ECONOMIC FEASIBILITY OF CONTAINER, FINISHED VEHICLE AND LNG TRANSPORT BY ARCTIC SHIPPING

ECONOMIC FEASIBILITY OF CONTAINER, FINISHED VEHICLE AND LNG TRANSPORT BY ARCTIC SHIPPING by Masahiko Furuichi 1 and Natsuhiko Otsuka 2 ABSTRACT Northern Sea Route (NSR) shipping has recently gained a momentum for maritime trade between East Asia and Northwest Europe, taking the direct effect of reduced shipping distance of approximately 40% compared to the conventional Suez Canal Route (SCR) into account. A common platform of cost estimation assumptions was proposed by the recent studies through clarifying and analyzing cost components referring to the literatures as well as the most recent interviews of the NSR shipping professionals (Furuichi, M. and Otsuka, N. (2012, 2013)). The NSR/SCR-combined shipping, when a vessel transits the NSR during the warmer months and the SCR in the colder months, was also proposed as a realistic scenario for the arctic shipping. The NSR/SCR-combined shipping of container transport between East Asia and Northwest Europe was studied as economically feasible, energy-efficient and carbon-dioxide-efficient when realistic figures are assumed (for example, the fuel cost, the NSR fee, and the NSR service period). This paper examines the economic feasibility of container transport as well as finished vehicle transport by the NRS/SCR-combined shipping, and LNG transport by the simple NSR shipping between East Asia and Northwest Europe. More annual voyages and reduced transport time of the NSR/SCR-combined shipping are significant advantages against the SCR shipping, especially when the vessel is carrying high value cargoes such as containers and finished vehicles. 1. INTRODUCTION This paper examines the economic feasibility of container transport as well as finished vehicle transport by the NRS/SCR-combined shipping, and LNG transport by the simple NSR shipping between East Asia and Northwest Europe. Norwegian LNG has been commercially transported by the arctic shipping between Norway and Japan recently. Finished vehicle transport can be potentially feasible by generating significant benefit of the NSR/SCR-combined shipping, taking full advantage of its speedy and less costly transport. Furthermore, taking the Pure Car Carrier (PCC) s point-to-point port call patterns into account, finished vehicle transport may be more promising than container transport for the NSR/SCR-combined shipping in the future, while container operators usually prefer the SCR along which more cargo demand exists. Additionally, reduction effect of CO 2 emission due to both reduced distance and slow steaming via the NSR is also potentially significant. These features may attract the operators, ship owners and/or shippers as greener shipping from the environmental viewpoint. 2. LITERATURE REVIEW Isakov, N., et al. (1999) is the first pioneering study on economic feasibility of the NSR commercial shipping of the natural resources produced in the Arctic region, i.e. crude oil, LNG and timbers to be exported. Ship and Ocean Foundation [SOF] (2000) is the milestone full-scale study on technical and economic feasibility of the NSR commercial shipping between Yokohama and Hamburg, by assuming ice-breaking bulk/container ship of 40,000 DWT. This study proposed the NSR/SCR-combined 1 Japan International Cooperation Agency (JICA), Senior Adviser, Furuichi.Masahiko@jica.go.jp 2 North Japan Port Consultants Ltd. (NJPC), General Manager, R&D Department, otsuka@njpc.co.jp 1 of 13

shipping by the ice-breaking bulk/container ship, which is compared to the SCR shipping by the ordinary bulk/container ship on a yearly operation basis. The unit cost of the NSR/SCR-combined shipping of general cargo was estimated at 18 (USD/ton), which is approximately equal to that of the SCR shipping by the ordinary ship of the same size. Consequently, no significant comparative advantage of the NSR/SCR-combined shipping was identified. Verny, J. and Grigentin, C. (2009) made a cost analysis of container transport between Shanghai and Hamburg, by assuming the ice-class -ship, which was compared among the potential alternative routes: the SCR, Siberia Land Bridge (SLB) route and Sea & Air route. Shipping unit costs of containers were estimated at 2,500-2,800 (USD/TEU) for the NSR shipping, which are approximately