Arctic Shipping Routes - Cost Comparisons with Suez

(by Tor Wergeland)

The purpose of this section is to look at the commercial aspects of using NEP to a similar trip using the Suez Canal. There are many ways one could make comparisons, but the main three usual approaches are:

• Calculating the total transportation costs for using each route to obtain a $/ton cost estimate for each route.
• Calculating the total cost of setting up a regular service based on an assumed yearly quantity to be shipped.
• Focusing on cost differences among the route alternatives.

The first approach focuses on cost savings for the end user of transport. The second approach takes into consideration that saving time makes it possible to service a given amount of cargo with fewer vessels (trips) and is thus taking into consideration the capital costs of investing in vessels. The third approach is more used in a first commercial feasibility study, i.e. one explores the order of magnitude of cost savings to get a feeling for cost differences and to be able to do simple sensitivity tests.

Since we are considering a hypothetical future where ice conditions have greatly changed in the Arctic, the starting point for a comparison will be to assume Arctic transit without icebreaker support. By then calculating the cost advantage of the northerly routes vs. a southern route through the Suez Canal, the implicit willingness to pay for icebreaker support will also be given.

We choose a ship with the same characteristics as the Beluga Fraternity¹ . The main data for the ship is given in table 7.1.

Table 7.1: General cargo ship characteristics

Source: www.sea-web.com

The route specific data are given in table 7.2.

Table 7.2: Route specific data Yokohama-Hamburg via Suez

The Suez Canal toll has been calculated on the basis of the calculator provided by the Suez Canal authorities4, using current exchange rates for SDR5/US$.

The insurance figures are based on figures from Drewry (2007)⁴ , where yearly figures have been converted to $/day figures. The comparison of insurance costs is, however, a tricky one. Currently the insurance costs for ships passing the Gulf of Aden towards Suez have soared since 2008 due to the piracy risk. It is claimed that the insurance has increased tenfold for this coastal area between September 2008 and March 2009⁵ . If that situation persists, it will increase the advantage of Arctic passages. It is claimed this is one important motivating factor for China’s increased interest in the Arctic.

Since we deal with a future scenario, we will disregard this piracy/insurance problem, but keep in mind that this could be a commercial argument in favour of Arctic passages.

Table 7.3: Container vessel data

Source: www.sea-web.com

The route specific data are given in table 7.4.

Table 7.4: Route specific data Shanghai-Hamburg via Suez

The sources are the same as for table 7.2

Comparisons with NEP - General Cargo Ship Yokohama-Hamburg via NSR

There are three parameters that will change if the general cargo ship decides to go via the NSR:

1.     The distance (which will affect total bunker consumption)

2.     The speed (expected speed reduction during NSR passage)

3.     The insurance costs

For the moment we will disregard icebreaker costs, as we assume that the NSR in the future may be navigated without icebreaker support. We could include the additional cost of an ice-navigator, but this is a minor cost element in the big picture.

The distance will depend on which route is taken through the NSR. Since the ship has a draught of 8 meter, we will assume it will go the shortest route of 2200 nm. The total distance will then be 6920 nm, or a reduction of almost 40%, as given in table 7.5. We will assume that the average speed is reduced somewhat during the NSR passage to 12 knots on average. This will on the other hand reduce the fuel consumption on this leg. We will further assume without any particular justification other than the assumption that although one could pass without icebreaker support, there might still be drift ice on this leg, so hull insurance will increase. We just assume it is tripled compared to the benchmark route. The results of these assumptions are summarized in table 7.6.

Table 7.5: Distances in nm Yokohama-Hamburg via the NSR

Table 7.6: General cargo ship Yokohama-Hamburg via the NSR

It should be clear from table 7.6 that the main savings from using the NSR are the reduction in fuel consumption in addition to cutting sailing time from 34 to 23 days. Fuel consumption is reduced by some 20%. How much this is worth in US$ will of course depend on the oil price.

Currently the price of low sulphur heavy fuel in Hamburg is $465 per ton, while diesel oil is $695⁸ . With the much stricter regulations for sulphur contents in bunker oil coming into effect in 2020⁹  it could be that in the future more ships will be using diesel fuel, which currently is 50% more expensive than heavy fuel. At the current price of $465, the savings in our example is $160.300 or more than 15 times the increased insurance costs in order of magnitude. In addition comes the savings of the Suez Canal toll of $51.168, so the total savings amounts to about $200.800.

Figure 7.1 shows the development of bunker prices since the turn of the millennium. It will be pure speculation how future bunker prices will develop, but the general sentiment is that they are more likely to be higher than today than lower.

The reduction in bunker consumption will also reduce emissions of CO₂. More use of Arctic passages would, ceteris paribus, contribute to more sustainable transport.

