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By John Helmer in Moscow

Icebreaking is the key to the expansion of energy and mineral shipments in the Arctic.

It is a little early for Russia to begin producing bananas and other soft, sun-dependent commodities. But depending on which global warming forecast you read, there may come a time when it will be cost-efficient to do so, earning the increment in export value of commodities, whose price is moving faster than the oil and gas-fired energy and fertilizers required for them to grow.

And since Russian energy leads the world in volume and value of export trade and reserves, it stands to reason that one Russian strategy for diversification downstream into energy-intensive products, and up the value chain, would be a form of agro-industry that is indifferent to Arctic cold.

Gazprom strategists are already contemplating one set of targets for this strategy. These are to acquire control of major nitrogenous and diversified fertilizers, and the intermediate ammonia producers providing feedstock for urea and nitrate fertilizer manufacture. An immediate target is the EuroChem group of Moscow, currently owned by Andrei Melnichenko, a metals and banking oligarch, who has offered to sell his 96% stake in the company; but who, according to Gazprom, is asking too high a price.

Gazprom is notoriously slow to make up its mind on strategic matters. This is understandable, as the transition between the Putin and Medvedev presidential arrangements opens up a great many jobs to change; not least of all around the Gazprom board of directors, headed until now by Dmitri Medvedev. He will not be inaugurated until May, and the staffing of both the presidential and prime ministerial offices, together with those of the new ministers, is unlikely to be finalized until the start of the summer holidays.

The weather forecast for the Arctic is equally slow to change – and just as prone to apparent contradictions. Before Gazprom’s new and old directors can make up their mind on asset hedges, and new business directions to take, they must first satisfy themselves that they can deliver their base products – gas and oil – to market through what Englishmen once searched in vain to find, calling it the “Northeast Passage”. East and west through the Arctic waters, runs what Russians call the Sevmorput – the North Sea Passage.

All strategy for the exploitation of natural resources above the Arctic Circle, on land or on the continental shelf, depends on the dynamics of the ice that has, until now, made such strategy too costly to contemplate.

The last two winters have been unusually warm by Arctic standards, but not uniformly across the region, and so Russian investment in icebreaking and new Arctic navigation routes to take account of warming in the west, freezing in the east, grow apace.

According to one of the leading Russian authorities on ice navigation and Arctic maritime development, Vsevolod Peresyipkin, general director of the Central Research and Design Institute of the Maritime Sea Fleet(CNIIMF), the winter of 2007 was “anomalously warm, as a result of what scientists of the Arctic and Antarctic view as a result of climate warming, accelerated by the greenhouse effect.” But this wasn’t uniform in the Arctic. The winter of 2008 in the western or European part was even warmer. “But in the eastern sector the winter was severe, with enormous amounts of snow.” Peresyipkin told Mineweb that data collected by Russian and American polar stations indicate that the average annual Arctic temperature is currently falling by 0.6 degrees C. “The climatologists’ conclusion is that the nature will fall short of the record peak for warming in recent years; the forecast is for a gradual fall of temperature, with a concomitant increase in icing.”

This isn’t a contradiction. The current warming, especially in the western Arctic, has not cut the overall lowering of average temperature across the entire Arctic coastline. Peresyipkin says that planning should be based on forecasts of an intensification of cold and ice thickness, but he also cautions that nature can be unpredictable.

With accelerating investment in oil and gasfield development in the Arctic region, the current decrease, followed by a projected increase in ice, are a challenge for Russian maritime navigation and vessel design. According to CNIIMF reports, “the routes of the ‘North Sea Pssage’ (Sevmorput) were covered in winter one-year ice of 1.5m thickness in the western sector, and 2m thickness in the east. Delayed ice creation in the autumn of 2006 and the higher temperature anomalies of the air in the winter-spring period of 2007 led to a decrease of ice thickness in the Karsk Sea by 30cm; in the Laptev, East Siberian and Chukotsky Seas by 20cm. The exception was the area of the Novosibirsk islands [between the Laptev and East Siberian Seas], where ice thickness was bigger than the norm.”

To date, Peresyipkin told Mineweb, the recent trends have lowered icing during the summer navigation period by 35% in the Karsk and Laptev Seas, and by 70% in the East Siberian and Chukotsky Seas. “Navigation without icebreakers on clear water in the Karsk Sea increased by one month, and in the eastern Arctic waters by 1.5 months. The decrease of the ice cover will ease access to the resources of the continental shelf, and the use of the Northern Sea route for shipping may become real.”

Russia’s major resource developers in the Arctic include Gazprom and LUKoil for energy, and Norilsk Nickel for ore concentrates and minerals. They are commissioning tankers and cargo vessels with ice-breaking capability. To 2010, the state oil pipeline company Transneft plans to deliver cargoes for tanker loading at the Arctic ports, Arkhangelsk and Vitino on the White Sea, while LUKoil will increase its tanker shipments from Varandey in the Pechora Sea. GazpromNeft, the oil affiliate of the gas producer, is installing a stationary loading platform in the Pechora Sea at present. Within two years or so, export volume by tanker will reach about 30 million tonnes (600,000 barrels per day). The drawing-board plans call for the exported crude to be shipped in two stages – the first by shuttle tankers of ice class, and deadweight of 20, 40 and 70 thousand tonnes, to loading complexes in Murmansk port, and then reloaded aboard tankers with deadweight of up to 300 thousand tonnes.