twice as much as those of the SCR shipping (1,400-1,800 (USD/TEU)). Consequently, the NSR shipping was figured out infeasible, because building cost of a new ice-class ship was assumed USD 180 million which is four times as much as the average building cost (USD 47 million) of a new ordinary ship in the 2012 market. Liu, M. and Kronbak, J. (2010) made a comprehensive analysis of container shipping cost between Yokohama and Rotterdam, by assuming the ice-class 4,300 TEU-ship. This analysis was based on the NSR/SCR-combined shipping on a yearly operation basis. Three factors most influencing on the total cost of the NSR shipping, i) the NSR service period of the year, ii) the NSR fee, and iii) fuel cost, were analyzed when estimating the shipping unit cost by setting several scenarios at various levels of the factors. Levels of the factors were set 90 days, 180 days and 270 days for the NSR service period, 50%-off, 80%-off and 100%-off for the NSR fees, and 350 (USD/ton), 700 (USD/ton) and 900 (USD/ton) for fuel cost. The NSR/SCR-combined shipping was evaluated infeasible for most of the scenarios, because the extremely high level of NSR fee (979USD/TEU) was assumed in the analysis. However, the NSR/SCR-combined shipping could be feasible, only if NSR fee were free (100%-off) and the fuel cost were at a higher level between 700 and 900 (USD/ton). Omre A. (2012) examined technical and economic feasibility of container shipping between Yokohama and Rotterdam, by assuming ice-class container ship of 3,800 TEU. This analysis was based on the NSR/SCR-combined shipping on a yearly operation basis. Two factors of the NSR service period and the fuel cost, which are most influencing on the total cost of the NSR shipping, were also analyzed when estimating the shipping unit cost by setting several scenarios. The NSR service periods were set 70 days, 100 days and 120 days, and similarly the fuel costs were set 400 (USD/ton), 550 (USD/ton) and 700 (USD/ton). Remarkable feature of the study is that the cost estimation was made by applying the relationship that fuel consumption per distance unit is proportional to the square of sailing speed and assuming the NSR fee is at a reasonable level of 5.0 (USD/GT) due to recently reported experiences in the analysis. Consequently, the NSR/SCR-combined shipping was evaluated realistically feasible in any scenarios. Furuichi M. and Otsuka N. (2012, 2013) proposed a common platform of cost estimation assumptions through clarifying and analyzing cost components referring to the literatures as well as the most recent interviews of the NSR shipping professionals. The NSR/SCR-combined shipping was also proposed as a realistic scenario for container transport in the studies. The NSR/SCR-combined shipping of container transport between Yokohama and Hamburg was studied as economically feasible when the realistic figures are assumed. As the NSR service period gets longer, more annual voyages will be possible via this route. Thus, more annual voyages and reduced transport time of the NSR/SCR-combined shipping are significant advantages against the SCR shipping, when the vessel is carrying high value cargoes. In conclusion, the NSR shipping (including the NSR/SCR-combined shipping) has been recently evaluated feasible for container transport by accumulating experiences and know-how in many studies. Extended NSR service period of the year and the fuel price appreciation in recent years are the most critical factors, which make the NSR shipping realistically more feasible than ever. However, no study has been found for the finished vehicle and LNG transport by the NSR shipping due to authors review. 2 of 13

3. PRACTICAL SCENARIOS So as to set the practical scenarios of container transport bas well as finished vehicle transport by the NSR/SCR-combined shipping, and the simple SCR shipping, various factors are to be taken into account, e.g. the NSR service period, maximum ship size for the NSR sailing, ship building cost of the ice-class, nominal sailing speed in the ordinary waters, and operational sailing speed in the ice waters and the ordinary waters. When focusing on container and finished vehicle transport as one of the most valuable potential cargoes, the NSR shipping may take advantage of speedy transport due to reduced sailing distance and avoid major risks of the SCR shipping, e.g. piracy risk off Somalia and choke point such as the Malacca Strait. Moreover, finished vehicle transport between East Asia and Northwest Europe does not expect any cargo demand along the NSR, because finished vehicle shipping is usually point-to-point transport. The authors set the practical scenarios of container transport as well as finished vehicle transport by the NSR/SCR-combined shipping, and LNG transport by the simple NSR, and simple SCR shipping respectively between East Asia and Northwest Europe in this chapter. 