Russia's Arctic oil exports surge but risks still hamper new trade route

Russian crude exports to China via its Arctic shipping route shortcut surged to a record high in 2023 as Moscow continued to pivot east to find buyers for oil shunned by Western refiners, according to tanker tracking data.

But the so-called Northern Sea Route's ice-prone, unpredictable voyage times remain a key hurdle to further expansion of the precarious trade route that Russia is so keen to promote.

Flows from Russia's Arctic and Baltic ports to China totaled 10.4 million barrels in the 2023 summer season, data from S&P Global Commodities at Sea showed. Shipped in 13 cargoes, the total was up from just one cargo of 484,000 barrels in 2022 and 2.2 million barrels in 2019 when the first commercial shipments began.

Northern Sea Route (NSR) tanker shipments, in which vessels travel east from the Barents Sea through the Bering Strait and south into the Pacific, were first tested in 2010, helped by receding Arctic ice due to global warming. But oil volumes exported on the route remain relatively modest, only happening in summer when the Arctic pack ice retreats.

Even though volumes on the shorter route have jumped from a low base, they only represent an eighth of the 80 million barrels shipped from the same Russian ports to China this year and a fraction of the total 1 million b/d of seaborne Russian crude to China shipped mostly south via the Suez Canal.

This year, almost half the volumes were Russia's benchmark medium, sour Urals export crude loaded at its Baltic Sea ports of Ust Luga and Primorsk and redirected to buyers in Northern China, the CAS data showed. The rest were Russia's lighter Novy Port crude from the Novoportovskoye field and Y-K Blend, also known as Arctic Light or Varandey crude loaded near Russia's Arctic port of Murmansk.

The surge in Russian oil shipped east through Arctic waters also comes as a boon for Chinese refiners hoping to benefit from discounted crude. The spread between the higher quality ESPO piped to Russia's Pacific Coast port of Kozmino and medium, sour Urals has averaged $15/b this year, according to assessments by Platts, part of S&P Global Commodity Insights.

Voyage time lottery

Although the NSR is about a third shorter for Russian Baltic shipments to northern China and about 45% shorter for shipments from terminals near Murmansk, some recent shipments have suffered major delays due to unexpected heavy ice.

On average, the voyage time for crude exports from Primorsk to Chinese ports was 40 days this year while trips from Murmansk averaged 27 days, the data showed. By contrast, shipping the crude via the traditional southern route averaged 50 days from both ports.

But the data showed considerable variability in the length of the Arctic voyages, testing the reliability and economics of the route which often requires ice-breaker escort vessels.

The fastest shipment from Murmansk to Rizhao in northern China this year took just 23 days, the data shows. In July, however, two Urals NSR shipments from the Baltic Sea to China took 47 days, more than two weeks longer than expected after hitting thick ice.

"Long voyage days certainly reduce the economics of the NSR passage, which include ice breaker costs, although lower bunker expenditure due to the shorter distance traveled via the NSR and no need to pay Suez Canal dues helps to balance that out," shipbroker Gibson said in a recent report.

"For now, crude volumes shipped via the NSR are very modest in comparison to voyages via Suez, whilst the economics for Baltic shipments remain questionable. However, this trade will undoubtedly continue to grow going forward due to global warming, gradually chipping away at Russian crude tanker ton mile demand," Gibson said.

Ice-breaker ceiling

The push for more Arctic oil shipments will also stretch Russia's technical capacity to accompany some shipments with ice-breaker escorts.

Russia has three nuclear icebreakers working the Northern Sea Route as a whole, plus a nuclear-powered ice-breaking container ship on the route, and other icebreakers under repair, according to state-owned nuclear company Rosatom that operates such vessels. In June, Russia said it planned to build more than 50 icebreakers and ice-class vessels, ports and terminals and other assets over the next 13 years at a cost of $22 billion to develop the NSR.

Russia is also talking up the use of non-ice-class vessels to ply the NSR as global temperatures rise, a move which has triggered warnings from environmental groups.

One key signpost for the viability of Russia's NSR ambitions is Rosneft's ability to bring on stream its giant Vostok Oil project next year on the scale officially planned. Vostok is due to export around 30 million mt/year of crude in 2024 and gradually increase to around 100 million mt by 2030 providing a major source of incremental export flows for the NSR.

"Recent indications are that Rosneft's plans for 600,000 b/d of Vostok Oil exports from a new Arctic port starting next year may be overly optimistic," said John Webb, a director for Russian and Caspian Energy at S&P Global Commodity Insights. "Output from producing Vostok fields are well below this level and a shortage of ice-class Russian tankers may further complicate Vostok exports."

Russia's push to export more of its crude to China via Arctic waters are a sign of its determination to sidestep the impact on its revenues from Western sanctions.

But hopes of more significant, year-round oil transport via the NSR may still be some years off.