In the past five years, between 47 and 50 vessels were operating on what the Russians call their North Sea route. Peresyipkin estimates that they made around 180 runs annually. The biggest of the fleet operators on the route is Murmansk Shipping, which accounts for about 75% of the vessel movements and shipments. At present, about 20 tankers have been operating in and out of Arkhangelsk, Vitino and Murmansk on approximately 200 shuttle runs.

Export of nonferrous metals and other cargo movements for the Norilsk Nickel company through the inland port of Dudinka have stabilized at around 1.3 million tonnes per year. Norilsk Nickel has already ordered 5 cargo carriers of 14,500 deadweight and ice class ARC7; these can operate without icebreaker support. The first of the fleet, called the “Norilsk Nickel” and Russian-flagged, started operations on the Dudinka-Murmansk run in April 2006.

Viktor Borodin, a spokesman for Norilsk Nickel, told Mineweb the second vessel of the fleet was put on water several months ago, but is still being fitted out in dock. It will come on route in the third quarter of this year. The keel of the third vessel has been laid at an Aker yard in Germany. Kvaerner-Masa, now Aker, were the winners of the fleet tender issued by Norilsk Nickel several years ago. Special design features for the vessels enable them to operate in seas with a cover of up to 1.5m thick, operating at 2 knots, with the Azipod engine system. The company claims that operating efficiencies have been so positive, the icebreaking services previously provided on contract by Murmansk Shipping have not been needed.

Years of stagnation and charges of mismanagement from state auditors and shipping experts have taken their toll on the Murmansk Shipping Company, which has been responsible to date for operating the atomic powered icebreakers required for the Arctic routes. In all, there are 12 icebreakers in the Russian Arctic. Six atomic powered and 2 diesel icebreakers work the Arctic basin, both west and east, while 4 diesel icebreakers, also state owned, are operated by Far Eastern Shipping Company (Fesco), and work in the Fareast.

Murmansk Shipping chief executive, Alexander Medvedev, refuses to answer questions about the icebreaker operations. The reason is that he is about to lose them to a new fleet operator, set up by the increasingly muscular Rosatom, the state agency for nuclear industry now being reorganized by former prime minister Sergei Kirienko. What Kirienko is doing is essentially to take over all nuclear-powered shipping from both the Murmansk company, and the federal Ministry of Transport in Moscow.

Ivan Dybov, spokesman for Rosatom, told Mineweb “the decision has already been made at the cabinet level. At present, the icebreaker fleet is in trust management of Murmansk Shipping until September 28, 2008. This will not be extended. The fleet management will then be transferred into the wholly owned state enterprise, Atomflot. This is currently under management by the Ministry of Transport. But it will be moved into management by the state corporation Rosatom within the next several months.” As he has done with mining, nuclear reactor, and nuclear fuel processing units under Rosatom control, Kirienko is likely to plan for the restructuring of the operating companies as public shareholding units, and then, in the long term, to privatize at least part of their equity to raise capital.

Along with the dual trend in the Arctic weather and ice, the future for commercialization of icebreaking in the Arctic is difficult to predict. But the decline of influence of both Murmansk Shipping and Murmansk port, on the Barents Sea, is unlikely to be halted, until there is a significant reorganization of both the government and commercial interests with a stake in the Arctic.

Last December, the shareholders of the newly constituted managing company created to develop Murmansk port endorsed an ambitious Rb157 billion ($6.4 billion) investment plan. About a third of this sum is for rail infrastructure to be built to raise the cargo capacities of the port, and to modernize existing coal loading; the state rail company, RZD, holds a 25% stake in the new company and is the dominant force behind reorganization at Murmansk. One-quarter of the proposed investment is assigned to creating a 35-million tonne oil shipping terminal.

But the new management plan for Murmansk is controversial among shareholders, because it emphasizes growth in oil shipments. To this end, however, Rosneft, Russia’s leading oil producer and exporter, and a 15% stakeholder in the management company, remains uncommitted. Rail deliveries of oil to Murmansk have been growing, but at just 573,000 tonnes in the ten months of 2007 to October 31, the volumes have been dwarfed by other northwestern Russian ports. Rosneft has built a floating oil storage and tanker loading facility, known as Belokamenka, in Kola Bay, off Murmansk, and runs a tanker shuttle from this point to Arkhangelsk port, as well as to Rotterdam and Hamburg. But storage capacity is limited to 360,000 tonnes, and tanker loading is no more than 5 million tonnes per annum.

Rosneft has told Mineweb it assigns higher priority to shipments from Arkhangelsk and St. Petersburg ports. LUKoil is committed to the expansion of its Varandey port to the east, in the Pechora Sea. Transneft, the pipeline company, is reluctant, because its port interests are on the Gulf of Finland, and Baltic Sea, at Primorsk; with the possibility of expansion to Ust-Luga. In short, energy export strategy is driven by the commercial profit margins of competing routes and outlets. If Russia ever goes into the banana business, it isn’t likely to be the cost of the energy or the fruit that dictates the direction of the trade.

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