3.1 Cost components Maritime shipping cost components can be clarified in many ways such as operator s viewpoint (Ship and Ocean Foundation [SOF] (2000), ship-owner s viewpoint, etc. (Hino M. (2011)). The authors apply the following cost component structure and their practical levels presented in Table 1. Cost component Description 1. Capital cost Capital cost is introduced as a yearly repayment (i.e. equivalent to a repayment of 10.9% of the capital cost for 15 years) of the new ship as defined by the condition (an interest rate of 7% and a return period of 15 years), from the project finance viewpoint (Ship & Ocean Foundation (2000)). 2. NSR fee, etc. NSR fee is assumed 5.0 (USD/GT), as reported at a level of 5.0 (USD/GT) by the latest NSR fee transaction (Falck, H. (2012)). Ice pilot fee is assumed 673 (USD/day) for the NSR navigation between Kara and Bering straits, as stipulated by the Russian regulation. 3. SCR fee, etc. Suez Canal fee is assumed as defined on the website of Suez Canal Authority as of December 2012. 4. Crew cost Crew cost is assumed 1.0 million (USD/ship/year), as Japan Ship-owners Association [JSA] (2012) reported. 5. Maintenance cost An annual maintenance cost is proportionally assumed 1.095 (%/year) of the ship building cost, as reported by Hino, M. (2011). 6. Insurance cost Annual insurance premium of both H&M and P&I insurance in total is proportionally assumed 0.343 (%/year) of the ship building cost, as reported by Hino, M. (2011). Annual insurance premium of 10 (USD/GT/year) in total is assumed as additional H&M and P&I insurance premium for the NSR shipping, as reported by Ship & Ocean Foundation [SOF], (2000). Apart from the ordinary insurance cost, Aden Emergency Charge (40USD/CEU) is similarly assumed for the SCR shipping as a kind of insurance premium for piracy off Somalia, as stipulated by MOL (2012). 7. Fuel cost Fuel unit cost is assumed between 300 and 900 (USD/ton), taking the recent transactions in Singapore into account. The relationship that fuel consumption per distance unit is proportional to the square of sailing speed is recommended to apply for calculation, when operational sailing speed is slower in the ice waters for the NSR shipping. 8. Port dues Port dues are assumed 0.428 (USD/GT/call) in total for each port entry, including port entry due, berthing due and line-handling charge. Additionally, vehicle handling charge of 100 (USD/CEU) are assumed for loading and discharging respectively at the both end ports. Table 1: Practical level of cost components 3 of 13

3.2 Common scenario 3.2.1 Origin and destination pair Yokohama (East Asia) and Hamburg (Northwest Europe) are selected as origin and destination pair for the base scenario of container transport, so are Yokohama (East Asia) and Bremerhaven (Northwest Europe) for finished vehicle transport, and Yokohama (East Asia) and Hammerfest (Northwest Europe) for LNG transport (Figure 1). Figure 1: Routes of the NSR/SCR-combined shipping, the NSR shipping and the SCR shipping 3.2.2 Maximum ship size of container ship, PCC and LNG ship The ordinary NSR has a draft restriction of 11.0 m at the Sannikov Strait, however, the alternative northern route off the Sannikov Strait without draft restriction has been recently available due to ice retreat. Breadth restriction of 33-49 m is determined by the breadth of ice breakers (single and/or double) to be followed. Sannikov Strait Figure 2: The representative NSR and its draft restriction at the Sannikov Strait Principal items should be appropriately determined for the target container ship (4,000TEU), PCC (6,500CEU) and LNG ship (150,000m 3 ), which satisfy the physical restriction of the NSR (Table 2). 4 of 13