A saving of around $200.800 for a ship of almost 13000 dwt implies that the willingness to pay for icebreaker assistance is limited. A fee of $16 or more per ton will cancel out the cost saving effect. In section 5.5.1 it was indicated that the icebreaker fee for carrying mechanical engineering products (which seems relevant for this ship type) was $74 in 2003. This is clearly unrealistic from a commercial point of view, as it would imply a cost almost twice that of the Suez Canal toll.

Figure 7.1: Bunker price developments

Comparisons with NEP - Container Ship Shanghai-Hamburg via NSR 

We assume the same sailing distance in the NSR of 2500 nm. In addition comes the increased distance Shanghai to the Bering strait compared to Yokohama – Bering Strait of 814 nm. The Arctic route is thus 8034 nm, or a reduction of 26%.

There is no way a container ship can go through the NSR in 23 knots if there is any ice there at all, so we assume that the average speed through the NSR is 14 knots. This will substantially reduce the bunker consumption and we have used the Admiralty formula as explained in a previous footnote to calculate the consumption.

The results are summarized in table 7.7.

Table 7.7: Container ship Shanghai-Hamburg via the NSR 

If we again use the April 2010 price of low sulphur heavy fuel oil of $465 per ton, the fuel cost savings are $606.000. The total cost savings for the container ship sums to $720.750, or $169 per container. The saving in sailing time is only 2 days, however.

The NSR Administration assumes that a loaded container weighs 24 tons. If that were the case, our container ship would only be able to carry around 2100 TEU or half its TEU capacity. If we then, more realistically, assume an average weight for a loaded container of 11 tons, our ship fully loaded would be willing to pay around $15 per ton for eventual icebreaker assistance. The NSR Administration stipulated a fee for container cargo to $31 per ton in 2003.

This comparison might not be very realistic. Because of the combination of high bunker prices and overcapacity in the container trades, hardly any container ship moves at service speed at the time of this writing. The main operators have all introduced super slow-steaming schemes to save on fuel consumption. By reducing the speed from 23-24 knots down to 16 knots, the roundtrip from Far East to Europe increases from 63 days to 84 days (port time included). In order to maintain frequency, the operators must use more ships on a specific service. With high bunker prices, the fuel savings are large enough to make it worthwhile employing more ships. One could therefore say that the comparison made here is relevant in a market situation with little excess TEU capacity. Our example looks at a single trip, but in the case of container traffic a total service view would make more sense commercially, but this is beyond the scope of this simplified feasibility exercise¹⁰ .

Comparison with the NWP - General Cargo Ship Yokohama-Hamburg via NWP

As described earlier in chapter 1, there are basically 7 different routes to choose through the NWP and the total distance will vary with the actual choices. Since the purpose of this exercise is just to get a feeling for the overall proportions, we will not consider any exact route, but just assume that the distance from the Bering Strait to the southwest coast of Greenland around the Davis Strait is about 3000 nm. The total roundtrip would then be as indicated in table 7.8.

Table 7.8: Distances in nm Yokohama-Hamburg via the NWP 

If we assume, similar to NSR comparison above, that the ship must reduce speed on the second leg and that the average speed will be 12 knots, then the results are summarized in table 7.9.

Table 7.9: General cargo ship Yokohama-Hamburg via the NWP

Again using a fuel price of $465 per ton, the savings on fuel amounts to $137.600, and the no. of days are reduced from 33 to 25. The total savings would be $178.100 or about $14 per dwt. The NWP thus seems slightly less attractive than the NSR-alternative, ceteris paribus.

Comparison with the NWP - Container Ship Shanghai-Hamburg via NWP

The total distance when using the NWP on the Shanghai-Hamburg route, is given in table 7.10.

Table 7.10: Distances in nm Shanghai-Hamburg via the NWP

Again we assume slow-steaming on the second leg down to 14 knots and the results are summarized in table 7.11.

Table 7.11: Container ship Shanghai-Hamburg via the NWP

At a fuel price of $465 per ton the fuel savings amount to $595.500 and total savings are about $710.000, or about $167 per TEU, only slightly less than for the NSR alternative. The saving of time is only 1 day compared to the Suez alternative.

Comparison with TPP - General Cargo Ship Yokohama-Hamburg via TPP

The transpolar alternative seems a little far-fetched today. We will see substantial changes in global affairs before the Arctic Ocean becomes navigable without icebreaker support. We will therefore assume more ice in this alternative than the others, reflected in even slower speeds on the Arctic Ocean leg. The cost savings will then be converted to willingness to pay for ice-breaker support. Since the Arctic Ocean belongs to the high seas, no single country will ever set up a support infrastructure for TPP, but one could assume that some private business may offer icebreaker support on commercial terms, so the calculations will indicate the order of magnitude of potential revenues for such a service. We assume distances for this alternative as in table 7.12.

Table 7.12: Distances in nm Yokohama-Hamburg TPP

The results are summarized in table 7.13.

