MARITIME TRANSPORTATION OF ENERGY

FROM RUSSIA & CENTRAL ASIA

- CHALLENGES & OPPORTUNITIES -

" From Russia with Love"
 

10 & 11 OCTOBER
Grand Europe Hotel

ST. PETERSBURG- RUSSIA

SYNTHESIS

Michael Grey
Conference Chairman

This high level Mare Forum conference in St Petersburg was designed to provide a comprehensive update on issues which bore on the efficient export of energy products from Russia and Central Asia. The place of Russian energy in world markets, the importance of transportation, safe shipping in extreme conditions, specialist ship operations , the financing of a fleet to carry energy cargoes from these demanding regions and environmental concerns were all covered in eight sessions over the two days.

Russian energy in the world

Russia had, in a short period, become the world’s second largest energy producer, the world’s largest potential supplier of natural gas with a huge obvious potential for additional growth. It had also in an equally short time forged a symbiotic relationship with Europe and become the region’s major supplier of energy. But energy exports were also fuelling Russia’s own industrial renaissance, with some 70% of its output exported. And while the world was quite definitely not running out of oil, the increasing accent was upon oil in places which were harder to exploit. The era of “easy oil” was over and clever solutions were needed to exploit “difficult” oil.

With its huge proven reserves of oil and gas, Russia was assured of a prosperous future in the energy sector, although there remained some question marks about law and governance in the country. The Yukos debacle had left certain aftershocks. Transparency and good governance, it was agreed, were necessary to attract the high level of investment and reduce levels of perceived risk. This demand for evidence of good governance, was a signal that needed to be registered at the highest levels of government.

Gas potential

There was no debate or doubts about the potential of Russia as a major exporter of energy for a very long time to come. While the explosive growth, which “had prevented a third oil crisis”, was tending to level off , the place of Russia as the world geared up to a far greater use of LNG was still firmly in the future. Thus the virtual doubling of the LNG fleet had yet to take into account the exploitation of Russian reserves, with the exception of those which would be shipped out of Sakhalin in specialist ice classed LNG carriers. Lessons learned in these waters would clearly be applicable with the development of other reserves in the Russian Arctic. The safety record of ships serving the Russian markets was seen to be much improved and presently good, especially in the tanker sector, where problems over the availability of good quality ice-class tankers had been resolved through the investment in new tonnage. Indeed there were suggestions that the provision of ships might prove somewhat excessive as a result of over-enthusiastic construction, perhaps putting pressure upon the premia which the provision of high quality ice class vessels demanded.

Coastal states’ issues

On a number of occasions throughout the conference, the issue of safety as viewed from the point of view of a coastal state was raised. The Turkish or Black Sea Straits with its potential for accident or congestion, and the increased deep draught traffic transiting the coastlines of the Baltic nations were viewed with increasing concern as the traffic and the size of the units involved, grew. Some suggest (although this might be viewed as controversial), that there are issues here for the attention of the International Maritime Organisation , as much as the coastal states themselves.

Meanwhile there is a clear message for ship owners and operators to reduce the risks of marine accident, and put in place comprehensive contingency plans to minimise any effects. Operators, it was suggested, should not wait to be “regulated by disaster”. Effective and far seeing risk management strategies will do much to prevent accidents, but also help to deflect the political fallout after a serious accident involving tankers or pollution.

Pipeline policies

The place of pipelines in the movement of energy exports in this vast land-mass was reviewed, although it is noted that some 70% of the oil exports are moved by ship. Russian policies as regards the movement of oil remain (and are expected to remain so) very much in the hands of the state and it is state policy to reduce the dependence on neighbouring countries, whether for their ports, or for pipeline routes. There is a strong capacity demand for new pipeline projects, although the costs are high and the development plans regarded as long term. It is noted that for a pipeline project to move forward, political support is a prerequisite, along with the access to investment capital. Worth also remembering that worries about diversion of oil through pipelines, rather than ships, is largely unfounded, as most of the oil that is pumped eventually ends up at the sea and on-carriage by ship.

