LNG carriers crack open the Northern Sea Route

July 3, 2018 - The Yamal Peninsula in northern Russia is practically the definition of ‘remote’: this region, extending into the Arctic Ocean, is one of the few places in the world where nomadic reindeer herding is still a way of life for some people. The peninsula also contains Russia’s largest deposits of natural gas, and as climate change has warmed the soil, huge craters have formed where underground pockets of methane escaped to the surface.

In the 1990s, Russian state-owned Gazprom began plans to develop the Yamal megaproject, which seeks to exploit trillions of cubic meters of natural gas: first pipelines, then specially constructed railroads moved the gas out of the peninsula. LNG carriers also left the seaport at Sabetta and headed west to Europe, but it wasn’t until last week that a specially-constructed LNG carrier, the Vladimir Rusanov, which is half-owned by Mitsui and half-owned by China COSCO, left the port and went east, through the icebound Northern Sea Route, bound for Jiangdu.

Vladimir Rusanov was the first LNG carrier from Yamal to transit the Northern Sea Route without an accompanying icebreaker ship. The Vladimir Rusanov, built in 2017, has a draft of 12 meters and can carry 173,000 cubic meters of LNG. Using the NSR, instead of going around Europe and through the Suez Canal, cut the transit time in half, to 15 days, and saved an estimated $430K in Suez Canal fees (according to Wilhelmsen’s Suez Canal fee calculator). The shorter transit time will allow LNG carriers to make many more trips per year from Yamal to Asia, doubling the revenue per vessel.

Not far behind the Vladimir Rusanov is Teekay’s Eduard Toll, another icebreaking LNG carrier bound for Asia from Yamal. Novatek, the company operating the Yamal LNG facility, currently has five LNG carriers and has plans to increase its fleet to 15 vessels. Because these new LNG carriers can break through up to two meters of ice without an accompanying icebreaker, they are able to greatly reduce the complexity of the supply chain linking one of the largest natural gas fields in the world with the world’s largest consumer of natural gas.

In March, Russian President Vladimir Putin called for a ten-fold increase in Northern Sea Route traffic by 2025, amounting to an annual rate of 80M tons.

Russia’s ambitious Arctic infrastructure projects are being built in partnership with China; earlier this month at the Shanghai Cooperation Organization’s meeting in Qingdao, China, the Chinese Development Bank agreed to provide $9.5B in funding to Russia’s state-controlled Vnesheconombank (VEB) in order to create a development partnership for the Eurasian Economic Union and the Chinese Belt and Road initiative. China recently passed South Korea to become the world’s second largest importer of liquefied natural gas after Japan, a fuel to which the Asian superpower has turned in the pursuit of cleaner energy. According to the IEA, Chinese demand for liquefied natural gas will grow by 70% from 2017 to 2023, from 51 billion cubic meters to 87 billion cubic meters.

LNG carrier spot rates maintained their strength over the past week, according to Stifel’s First Watch Maritime Update, with east-of-Suez daily rates holding at $70K and west-of-Suez rates steady at $85K. For context, in 2017 those rates averaged $39.9K and $47K, respectively. Stifel forecasts that incremental demand for LNG carrier capacity will outstrip incremental increases in supply in both 2019 and 2020, creating a favorable environment for carriers but potentially hampering producers trying to get their gas to market.

Source: Freight Waves