period of time. For example, a round trip between northern Europe and US previously took eight weeks, but nowadays it takes only four weeks.
  Figure 5 shows the relationship between the increase in ship’s speed and the related reduction in the time for the round trips and hence the faster cargo delivery. Figure 6 shows the influence of the cargo handling speed; on a speed of approximately 25 knots and handling of 60 TEU per hour the ship could make 8 more round trips per year compared with the handling of 30 TEU/h.
  In fact, increasing the ships’ speed and the cargo handling capacities has a great influence on the shipping companies’ revenues. Table 2 shows the productivity evolution in shipping between Europe and Asia and how a container ship of 100,000 DWT is 22.1 times more productive than a conventional cargo ship, 10 times more productive in terms of annual cargo transported, and 50 per cent faster in round trips. This was mainly due to the increase in ship speed, by about 32 per cent, and cargo handling capacity, by 40,200 tons per year.
  Yet, the profit will not increase more than until a certain speed of the ship, as per the diminishing return principle, and the high speed ships have now almost reached the highest profitable limit. Figure 7 shows the optimum speed of various types of ships and the relationship between fuel consumption and speed; the optimum speed for a container ship is about 27 knots where the fuel consumption would reach nearly 77 tons per day.

Figure 5. Economics of speed and the diminishing return. (Ma Shuo, 2007)

The economics of size
The size of the ship is determined in a way similar to the economics of speed; the bigger the ship’s size the more the profit, until a certain limit, the diminishing return. In the diminishing return point the added value will not increase the income with the same rate any more. As an example Figure 8 in the next page shows the economics of size with regard to the cargo and ship costs; it illustrates that approximately 100,000 DWT is the optimum ship size in relation to the ship’s cost. However, 50,000 DWT is the optimum size with regard to the cargo coast. Nevertheless, the intersection between the cargo and ship costs gives us the optimum ship size which is nearly 100,000 DWT, as per Figure 8. Therefore, the added value to the ship size after 100,000 tons would not reflect the same proportion of revenue. Accordingly, there was a need to find another way to reduce the operational cost such as speeding up the cargo handling operation to reduce the time for the port stay.

Figure 6. Effect of speed and cargo handling efficiency on supply. (Ma Shuo, 2007)	Figure 7. Economics of speed. (Ma Shuo, 2007)

Port stay
Therefore, it is wise to try to reduce the ships stay in ports not only because they are gaining money for sailing and not for staying in port, but also to reduce the round trip periods. Definitely, the same economic principles, economy of scale and the diminishing return, apply also in the cargo handling operations. Therefore, there is also a certain limit where the port is to adjust the loading/discharging rates; otherwise the diminishing return would result in reducing the revenue in relation to the added value. Table 3 on the next page shows the optimum size of cargo gang and the effect of the diminishing return. The optimum number is seven persons and an added number would reduce average outputs in effect of the diminishing return.

Table 3. Cargo handling and the optimum size of gang. (Ma Shuo, 2007)

New alternative
By applying these economic principles and to avoid diseconomy of scale we all realise there is a need to find a new economic substitute to reduce the operational cost, such as shortening the trip distance. Normally, trip distances are fixed and well known, and therefore it is not even easy to think about this substitute. Yet, the climate change may carry the solution.
  Navigation in the ANSR requires ice class ships, which means additional cost to the fixed capital cost but not to the operational cost, unless the passage requires ice breaker assistance, which will be negligible on effect of the climate change and melting of the Arctic sea ice.
  However, a special design of ships and propulsion system like the double acting ships (DAS) using Azimuthing Podded Propulsion (Azipod) is preferable in such an environment (Juurmaa, Mattsson, & Wilkman, 2001). Reducing the trip distance was a dream and the reason behind the opening of both the Suez and Panama canals for navigation, which significantly reduced the trip distances across the globe. Yet, their higher passage fees and the current escalating fuel prices, inter alia, the maritime industry stakeholders have to find new ways of reducing operational costs. The opening of the ANSR should be considered, as it can halve the trip distance between the East and West, as previously mentioned.

Figure 8. Economics of size. (Ma Shuo, 2007)

Subsidiary costs
Insurance premiums are another aspect to be considered when deciding to employ ships along the ANSR as there is little international experience to determine how expensive that coverage will be. Particularly, to set a proper insurance coverage more information will be needed on environmental risks and shipping services along the routes especially in the Russian part, including its legislative development.
  On the other hand, new building price premium for ice class tankers, especially the 1A, has seen a reduction over the years, and hence investment in new built tankers is seen as a long term good strategy, even in open competition market in the ice region (Duggal, 2006).

Conclusion
It is wise for the shipping industry stakeholders to consider using the ANSR in shipping traffic as it would significantly reduce the ships operating costs and hence increase the revenues. Building ice class ships may carry certain additional costs, but that will be included in the capital cost, which is considered a fixed cost. New ships insurance premiums are expected to cover the adventures of employing ships in such routes, all of which will create new shipping markets.
  In fact, climate change has introduced a new hope of reducing the escalating operating costs, particularly, as a result of high fuel prices and manning costs.

References: Chalecki, B. (n.d.). Climate Change in the Arctic and its Implications for U.S. National Security [Electronic Version]. Retrieved 15 May 2008, from www.fletcher.tufts.edu/maritime/documents/ArcticSecurity.pdf Duggal, B. S. (2006). Ice class ships: Operational guidelines [Electronic Version]. Seaways August 2006. Retrieved 11 April 2008, from www.nautinst.org/ice/docs/iceClass_Duggal per cent20.pdf Juurmaa, K., Mattsson, T., & Wilkman, G. (2001). The Development of the new Double Acting Ships for ice Operation [Electronic Version]. POAC 2001, . Retrieved 11 May 2008, from www.akerarctic.fi/publications/pdf/Poac01XNewDAS.pdf Ma Shuo. (2007). Maritime Economics. In World Maritime University (Ed.) (WMU 111 Lectures ed.). Mulherin, N. (1996). The Northern Sea Route Its Development and Evolving State of Operations in the 1990s. Norwegian Atlantic Committee [NAC]. (2006). Developments in Arctic Shipping [Electronic Version]. Ocean Future, 8. Retrieved 23 March 2008, from www.atlanterhavskomiteen.no/Publikasjoner/Internett-tekster/Arkiv/2006/FN-8 per cent20Developments per cent20in per cent20Arctic per cent20Shipping.pdf Reykjavík. (2004). Arctic Climate Impact Assessment Policy Document [Electronic Version]. The Fourth Arctic Council Ministerial Meeting, from www.acia.uaf.edu/PDFs/ACIA_Policy_Document.pdf Stopford, M. (1997). Maritime Ecnomics (2 ed.). Abingdon, Oxon: Routledge 2 Park, Abingdon, Oxon OX14 4RN & Routledge 270 Madison Ave, New York. NY 10016. Veson Nautical distance 2004. (2004). WMU Intranet, Malmo. Volk, B. (2002). Growth Factors in Container Shipping [Electronic Version]. Retrieved 24 April 2008, from www.amc.edu.au/mlm/papers/AMC3_GRO.pdf Whitney, Bradley, & Brown. (2001). Naval Operations in an Ice Free Arctic. Naval Operations in an Ice-free Arctic Symposium 17-18 April 2001 Final Report, from www.natice.noaa.gov/icefree/FinalArcticReport.pdf

Latest update 29-08-2008

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