Port problems and progress

The ability of Russia to export freely is closely associated with the capability of the country’s ports, which are benefiting from a clear policy pronouncement by President Putin that port capacity is to be doubled to such an extent that 50% of the country’s exports can be handled over the nation’s own ports, rather than relying on those of neighbouring states. There have been substantial investments in large port projects in the Baltic and Black Sea, while it is likely that the ice-free terminals of Murmansk will soon be similarly modernised and expanded. No fewer than seven Russian ice-ports are being developed, with three of these terminals already in operation.

The state itself was determined, the conference heard, to enhance both flag state and port state control measures, improve contingency plans and improve navigational safety. The Russian government still retains control of its large icebreaker fleet, and there are clearly questions about its capability, bearing in mind the age of the units, the timescale for construction of large ships with Arctic capability, and the size of tankers which require escort.

The human element

It is clear that there is a strong and encouraging accent on the human element’s contribution to ship safety and efficient operations in demanding waters, with commitments, from both government and companies to training and the recruitment and retention of high quality ship’s personnel. Worries remain, however, about the wastage and attrition of expensively trained officers moving into foreign flag operations where packages were better. It is the qualitative improvement of crew skills which, the conference was told, will impact upon safety. Nowhere is this more apparent than in the special skills necessary for ice-operations, where there was no substitute to the experience gained in these difficult, challenging waters. In this respect demands upon the availability of ice trained and experienced crews was increasing fast with the growth of the fleet and its utility in winter waters. There was a direct requirement for some 2400 ice trained crew members in the short term. . Sophisticated and modern equipment was no substitute for experienced seafarers.

R&D imperatives

Much had also been done in the improvement of design of ice strengthened tankers, with the emphasis on optimising their use and increasing their payloads to compensate for the higher construction costs and higher horsepower. Bigger ships would also reduce the risks of accident by lowering the intensity of tanker traffic in vulnerable waters.

There was still a requirement for research, if LNG from the high Arctic was to be safely recovered. Double acting LNG vessels, capable of operating in the intense cold were likely to be required, but designers would need further research into the cargo containment system integrity, risk reduction and ice interaction.

Risks of operating in such waters, both from a commercial and operational safety standpoint needed to be understood, while there was a need for more knowledge of cold climate operations, where great strains were put on both hardware and people. There were requirements for better meteorology and monitoring of conditions, more guidance and expertise, while charterers had to have realistic expectations. There were far higher costs implicit in cold climate operations, with a suitable tanker costing about $7.5m extra to construct and extra crew costs of up to $0.5m per annum to be recouped. Realism also accepted a certain amount of ice damage as inevitable , and would accept that realistic premiums were necessary to pay for all the additional burdens incurred by special ships necessary to protect a fragile environment.

Facilitation reform needs identified

But efficiency meant more than seamless marine operations protecting the cashflow from any interruption. It also meant port facilitation practices that were efficient and modern, with shorter delays for paperwork clearance and a reduction in the often numbing bureaucracy that desperately needed reform, with issues of power and control to be resolved. There was a strong imperative for electronic data processing and electronic clearance to be implemented in Russian ports, where a ship could sometimes be delayed for four to five hours after cargo had finished, with a whole range of associated and undefined costs. Reform to the customs and other authorities who were involved in facilitation procedures could make a real difference, and needs to be emphasised at the highest level.

Professionalism pays

The need for a change from a “culture of compliance” to one of operational excellence and its implications for enhanced safety and greater efficiency was a recurring theme at this high level meeting. The importance of training was emphasised, and, more particularly, the stability of ships’ crews. The provisions of the STCW Code, it was emphasised, should be seen as merely the basic minima, with a whole range of additional training and experience really necessary to produce real value. Statistics proved that this approach worked, with a notable reduction in the level of incidents. A cash value could be placed on such improvements, as it could to justify more efficient ship operation.

Nothing less than a return to traditional values in the business of operating ships was called for, with a greater emphasis on professionalism , in pride in a professionally operated company, with relationships of respect and trust between ship and shore, with good communications producing essential co-operation.

Financing matters

Operational issues intruded even into the sessions in which the financing of ships was explored. While the growth in Russia was higher than the world average, and the world demand for oil a strong background for such growth, commercial risks in Russian investment was still regarded as high. Thus, the use of the Russian flag remained an issue with lenders, on account of the international courts’ attitude to a Russian mortgage. There was also concern on behalf of the lenders to the risks inherent in LNG projects, where ship sizes were sharply increasing and with ice class vessels. Solutions revolved around the provision of a second Russian register, a new tax regime and political support of the shipping industry. A tonnage tax regime such as is now found in a number of EU countries is regarded as one of the essentials.