Ship-size Route Crew Container ship (4,000TEU) PCC (6,500CEU) LNG ship (150,000 m 3 ) LOA (m) Beam (m) Draft (m) DWT (ton) Nominal Speed (Knot) Engine Power (KW) Vessel Cost (M. USD) NSR/SCR 25 296 32 13.0 50,000 25.0 40,000 47.0 NSR/SCR 25 200 32 10.3 21,500 20.0 15,500 68.3 NSR/SCR 46 290 49 11.9 77,000 20.0 27,000 200.0 Table 2: Principal items of target container ship, PCC and LNG ship for the NSR/SCR-combined shipping, the NSR shipping and the SCR shipping 3.2.3 Operational sailing speed Operational sailing speeds of both container ship and PCC in the ice waters are assumed 14.1 knot for the summer time (August, September and October), 12.8 knot for the spring and autumn season (May, June, July, November and December), while 20 knot for container ship and 14 knot for PCC in the ordinary waters. Similarly, operational sailing speeds of LNG ship are assumed averagely 10.4 knot in the ice waters, while 18 knot in the ordinary waters. NSR Service period May June July Aug. Sep. Oct. Nov. Dec. [Ice waters] Container ship & PC: 12.8 knot [Ice waters] Container ship & PCC: 14.1 knot [Ice waters] Container ship & PCC: 12.8 knot LNG ship: 10.4 knot LNG ship: 10.4 knot LNG ship: 10.4 knot Operational [Ordinary waters] Sailing Speed Container ship: 20.0 knot PCC: 14 knot LNG ship: 18 knot 105 days --- --- --- 30 days 30 days 30 days 15 days --- 135 days --- --- 15 days 30 days 30 days 30 days 30 days --- 165 days --- 15 days 30 days 30 days 30 days 30 days 30 days --- 195 days --- 30 days 30 days 30 days 30 days 30 days 30 days 15 days 225 days 15 days 30 days 30 days 30 days 30 days 30 days 30 days 30 days Table 3: Operational sailing speed in the ordinary and ice waters for the common scenario 3.2.4 Fuel consumption Fuel consumption of the sailing ship is computed by multiplying SFOC (Specific Fuel Oil Consumption) (g/kwh), engine power (KW) and sailing hours (h). Since ice-class ship may consume more fuel than the ordinary ship, mainly due to the additional weight of reinforced thick steel hull, premium for SFOC of ice-class ship should be assumed at a reasonable level (10%). SFOC is fixed at a level of 185 (g/kwh), whatever the ship type is applied, which may decrease proportionally to the square of operational sailing speed in the waters. Therefore, reduction effect of fuel consumption increases to a large extent, when the operational sailing speed is slower than the nominal sailing speed (Omre A. (2012)). 3.3 Base scenario 3.3.1 The NSR service period The NSR service period is assumed 105 days for the base scenario. The NSR service period of 135 5 of 13

days, 165 day, 195 days and 225 days are assumed as the comparative scenarios, taking the recent NSR commercial shipping records into account (Table 3). 3.3.2 Load factors of LNG ship, PCC and container ship Load factors of PCC and LNG ship are assumed 90%, while that of container ship is assumed 70%, taking the cargo demand features into account. 3.3.3 Fuel unit cost Fuel unit cost is assumed 650 (USD/ton) for the base scenario, taking the recent transactions in Singapore into account. Figure 3: Bunker oil price for the last twenty years 3.4 Various aspects of the arctic shipping evaluation Maritime shipping industry is a capital intensive industry which by nature aims at maximizing profit on a yearly operation basis of a fleet of ships. The NSR/SCR-combined shipping may achieve more annual voyages than the SCR shipping between East Asia and Northwest Europe by taking advantage of reduced sailing distance. Consequently, the more annual shipment from one place to the other on a yearly operation basis is expected for the NSR/SCR-combined shipping, so that the maritime shipping industry is able to make more profit than the simple SCR shipping operation. Therefore, the annual shipment capacity of the NSR/SCR-combined shipping may become an important index from the financial viewpoint. Secondly, speedy transport of valuable cargo via the NSR due to reduced sailing distance compared to the SCR shipping may become also a significant competitive advantage. Thirdly, the NSR shipping may reduce fuel consumption, because of reduced sailing distance and higher energy efficiency gained by reduced operational sailing speed in the ice waters, say slow steaming. Assuming that carbon dioxide be produced 3.19 ton by burning 1.0 ton of bunker fuel (IMO (2009)), reduction effect of CO 2 emission by unit cargo between the same origin and destination pair may become an important index from the greener shipping viewpoint. 