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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.

Benchmark Route 1: General Cargo Ship from Yokohama to Hamburg via Suez

We will therefore use the third approach and look at the main cost components where there will be differences. The comparison would be relevant for a ship owner with a given ship and a choice of which route to sail.

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

Gross tonnage GRT

9611

Net tonnage NRT

4260

Deadweight ton DWT

12672

Suez Canal Net Tonnage 

SCNT2

12915

Draught in meter

8

Service speed in knots

14

Gram fuel per kwh

190

Power in kw

5400

Ton fuel per day at service speed

24,624

Source: www.sea-web.com(external link)

The route specific data are given in table 7.2.

Table 7.2: Route specific data Yokohama-Hamburg via Suez

Distance in nautical miles (nm)

11430

Journey days at service speed

34

Fuel consumption in tons

838

Suez canal toll in US$

51168

Hull and machinery insurance $/day

250

P&I3

P&I insurance, $/day

200

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.

Benchmark Route 2: Container Ship from Shanghai to Hamburg via Suez

As a benchmark ship we have chosen a Chinese container vessel with a capacity over 4000 TEU6 , called aptly CSCL Hamburg. Main ship data is given in table 7.3.

Table 7.3: Container vessel data

Gross tonnage GRT

39941

Net tonnage NRT

24458

Deadweight ton DWT

50790

TEU

4253

Suez Canal Net Tonnage SCNT

57387

Draught in meter

12,6

Service speed

23

Gram fuel per kwh

190

Power in kw

36515

Ton fuel per day at service speed

166,5

Source: www.sea-web.com(external link)

The route specific data are given in table 7.4.

Table 7.4: Route specific data Shanghai-Hamburg via Suez

Distance in nautical miles (nm)

10857

Journey days at service speed

20

Fuel consumption in tons

3275

Suez canal toll in US$

135145

Hull and machinery insurance $/day

600

P&I insurance, $/day

330

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

Yokohama to the Bering Strait

      2700

Bering Strait to Novaja Zemlja

     2500

Novaja Zemlja to Hamburg

     2000

Total

     7200

 

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

Distance NSR in nm

2200

Distance outside NSR in nm

5500

Speed in NSR in knots

12

Speed outside NSR in knots

14

Fuel consumption at 12 knots tons/

day7

15,5

Days in the NSR

9

Days outside NSR

14

Total days

23

Fuel consumption in the NSR in tons

135

Fuel outside NSR in tons

344

Total fuel consumption in tons

479

Fuel consumption reduction in tons

345

Increased insurance costs in $

10600

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

Image  

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 

Distance NSR in nm

2700

Distance outside NSR in nm

5534

Speed in NSR in knots

14

Speed outside NSR in knots

23

Fuel consumption at 14 knots tons/day

37,6

Days in the NSR

8

Days outside NSR

10

Total days

18

Fuel consumption in the NSR in tons

302

Fuel outside NSR in tons

1669

Total fuel consumption in tons

1971

Fuel consumption reduction in tons

1304

Increased insurance costs in $

20709

Saved Suez canal toll

135145

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 

Yokohama to the Bering Strait

    2700

Bering Strait to the Davis Strait

    3000

Davis Strait to Hamburg

    2300

Total

    8000

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

Distance NWP in nm

3000

Distance outside NSR in nm

5000

Speed in NWP in knots

12

Speed outside NWP in knots

14

Fuel consumption at 12 knots tons/day

15,5

Days in the NWP

10

Days outside NWP

15

Total days

25

Fuel consumption in the NWP in tons

161

Fuel outside NWP in tons

366

Total fuel consumption in tons

528

Fuel consumption reduction in tons

296

Increased insurance costs in $

10600

Saved Suez canal toll

51168

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

Shanghai to the Bering Strait

3200

Bering Strait to the Davis Strait

3000

Davis Strait to Hamburg

2300

Total

8500

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

Distance NWP in nm

3000

Distance outside NWP in nm

5500

Speed in NWP in knots

14

Speed outside NWP in knots

23

Fuel consumption at 14 knots tons/day

37,6

Days in the NWP

9

Days outside NWP

10

Total days

19

Fuel consumption in the NWP in tons

335

Fuel outside NWP in tons

1659

Total fuel consumption in tons

1994

Fuel consumption reduction in tons

1281

Increased insurance costs in $

20709

Saved Suez canal toll

135145

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

Yokohama to Bering Strait

2700

Bering Strait – Svalbard TPP

2300

Svalbard – Hamburg

1600

Total

6600

The results are summarized in table 7.13.