Much will depend upon the “friendliness” and stability exhibited by the Russian government to the industry. If they are interested in seeing shipping prosper and , moreover, maintain this interest; if they do not change the laws regularly, thus promoting a stable legal environment, the Russian register is likely to grow healthily. The alternative, should the climate not prove propitious, will be for Russian owners to move offshore.

It is clear that international acceptance goes hand in hand with good governance, auditing and accountancy practices along with a competent and supportive legal framework. There must be a strong message to policy makers here. In terms of ship quality, there is a different criteria between ships capable of Baltic operations and those which are capable for high Arctic winter operations, where ice loads on deck require a stronger structure and heated fittings to reduce accretion. In these conditions “things that you don’t expect” happen and there is a challenge to both ship and personnel, and to designers who have to consider redundancy of systems , fatigue loads and the special requirements for power and seakeeping, along with structural strength in temperatures which can produce brittle fracture and other undesirable consequences. The importance of training and experience was heightened with these latitudes.

A growing demand for LNG transport was reflected in new operators entering this demanding trade and the conference gained some insights into one of these newcomers’ experiences . An experienced shipbuilder of reputation, expertise along with industry acceptance would appear to be pre-requisites for an entry into this high priced operation, with costly and extensive training necessary and unavoidable, to take aboard the new techniques of cryogenic operations.

Environmental background

The political spotlight on environmental safety was intensified with the growth of oil exports from Russia and it was important to be proactive in demonstrating the safety measures being put in place. At the same time, it was important not to be negative about shipping’s considerable progress in safety and the prevention of pollution. It was important to emphasise global standards and focus upon enforcement and implementation of these. It was also necessary to be realistic about risk, have in place proper contingency plans, and not exaggerate the problems. At the same time it was necessary to recognise the realities of the anxieties felt by coastal states as the oil traffic passing their shores grew. It was a practical proposition to think about designing ships for “zero emissions” and to design for waste stream management.

Nevertheless, it was the realities of the present that worried the administrations of coastal states when they saw poor navigation compounded by a refusal to take a pilot in complicated waters, regardless of IMO recommendations. Bigger ships found it harder to manoeuvre in narrow channels. There was a depressing defiance of coastal states’ wishes over the ship to ship oil transfers just outside territorial waters, where the writ of a coastal state did not run. There were clear messages to both owners and charterers over these concerns, with a need to emphasise the huge potential costs of a grounding or collision, for the modest costs of a pilot.

Conclusions and suggestions for policy makers include:
 
1. The demand for more transparency and good governance in Russian business and law.

2. The need for reform of Russian port procedures to embrace electronic data transfer and less bureaucracy on the ground in port facilitation.

3. The need for owners and charterers to acknowledge the fears of coastal states and not wait for “regulation by disaster”.

4. The compulsion for owners to train , retain and provide a career for well trained and experienced officers capable of operating in difficult ship operating conditions.

5. The need for charterers to be aware of limitations, recognise their place in the chain of responsibility and have realistic expectations.

6. The importance of a “friendly” legal and political climate for shipping with a speedy resolution to problems of flag, the second register and tonnage tax.

7. The need for a recognition of the need for investment in ports to be accompanied by investment in icebreaker support , with advanced, powerful craft capable of working with large tankers.

8. The fact that some of the lessons from this conference, which was chiefly to do with advanced, high-performance ships in a high quality sector, can be “filtered down” to other shipping in the Russian trades which have yet to engage in a quality upgrade.

Michael Grey
Conference Chairman

Thanks to our sponsors and supporting organisations who made this conference possible:

Russian Maritime Register of Shipping - Braemar Seascope - Sovcomflot - Stena Bulk - Lloyd's Register - Bureau Veritas - DNV - OCIMF - ABS - Fearnleys
 

[This forum is organised as back to back with the

Russian Maritime Registry of Shipping annual conference
 

which will take place following Mare Forum’s conference on 12 & 13 of October in St. Petersburg.]