4. EMPIRICAL ANALYSIS Empirical analysis was undertaken for the base scenario of container transport as well as finished vehicle transport by the NRS/SCR-combined shipping between East Asia and Northwest Europe, assuming a practical level of the dominant factor variables. Since East Asia and Northwest Europe are the two major regions where finished vehicles are both produced and consumed, two-way transport are expected between these regions, similar to the container transport. Cost estimation was made on a yearly operation basis, assuming the NSR/SCR-combined shipping which combines the NSR shipping 6 of 13

for the summer time and the SCR shipping for the rest of the year. This provides a fair platform to compare the NSR/SCR-combined shipping with the SCR shipping on the same operation basis, which is practically important from the financial viewpoint. On the other hand, additional empirical analysis was undertaken for LNG transport by the simple NSR and simple SCR shipping respectively between East Asia and Northwest Europe. 4.1 Container transport 4.1.1 Shipping unit cost for the base scenario Shipping unit cost of container transport was computed 1,211 (USD/TEU) for the NSR/SCR-combined shipping base-scenario (ice-class 4,000TEU container ship, the NSR service period: 105 days), compared to 1,355 (USD/TEU), 1,320 (USD/TEU) and 1,211 (USD/TEU) for SCR shipping respectively by the ordinary ships of 4,000TEU, 6,000TEU and 8,000TEU. This implies that the NSR/SCR-combined shipping of container transport for the base scenario is competitive enough against the SCR shipping by the ordinary large container ships between 4,000TEU and 8,000TEU. [Container Ship] LOA: 296m, Beam: 32m, Draft 13.0m Dead Weight Ton (DWT): 50,000 ton Capacity: 4,000TEU Engine Power: 40,000KW Figure 4: Shipping unit cost breakdown of container transport (base scenario) Figure 5: Shipping unit cost of container transport of the NSR/SCR-combined shipping and the SCR shipping with various NSR service periods 7 of 13

4.1.2 Effect of the NSR service period As the NSR service period gets longer up to 225 days, the NSR/SCR-combined shipping (984USD/TEU) appears nearly competitive against the SCR shipping (944USD/TEU) by the ordinary ultra-large container ship of 15,000TEU. This also implies that the NSR/SCR-combined shipping of container transport by ice-class 4,000TEU container ship can be regarded as economically feasible to a certain extent, even though the SCR shipping is operated by the large (between 4,000TEU and 8,000TEU) and/or ultra-large container ships (15,000TEU). Ship size/ 6,000 TEU 8,000 TEU 15,000 TEU NSR service NSR: 0day NSR: 0day NSR: 0day NSR: 0day NSR:105days NSR:225days period SCR:365days SCR:365days SCR:365days SCR:365days SCR:260days SCR:140days Annual voyages NSR: 0 SCR: 12 NSR: 0 SCR: 12 NSR: 0 SCR: 12 NSR: 0 SCR: 12 Total: 13 NSR: 5 SCR: 8 Total: 15 NSR: 11 SCR: 4 Shipping unit 1,355 1,320 1,211 944 1,211 984 cost per TEU (USD/TEU) (USD/TEU) (USD/TEU) (USD/TEU) (USD/TEU) (USD/TEU) Table 4: Shipping unit cost of container transport by the SCR shipping and the NSR/SCR-combined shipping with various NSR service periods In addition, NSR/SCR-combined shipping enables 13 to 15 voyages per year for container transport depending on the NSR service period (105days-225days), while the number of annual voyages is 12 for the simple SCR shipping, which achieve annual shipment of 33,600 (TEU/year). As the number of annual voyages increases, NSR/SCR-combined shipping by ice-class -ship may achieve annual container shipment of 36,400 (TEU/year) [108.3%], 39,200 (TEU/year) [116.7%] and 42,000 (TEU/year) [125.0%] respectively for the annual voyages of 13, 14 and 15. Additional annual shipment of 25% of containers may seem significantly attractive to the operators, ship owners and/or shippers from the financial viewpoint. Ship size/ NSR service NSR: 0day NSR:105days NSR:135days NSR:165days NSR:195days NSR:225days period SCR:365days SCR:260days SCR:230days SCR:200days SCR:170days SCR:140days Annual voyages NSR: 0 SCR: 12 Total: 13 NSR: 5 SCR: 8 Total: 14 NSR: 6 SCR: 8 Total: 14 NSR: 8 SCR: 6 Total: 15 NSR: 9 SCR: 6 Total: 15 NSR: 11 SCR: 4 Annual vehicle 33,600 36,400 39,200 39,200 42,000 42,000 shipment (TEU/year) (TEU/year) (TEU/year) (TEU/year) (TEU/year) (TEU/year) Table 5: Annual shipment of container transport by NSR/SCR-combined shipping of 4,000TEU 4.1.3 Transport time ship with various NSR service periods Transport time of container via the NSR was estimated 19.3 days, 35% faster than that (30.4 days) via the SCR. Reduced transport time via the NSR is significant advantages against the SCR shipping, especially when the vessel is carrying high value cargoes such as containers. 