Summary of Working Paper No. 59-1996

III.05.2: The NSR Transit Study: The Economics of the NSR. A Feasibility Study of the Northern Sea Route as an Alternative to the International Shipping Market

By Trond Ragnvald Ramsland and Svein Hedels, Foundation for Research in Economic & Business Administration (SNF), Bergen, Norway.

In this paper we have analyzed the profitability of an ice classified vessel trafficking the NSR versus the profitability of a regular vessel transiting through Suez. An investor facing the choice of either investing in a highly ice classified vessel or a standard bluewater vessel, will need a few questions answered. The first question is which of the two cash flows will have the larger net present value. The objective of this project has been to compare a pair of cash flows generated by an ice-classified and a bluewater vessel of compatible cargo-carrying capacity. A vessel with ice classification Ice 1-A Super or higher is according to Platou Shipbrokers (Sales & Purchase Division) 15-30 percent more expensive to build than a vessel with marginal ice classification. To justify such an investment, an ice classified vessel must be able to generate a cash flow that can finance the additional cost for the investor.

Its engine size and degree of ice - classification will vary according to design criteria. This analysis assumes that a 12 month NSR operation design criterion is not relevant until more specific data on natural conditions becomes available among others through INSROP sub-programme I. We also assume that the capital costs involved with passing the 6 months operational barrier (Ships built to Polar 10-30 class) are of a magnitude not realistic today for an independent investor. The cargo generating areas are Northwest Europe (NWE) and the Far East (FE). Our findings can be summed up as follows:

Given today's level of freight rates, revenues per year will be higher for the NSR alternative than for the Suez alternative. Operational costs will be lower and operational income and free cash flow higher. The current ice - classified fleet, Ice 1 A Super or higher, could potentially make significantly increased revenues on operations on the NSR. This is subject to cargo availability.

Cargo availability between Europe and the Far East depends to a large degree on Russian cargoes being channeled through the Baltic and the Black Sea Ports.

The increased operational income and free cash flow, will not be sufficient to give an acceptable return on the increased capital costs that are needed to finance the NSR project. Net present value of the NSR project are therefore lower than for the Suez project, subject to equal freight rates for the period January - June.

Our calculations have thus led us to believe that the potential of operations on the Northern sea route will not be sufficient to justify investments in newbuildings on a stand-alone basis. This is subject to risk perceptions and insurance rates in the Arctic. Consequently above market freight rates must be likely in the standard ice season Jan - April, and cargo quantities must be sufficient for the hire of vessels in ice premium waters in this period.

Ice Premium waters, are to a large degree Russian Ports in the Baltic Sea, the inner Black Sea & the Sea of Azov, The White Sea and the Russian Far East.