Russia is moving towards blocking ships under a foreign flag from sailing in the Northern Sea Route in its exclusive economic zone as the country seeks to boost profits from potential oil and gas extraction in its arctic region.
Such a monopoly could pay off in the Northern Sea Route, the shortest shipping route from Europe to the Pacific Ocean, but only if the Arctic region of Russia emerges as a major oil and gas hub, according to industry experts.
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.”
The distance from St. Petersburg to Vladivostok along the Northern Sea Route is around 14,000 km, while the widely used traditional route through the Suez Canal amounts to over 23,000 km.
The northern route would allow cargo owners from Northeast Asia to move cargo to Northern Europe 9 days faster.
“Providing Russian shippers with a monopoly on transportation of oil and gas produced in the Arctic Sea should bring them additional profits, which could be invested in the industry,” said Artyom Lukin, associate professor of International Relations at the Far Eastern Federal University.
Will it work?
“But will this scheme work in practice? The answer is only if significant volumes of oil and gas are extracted and pass through the Russian Arctic,” Lukin said.
At present there is only one operational project in the region, Yamal LNG, while preparations are under way for the construction of a second, the Arctic-LNG 2.
“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.
Monopolizing the Northern Sea Route also has international risks.
“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.”
About 90% of recoverable hydrocarbon resources of the entire continental shelf of Russia are located in the Arctic zone of the Russian Federation.
The region also accounts for 90% of natural gas production and 80% of gas reserves that are commercially feasible to extract. Predicted hydrocarbon reserves in the deep-water of the Arctic Ocean are 15-20 billion tons of equivalent fuel.
The region is also home to 90% of Russia’s nickel and cobalt, 60% of its copper, and most of the diamond deposits.
Can Russia block access to the route and still expect its own ships to be allowed access to the ports of the European countries. two can play the tough game.