4.2 Finished vehicle transport 4.2.1 Shipping unit cost for the base scenario Shipping unit cost of finished vehicle transport was computed 574 (USD/CEU) for the 8 of 13

NSR/SCR-combined shipping by the ice-class PCC (6,500CEU) as a base scenario (the NSR service period: 105 days). This implies that the NSR/SCR-combined shipping of finished vehicle transport is competitive against the SCR shipping by the ordinary PCC of the same size. Finished vehicle transport seems more economical than container transport via the NSR. When looking at cost component breakdown, fuel cost accounts for only 30% of the shipping unit cost of finished vehicle transport, while it accounts for 55% of container transport. This can be explained by the relatively smaller tonnage (21,500DWT) of the PCC (6,500CEU) compared to that (50,000DWT) of container ship (4,000TEU), and consequently by far smaller engine power of PCC (15,500KW) which directly relates to the fuel consumption efficiency, compared to container ship (40,000KW). [Pure Car Carrier (PCC)] LOA: 200m, Beam: 32m, Draft 10.3m Dead Weight Ton (DWT): 21,500 ton Capacity: 6,500CEU Engine Power: 15,500KW Figure 6: Shipping unit cost breakdown of finished vehicle transport (base scenario) 4.2.2 Effect of the NSR service period As the NSR service period gets longer up to 225 days, the NSR/SCR-combined shipping (519 USD/TEU) appears much more competitive against the SCR shipping. Figure 7: Shipping unit cost of finished vehicle transport of the NSR/SCR-combined shipping with various NSR service periods 9 of 13

The NSR/SCR-combined shipping enables 11 to 13 voyages per year for finished vehicle transport depending on the NSR service periods (105days-225days), while the number of annual voyages is 10 for the simple SCR shipping, which may achieve annual shipment of 58,500 (CEU/year). As the number of annual voyages increases, the NSR/SCR-combined shipping by PCC of 6,500CEU may achieve 64,350 (CEU/year) [110%], 70,200 (CEU/year) [120%] and 76,050 (CEU/year) [130%] respectively for the annual voyages of 11, 12 and 13. Additional annual shipment of 30% of finished vehicles may seem significantly attractive to the operators, ship owners and/or shippers from the financial viewpoint. Ship size/ 6,500 CEU 6,500 CEU 6,500 CEU 6,500 CEU 6,500 CEU 6,500 CEU NSR service NSR: 0day NSR:105days NSR:135days NSR:165days NSR:195days NSR:225days period SCR:365days SCR:260days SCR:230days SCR:200days SCR:170days SCR:140days Annual voyages Total: 10 NSR: 0 SCR: 10 Total: 11 NSR: 4 SCR: 7 NSR: 6 SCR: 6 NSR: 7 SCR: 5 Total: 13 NSR: 8 SCR: 5 Total: 13 NSR: 9 SCR: 4 Annual vehicle 58,500 64,350 64,350 70,200 76,050 76,050 shipment (CEU/year) (CEU/year) (CEU/year) (CEU/year) (CEU/year) (CEU/year) Shipping unit 592 574 544 533 529 519 cost per CEU (USD/CEU) (USD/CEU) (USD/CEU) (USD/CEU) (USD/CEU) (USD/CEU) Table 6: Shipping unit cost of finished vehicle transport with various NSR service periods 4.2.3 Transport time Transport time of finished vehicle transport via the NSR was estimated 23.8 days, 33% faster than that (35.5 days) via the SCR. Reduced transport time of the NSR shipping is significant advantages against the SCR shipping, especially when the vessel is carrying high value cargoes such as finished vehicles. 4.3 LNG transport 4.3.1 Shipping unit cost for the base scenario Since LNG transport is non-regular service by tramper (LNG ship), shipping unit cost of LNG transport between Hammerfest (Norway) and Yokohama (Japan) was computed 43 (USD/m 3 ) for the simple NSR shipping by the ice-class LNG ship (150,000m 3 ), and 70 (USD/m 3 ) for the simple SCR shipping by the ordinary LNG ship (150,000m 3 ). LNG shipping unit cost between Hammerfest (Norway) and Yokohama (Japan) by the simple NSR shipping was estimated approximately 40% lower than that by the simple SCR shipping. This is a significant evidence of competitive advantage of the NSR shipping for this origin and destination pair, which actually enabled the NSR commercial shipping of LNG in 2012. 