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Despite all trade policy challenges and sanctions, Russia continues to work intensively on its

maritime infrastructure. Particularly in focus: the Arctic. Support is not only coming from China and the Middle East but from Europe, too

Regardless of the angle you look at the Russian maritime industry, it is predominantly concerned with the tanker business, followed[ds_preview] by bulk shipping, predominantly with smaller units. This observation is reflected in various areas such as fleet development and financing, ports, trade routes and commodity flow, infrastructure and politics. The second determining factor is international politics, a complicated mixture of trade policy, sanctions, energy policy, climate policy and geopolitics.

Sovcomflot shipping group (SCF) is by far the most important shipping player for Russia. Accordingly, its name has rarely or never been missing in maritime news in recent months whenever the vast expanse with coasts on the Baltic Sea, the White and Black Sea, the Caspian Sea, the Pacific in the Far East and not least the Arctic Sea and the Northeast Passage is mentioned. The potential is enormous, especially since Russia has large deposits of raw materials on or below the seabed, e.g. gas fields need development and integration into comprehensive logistics chains. In addition, there are large quantities of crude oil that are exported – mainly by tankers.

Despite various disputes between Russia and other countries, let alone the economic sanctions imposed as part of the annexation of the Crimean peninsula, oil transport has not collapsed in the long term.

Increasing oil exports

Exclusively for HANSA, Court Smith, Senior Analyst at VesselsValue, took a close look at the shipments with the result that »total crude oil exports from Russia have continued to increase over the past several years. The distribution of exports has been mixed. Black Sea exports have increased the fastest and seen the steadiest movement upwards. Baltic exports slipped downwards in 2017 and 2018 but have since rebounded upwards.«

The mix of ships which moved cargoes out of particular regions has shifted over time as well. Smith has made a side-by-side comparison of scale of crude tankers which loaded cargoes first half of 2019 versus the same time period of 2013. There is a marked shift towards Suezmax vessels, which offer favourable dollar per ton shipping costs in most rate environments. »A larger percentage of coated ships are being used to export cargoes as well, which is a reflection of the weak returns seen in the clean tanker markets in 2018 that encouraged owners of older units to enter the crude or dirty products trade«, the analyst explains.

Clean tanker exports from Russia are trending upwards as well. There is a growth in the volume of exports from three of the four regions (see table »Clean Tanker Shipments by Region«).

Nevertheless, Russian shipping also has to contend with market conditions, political and financial circumstances. However, Sovcomflot & Co. seem to be coping relatively well. After a slump in 2016, new building activities have risen continuously – at the same time second-hand purchase projects have shrunk – which also makes sense in view of the fleet age. A large proportion of the ships are more than 25 years old.

In advance of the trade show »Neva« (see extra box), official sources said that 2018 saw »global markets realize Russia’s strategic LNG potential, with business booming in Russian-flagged vessel builds, energy exports, Arctic shipping volumes and Northern Sea Route infrastructure redevelopment investments.« Novatek’s Yamal LNG project shipped its 10 millionth tonne, attaining maximum output capacity one year early and projecting a further 10 % increase for 2019. Sovcomflot announced yet further expansion of its LNG-fuelled fleet. Japan’s Saibu Gas signed with Novatek to utilize the Hibiki LNG terminal while Mitsubishi Corp. showed interest to join LNG2 at the ground level. South Korea and Japan signed strategic energy agreements with Russia. In addition, Moscow announced investment plans for Northern Sea Route port development through 2024.

Partners in the East and West

Despite all state support by the government Putin/Medvedev, international partners are also needed to modernize fleets and infrastructure. These partners have been found, especially in the Far East and the Middle East, but also in Europe, including Germany.

One of these partners is the Arab DP World Group. An agreement was concluded in June to improve the infrastructure on the Northeast Passage, which is often criticised for not being efficient enough.

In this project, the state-owned Russian Direct Investment Fund, Rosatom – the infrastructure operator of the NSR –, Norilsk Nickel – the world leader in the production of palladium and high-quality nickel – and DP World agreed to jointly start a project for the integrated development of the NSR. The most effective commercial options for the use of the Northern Sea Route shall be studied. The parties intend to create a strategic partnership in the form of a joint venture for the development of transit cargo traffic through the NSR.

The key objective of the project is to increase the volume of freight traffic through the NSR and the Arctic zone of the Russian Federation.

For the first stage, the signatory parties will have to develop a strategy to increase the efficiency of the use of the NSR and to determine ways of developing transit traffic.

The focus will be on linear transportation of containers and other bulk cargo. »It will be necessary to determine the amount of funding for the design and construction of an additional ice-class fleet and icebreakers, as well as the port infrastructure«, it was said.

DP World chief executive Ahmed bin Sulayem said: »Our expertise in developing new ports, infrastructure and innovative new supply chain solutions, are key factors in our successes over the last few decades. We see enormous potential in NSR and look forward to creating new successes with our partners«

Another important step is to get China on board. As orchestrated with the DP World agreement, a cooperation was signed during St. Petersburg Economic Forum in June. Chinas Cosco Shipping Corporation and the official Silk Road Fund signed an agreement with Sovcomflot and PJSC Novatek to establish a joint venture called Maritime Arctic Transport. The focus is said to be managing an icebreaking tanker fleet, comprising existing and new vessels, »engaged in the transportation of LNG for current and planned Novatek projects, namely Yamal LNG, Arctic LNG 2 and others.«

Some analysts saw the transaction

as an alternative to a potential acquisition of up to 25% of SCF shares by Cosco. Rumours were spread in autumn 2018, however, nothing has been made official so far.

Sergey Frank, CEO of Sovcomflot explained the need for cooperation with the »sheer scale and level of complexity to provide safe, year-round transportation of LNG across the Northern Sea Route«. This required the combination of a whole range of intellectual, technological, human and financial resources from leading Russian and Chinese organizations, he said, adding to be pleased to participate in such an important energy project for the economies of the countries.

Sovcomflot specializes in the transportation of crude oil, petroleum products and liquefied gas, as well as the servicing of offshore oil and gas exploration and production. The company’s fleet includes 146 vessels, of which more than 80 units have ice class. The cooperation between Sovcomflot and Novatek began in 2010, following the organisation of experimental high-latitude voyages along the Northern Sea Route which helped ground the technical possibility and economic feasibility of energy shipping with large-tonnage vessels.

However, this is not the only cooperation with China. In spring, gas producer Novatek announced to sell 20% of the Arctic LNG project to two Chinese firms.

International financing

One important aspect of SCF’s strategy is the use of LNG as fuel for some of its tankers. In 2018, the first »Green Funnel« LNG-fueled Aframax crude oil tanker was delivered from Russian Zvezda Shipbuilding Complex. SCF plans to have eleven of these tankers in its fleet by 2023, with five more under technical management. For this project, the shipowner secured several funding opportunities. Russian VEB Leasing has already extended financial backing for a newbuilding programme for the tankers that will be operated by Novatek under a 20-year charter or by Shell. International banks are active, too. In May, a consortium of ING Bank, Credit Agricole and KfW IPEX Bank signed a 297mill. $ recourse credit facility for up to ten years. A few months earlier, these banks signed another credit facility (149mill. $) for tankers, which will be operated by Total. In December, German DVB Bank was involved in a 264mill. $ credit facility, together with Citibank, ING, Societe General and UniCredit. To sum up, Sovcomflot collected 900mill. $ debt capital in 2018 alone.


Michael Meyer