The Arctic Ocean Is Open for Business

On Tuesday, the liquid natural gas, or LNG, tanker Ob River delivered natural gas from Norway to Japan. While gas deliveries between the two countries happen all the time, this is the first time an LNG tanker took the Northern Sea Route, or NSR, between the two countries. Arctic ice hit a record low earlier this year and remains depressed. Companies are taking advantage of that, and this shipment shows the Arctic Ocean is open to winter business. Read on to find out why this is important, who's set to do business in the Arctic, and how to profit from it all.

The inaugural trip

Blue line is Northern Sea Route, red line is route through Suez Canal. Source: Wikipedia

The regular route between Rotterdam and Yokohama is 11.2 thousand nautical miles. The Northern Sea Route is almost 35% shorter at just 7.1 thousand nautical miles. Even with the additional costs of higher insurance and an icebreaker ship, the shorter lease of the LNG tanker more than made up for the additional costs.

A gas-trading subsidiary of Gazprom chartered the LNG shipment. The gas was produced at an LNG plant owned by Statoil ASA (EQNR -0.07%) in Hammerfest, Norway. The ship left Norway on Nov. 7, and arrived in Japan on Dec. 3. It was estimated that taking the NSR saved the Ob River 20 days, a time savings of over 40%.

The trip is especially profitable as Japan has the highest natural gas prices in the world, stemming from the country's huge demand, lack of supply, and the need for all its natural gas to be shipped in.

Source: World Bank Global Economic Commodities Database (Pink Sheet)

Natural gas prices in Japan have been higher than the rest of the world since 2009, but really diverged in 2011 after the Fukushima disaster when Japan stopped using nuclear power and made up the difference with natural gas power plants.

The late trip was made possible by the record low arctic sea ice this year. The NSR has been used in the summer since 1932, if not earlier. While traffic in the region has been constant since the 1930s, traffic using the entire route has really taken off in recent years as less ice has meant a longer season.

Source: Rosatom, RIA.ru

The 2011 NSR season was longer than the 2010 NSR season by about a month, with over five times the amount of cargo shipped.

The 2012 NSR season was a record breaker. In September, sea ice in the Arctic reached a low of 3.41 million square kilometers, 50% lower than the 1979-2000 average and a record low since satellite observations of arctic ice began in 1979. The previous record was recorded on September 16, 2007, of 4.17 million square kilometers. The depressed ice levels made for a 2012 NSR season that was slightly longer than the 2011 season. As more loaded ships traversed the NSR, they brought with them a 50% rise in cargo.

Arctic scientists now speculate that the 2013 season could have an almost complete disappearance of ice on the NSR. This should lead to more ships taking the route. Companies have taken notice of the steadily improving ice conditions in the Arctic and are gearing up to take advantage of it over the next few years.

Arctic development
There is one big Arctic LNG project under way, a few in the planning stages, and another had been shelved this year.

• Yamal LNG is a joint venture between Novatek (80% owner) and Total (TTE -1.28%) (20% owner). The project is scheduled to go online in 2016-2017 with production of 2 billion cubic feet per day, with gas to be exported at the Sabetta port, currently under construction. The companies have announced plans to order 10 ice-class tankers to ship the gas to markets around the world. The partners plan to presell at least half of the production next year.
• There are many projects in Russia in the planning stages.
• Shtokman LNG was a joint venture between Gazprom, Total, and Statoil. The project has been put on hold indefinitely as the partners were worried that low-cost gas from the U.S. would make the project uneconomic.

The partners in the Shtokman project realized the opportunity to sell to Japan won't last forever. More and more projects are expected to come online around the world around in 2015-2016, including Cheniere Energy's (LNG -0.73%) Sabine Pass Terminal in the U.S. in 2015, Chevron's (CVX 0.75%) delayed and over-budget Gorgon project in Australia, Interoil's (NYSE: IOC) Elk and Antelope fields in Papua New Guinea, as well as expansions to the various Sakhalin projects of Royal Dutch Shell (RDS.B), which is developing Sakhalin-2, and ExxonMobil (XOM -0.09%) which is developing Sakhalin-1.

U.S. natural gas companies are in a great position to export to Asia once export facilities are up and running.