4.3.2 Effect of the NSR service period Since LNG transport is non-regular service by tramper (LNG ship), shipping unit cost of LNG transport between Hammerfest (Norway) and Yokohama (Japan) was analysed on a simple NSR or SCR shipping basis. If the NSR service period gets longer, however, the simple SCR shipping may gain more competitive advantages against the simple SCR shipping. 4.3.3 Transport time Transport time of LNG via the NSR was estimated 18.4 days, 41% faster than that (31.1 days) via the SCR. Annual shipment capacity increment of the NSR shipping may appeal to the operators and ship owners, while this is a significant advantage for LNG transport. 10 of 13

[LNG ship] LOA: 290m, Beam: 49m, Draft 11.9m Dead Weight Ton (DWT): 77,000 ton Capacity: 150,000m3 Engine Power: 27,000KW Figure 8: Shipping unit cost breakdown of LNG transport by the NSR and SCR shipping 4.4 Comparison of reduction effect of CO 2 emission Reduction effect of CO 2 emission due to reduced distance and slow steaming of finished vehicle transport via the NSR was computed between 6% and 22% for the NSR service period of 105 days and 225 days. Similarly, reduction effect of CO 2 emission due to reduced distance and slow steaming of container transport via the NSR was computed between 14% and 35% for the NSR service period of 105 days and 225 days. Figure 9: CO 2 emission of finished vehicle and container transport by the NSR/SCR-combined shipping by various NSR service periods, and LNG transport by the SCR and NSR shipping On the other hand, reduction effect of CO 2 emission due to reduced distance and slow steaming of LNG transport via the NSR compared to that via the SCR was computed 56%. These effects may 11 of 13

attract the operators, ship owners and/or shippers as greener shipping from the environmental viewpoint. 5. CONCLUSIONS This paper examined the economic feasibility of container transport as well as finished vehicle transport by the NRS/SCR-combined shipping, and LNG transport by the simple NSR shipping between East Asia and Northwest Europe. Based on the base scenario by ice-class container ship of with the NSR service period of 105 days, fuel price of 650 (USD/ton) and the NSR fee of assumed 5.0 (USD/GT), the shipping unit cost of finished container transport was computed 1,211 (USD/TEU) for the NSR/SCR-combined shipping, which may prove significantly competitive against the SCR shipping (1,355 (USD/TEU), 1,320 (USD/TEU) and 1,211 (USD/TEU) respectively by the ordinary container ships of, 6,000 TEU and 8,000 TEU. As the NSR service period gets longer up to 225 days, the NSR/SCR-combined shipping (984USD/TEU) appears nearly competitive against the SCR shipping (944USD/TEU) by the ordinary ultra-large container ship of 15,000TEU. This also implies that the NSR/SCR-combined shipping of container transport by ice-class 4,000TEU container ship can be regarded as economically feasible to a certain extent, even though the SCR shipping is achieved by the large (between 4,000TEU and 8,000TEU) and/or ultra-large container ships (15,000TEU). Transport time of container transport via the NSR was estimated 19.3 days, 35% faster than that (30.4 days) via the SCR. Reduced transport time of the NSR shipping is significant advantages against the SCR shipping, especially when the vessel is carrying high value cargoes such as containers. Reduction effect of CO 2 emission due to reduced distance and slow steaming of container transport via the NSR was computed between 14% and 35% for the NSR service period of 105 days and 225 days. Similarly, based on the base scenario by ice-class PCC of 6,500 CEU with the NSR service period of 105 days, fuel price of 650 (USD/ton) and the NSR fee of assumed 5.0 (USD/GT), the shipping unit cost of finished vehicle transport was computed 574 (USD/CEU) for the NSR/SCR-combined shipping, compared to 592 (USD/CEU) for the SCR shipping by the ordinary PCC of the same size. This implies that the NSR/SCR-combined shipping of finished vehicle transport is competitive enough against the SCR shipping. As the NSR service period gets longer