Table 7.13: General cargo ship Yokohama-Hamburg TPP

Distance TPP in nm

2300

Distance outside NSR in nm

4300

Speed in TPP in knots

10

Speed outside TPP in knots

14

Fuel consumption at 10 knots tons/day

9

Days in the TPP

10

Days outside TPP

13

Total days

2211 

Fuel consumption in the TPP in tons

86

Fuel outside TPP in tons

315

Total fuel consumption in tons

401

Fuel consumption reduction in tons

423

Increased insurance costs in $

10600

Saved Suez canal toll

51158

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

Shanghai to the Bering Strait

3200

Bering Strait to Svalbard

2300

Svalbard to Hamburg

1600

Total distance

7100

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

Distance TPP in nm

2300

Distance outside TPP in nm

4800

Speed in TPP in knots

12

Speed outside TPP in knots

23

Fuel consumption at 12 knots tons/day

23,6

Days in the TPP

8

Days outside TPP

9

Total days

17

Fuel consumption in the TPP in tons

189

Fuel outside TPP in tons

1448

Total fuel consumption in tons

1637

Fuel consumption reduction in tons

1638

Increased insurance costs in $

20709

Saved Suez canal toll

135145

 

Comments to Some of the Assumptions

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.

Advantages not Quantified

We have absolutely no empirical basis for our assumption that insurance costs will triple for ships sailing the Arctic passages. But even a tripling in costs is a cost disadvantage of almost negligible order of magnitude.

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

 

NEP

NWP

TPP

General cargo ship Yokohama-Hamburg

42 %

36 %

 51 %

Container ship Shanghai-Hamburg

40 %

39 %

50 %

 

The Passages in Comparison

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)

 

NEP

NWP

TPP

Days saved

11

9

12

Fuel cost savings for fuel price of $465 pr. ton, $

160300

137600

196500

Total savings, $

732200

178100

237000

Total savings per dwt, $

16

14

19

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

 

NEP

NWP

TPP

Days saved

3

1

3

Fuel cost savings for fuel price of $465 pr. ton, $

616700

595500

761800

Total savings, $

732200

710000

876200

Total savings per container, $

172

167

206

 

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

 

NEP

NWP

TPP

Yokohama-Hamburg case (fuel price $175), in $/dwt

8

7

9

% change in advantage

-51 %

-48 %

-52 %

Yokohama-Hamburg case (fuel price $750), in $/dwt

25

21

28

% change in advantage

45 %

48 %

48 %

Shanghai-Hamburg case (fuel price $175), in $/TEU

81

80

94

% change in advantage

-52 %

-52 %

-54 %

Shanghai-Hamburg case (fuel price $750), in $/TEU

257

253

316

% change in advantage

52 %

51 %

53 %

 

Bibliography


  •  1. This is one of the two ships that made a NSR transit in September 2009
  •  2. SCNT = 1.1* (GRT+NRT)/2
  •  3. P&I – Protection and Indemnity is the self insurance against third party liabilities
  •  4. Drewry (2008), p. 130
  •  5. Jacobson, Linda (2010), China prepares for an ice-free Arctic, SIPRI Insights on Peace and Security, No. 2010/2, March 2010
  •  6. TEU – Twenty foot equivalent unit – the no. of loaded 8x8x20-feet containers the ship can carry
  •  7. We have used the Admiralty formula as an approximation. This says that bunker consumption (Cons) varies with the cube of the speed – Cons = k*speed3
  •  8. According to http://navigatemag.ru/bunker/, 28.4.2010
  •  9. On 9.10. 2008 the IMO decided on new restrictions regarding sulphur contents in marine bunker. At the time of the decision, the maximum allowed level of sulphur was 4,5% by weight. By 2012 it is reduced to 3,5% and by 2020 it should be 0,5%. This will mak
  •  10. missing bibliography definition
  •  11. Due to rounding it is not 23.
  •  12. The calculator is available on http://www.suezcanal.gov.eg/calc.aspx
  •  13. SDR – Special Drawing Rights in IMF – the International Monetary Fund. Current exchange rate (April 2010)

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