Table 7.13: General cargo ship Yokohama-Hamburg TPP

With a fuel price of $465 per ton, the fuel savings amount to about $196.500 and the total savings are $237.000, which corresponds to about $19 per dwt. If a company were to charge, say $15 pr. dwt for icebreaker support, it will correspond to almost $20.000 per day. This is hardly enough to attract any private investor into setting up an icebreaker support company.

Comparison with TPP - Container Ship Shanghai-Hamburg via TPP

We assume distances for this alternative as in table 7.14.

Table 7.14: Distances in nm Shanghai-Hamburg TPP

The results are summarized in table 7.15. With the same fuel price of $465 per ton, then the fuel savings amount to $761.800 and total savings are $876.200, or $206 per TEU. An icebreaker fee of, say $175 per TEU would imply a daily income of around 93.000 $/day for the support provider, almost 5 times that of the general cargo ship case. One could then imagine convoys of ships being supported by icebreakers that will make a private icebreaker support service something to be investigated out there in the far future.

Table 7.15: Container ship Shanghai-Hamburg TPP

This numerical exercise is based on a set of assumptions. Some of these assumptions may be debated. This is clearly the case with the stipulated distances on the three passages. We have assumed that in distant future ships may be able to navigate these passages without icebreaker support. That does not mean that the passages will be free of ice. A ship observing large ice floes will try to avoid them and navigate around them. The actual sailing distance could then easily increase so much that the advantages are eroded. This is particularly the case for transpolar routes. This should be kept in mind when interpreting the results.

The average speed set for the passages are rather arbitrarily set, and one could argue that if the general cargo ship is going 12 knots, how come the container vessel could do 14? The reasoning is simple – there will be stretches without any ice at all, and then the container vessel can speed up more than the general cargo vessel, so the average speed will be higher. The actual numbers chosen are still without any empirical foundation.

We have mechanically used the Admiralty formula when calculating the fuel consumption effect of slow-steaming. This is at best an approximation that may not reflect the actual savings for the specific ships used as reference. In lack of empirical data for this, this approximation is our best choice.

The two dominant cost savings factors in the examples above are the fuel savings and the saved Suez Canal toll. On the Yokohama-Hamburg route, the time savings are substantial. A reduction in sailing time from 34 to 22 days will free up capacity that has a value for the ship owner as the ship can faster be put into new contracts. This value would have been explicit if we had chosen a total yearly service approach. The value is difficult to stipulate, however, as it will totally depend on the actual market situation at the time of the sailing.

Time savings could also have a value for the cargo owners. Commodities in transport tie up capital, which is an implicit cost for the cargo owners. For high value cargo, this cost element could be significant. Since we have not considered any particular cargo in our examples, we also ignore this advantage.

A reduction in fuel consumption implies a reduction in emissions of greenhouse gases and other substances. Using the Arctic routes rather than the Suez route contributes to more sustainable transport networks, ceteris paribus. Emissions will be proportional to the actual fuel consumption. Table 7.16 indicate the percentage reductions in fuel consumption and could be indicative for the reductions in CO₂. In a future where environmental concerns are more prominent, this is also an advantage that could be used commercially.

Table 7.16: Fuel consumption reductions when using the Arctic passages

We have used some simple calculations to compare the 3 different Arctic passages NEP, NWP and TPP, just to get a feel for the order of magnitude of cost savings. Some main results are summarized in tables 7.17 and 7.18.

Table 7.17: General cargo vessel Yokohama-Hamburg (0 icebreaker fees)

Table 7.18: Container vessel Shanghai-Hamburg (0 icebreaker fee)

Not surprisingly, the TPP comes out as the best alternative, simply because crossing the pole is the shortest route if ice is not too much of an obstacle. This is also by far the least likely route to become accessible without icebreaker support in the near future.

The NSR seems marginally better than the NWP, but then there is the question of icebreaker fees. The average fee rose to $23 in 2003, and this level will kill the economics for both cases. The fee must be way below $15 per ton if commercial activities should seek an Arctic solution, given current oil prices. The latest official data for fees that we have been able to obtain dates back to 2003 (see section 5.5.1). The current situation is non-transparent, but the Beluga experience in 2009 clearly indicates that fees are negotiable.

The actual numerical results are of course very dependent on the oil price chosen. To see the sensitivity of the results for both lower and higher oil prices, table 7.19 shows the total cost savings for a fuel price of $175, which reflects the 2002-2003 price level and $750, which reflects the mid 2008 record high level. Most experts seem to believe we are facing much higher oil prices in the future. This will make use of Arctic passages more attractive.

Table 7.19: Cost savings of using Arctic passages for other fuel price levels

Tor Wergeland, 2010, Arctic Shipping Routes - Cost Comparisons with Suez, CHNL.©