up to 225 days, the NSR/SCR-combined shipping (519USD/CEU) appears much more competitive against the SCR shipping. Transport time of finished vehicle transport via the NSR was estimated 23.8 days, 33% faster than that (35.5 days) via the SCR. Reduced transport time of the NSR shipping is significant advantages against the SCR shipping, especially when the vessel is carrying high value cargoes such as finished vehicles. Reduction effect of CO 2 emission due to reduced distance and slow steaming of finished vehicle transport via the NSR was computed between 6% and 22% for the NSR service period of 105 days and 225 days. Shipping unit cost of LNG transport between Hammerfest (Norway) and Yokohama (Japan) was computed 43 (USD/m 3 ) for the simple NSR shipping by the ice-class LNG ship (150,000m 3 ), and 70 (USD/m 3 ) for the simple SCR shipping by the ordinary LNG ship (150,000m 3 ). LNG shipping unit cost between Hammerfest (Norway) and Yokohama (Japan) by the simple NSR shipping was estimated approximately 40% lower than that by the simple SCR shipping. Transport time of LNG via the NSR was estimated 18.4 days, 41% faster than that (31.1 days) via the SCR. Annual shipment capacity increment of the NSR shipping may appeal to the operators and ship owners, while this is a significant advantage for LNG transport. Reduction effect of CO 2 emission due to reduced distance and slow steaming of LNG transport via the NSR compared to that via the SCR was computed 56%. 12 of 13

6. REFERENCES Falck, H. (2012). Shipping in Arctic Waters -The Northern Sea Route-, Mariehamn (April 26th. 2012). Furuichi, M. and Otsuka, N. (2012). Effects of the Arctic Sea Routes (NSR and NWP) Navigability on Port Industry, May, 21, Jerusalem, Israel, Presentation at Port Planning and Development Committee, International Association of Ports and Harbors (IAPH). Furuichi, M. and Otsuka N. (2013). Cost Analysis of the Northern Sea Route (NSR) and the Conventional Route Shipping, Proceedings of IAME 2014 Conference. Hino, M. (2011). Progress of maritime shipping industry and current situation, Financial Department of Ehime Bank (in Japanese). IMO. (2009). Second IMO GHG Study 2009. Isakov, N. A., et al. (1999). The NSR Simulation Study Package 3: Potential Cargo Flow Analysis and Economic Evaluation for the Simulation Study (Russian Part), INSROP Working Paper No. 139. Japan Ship owners Association (JSA). (2012). Shipping Fact 2012 (in Japanese), Date of access: 21/12/2012, http://www.jsanet.or.jp/data/pdf/data1_2012b.pdf. Liu, M. and Kronbak, J. (2010). The potential economic viability of using the Northern Sea Route (NSR) as an alternative route between Asia and Europe, Journal of Transport Geography, No.18, pp.434-444. Maritime Press Japan. (2012). Transactions of newly built merchant fleet in 2012 (1), (in Japanese), (December 10, 2012). Maritime Press Japan. (2012). Transactions of newly built merchant fleet in 2012 (2), (in Japanese), (December 11, 2012). MOL. (2012). http://www.moljapan.co.jp/service/ex_charge/eur.shtml (Date of access: 21/12/2012). Omre A. (2012). An economic transport system of the next generation integrating the northern and southern passage, Master Thesis, Norwegian University of Science and Technology. Otsuka, N., Izumiyama, K. and Furuichi, M. (2013). Study on feasibility of the Northern Sea Route from recent voyages, International Conferences on Port and Ocean Engineering under Arctic Conditions (POAC) 13. Panama Canal Authority. (2012). http://www.pancanal.com/eng/maritime/tolls.html (Date of access: 21/12/2012). Ragner, C. L. (2000). Northern Sea Route Cargo Flows and Infrastructure - Present State and Future Potential, FNI Report 13, Fridtjof Nansen Institute. Ship & Ocean Foundation [SOF]. (2000). The Northern Sea Route -The Shortest sea route linking East Asia and Europe. Suez Canal Authority. (2012) http://www.suezcanal.gov.eg/tollcirculars.aspx (Date of access: 21/12/2012). UNCTAD. (2011). Review of Maritime Transport 2011. Verny, J., and Grigentin, C. (2009). Container shipping on the Northern Sea Route, International Journal of Production Economics, No.122, pp. 107-117. Yakovlev, A., et al. (1999). The NSR Simulation Study Package 7: Legal and Environmental Evaluation of the Routes Selected for the INSROP Simulation Study, INSROP Working Paper No. 128. 13 of 13