Unrevised

Members present

Lord Soley (Chairman)

Lord Addington

Baroness Browning

Lord Hannay of Chiswick

Viscount Hanworth

Lord Hunt of Chesterton

Lord Moynihan

Baroness Neville-Jones

Lord Oxburgh

Baroness Symons of Vernham Dean

Lord Tugendhat

________________

Examination of Witnesses

Lord Fairfax of Cameron, Chairman of Sovcomflot Overseas Holding Ltd, Rob Hindley, lead specialist in Arctic technology, Lloyd’s Register, and Tom Paterson, Senior Vice-President, Shipowning, Arctic, and Projects, Fednav

Q131 Lord Soley: Good morning gentlemen. I am very pleased to welcome you to this Select Committee on the Arctic. I start by reminding you that we are webcast live—you will all be aware of that—and that you have before you a declaration of the interests of all the members. I say a particular thank you to Tom Paterson, who I think has flown in from Canada especially for this hearing, for which we are very grateful. We are also grateful to our other two witnesses, who have very impressive CVs on this. I trust you will all be able to help us on our inquiry.

Lord Tugendhat: Before you begin, interests were mentioned, and I should add that I am a shareholder in Rio Tinto.

Lord Soley: I think that ought to be recorded. Thank you very much.

How realistic, in your view, is the opening up of the Arctic to shipping? I would like all your views on this. We have heard various assessments of how much shipping through the Arctic and from the Arctic to nearby states is going to increase. I would like to get some idea of the difference between bulk carriers and in-and-out-of-the-Arctic carriers, which seem to have a different assessment. Who would like to start on the issue of how realistic you see the assessments, and your assessment, of the increase in sea traffic through the Arctic?

Rob Hindley: Primarily there are two different transport processes at work here. One is transit shipping using the Arctic as a transit route. The second concerns what we call destinational shipping, which is either into the Arctic or more commonly transporting primarily natural resources out of the Arctic. To touch first on how realistic a significant increase in Arctic shipping is, I would say that it is probably not. Primarily this is because, despite the recent changes in the Arctic ice extent, there is still a limited open-water season for ships to operate in. Beyond that limited season, ships operating require ice-class or ice strengthening, which is an added economic cost. Associated with that is the variability of the ice. You cannot predict year on year when the passage is going to be open, and from a shipping perspective, which I am sure my colleagues will highlight, that variability or unpredictability is not conducive to shipping.

There is likely to be an increase in destinational shipping associated primarily with natural resource export projects. The amount of traffic associated with that increase is primarily focused on the economics: whether there is an economic reason or a valid economic model for exporting natural resources out of the Arctic.

Q132 Lord Soley: You have seen the very varied estimates of how much the ice will retreat. Do any stand out in your mind as being the most accurate, or do you have to have a bit of a wait and see about this?

Tom Paterson: That is a very good question, Lord Chairman. The variability of the ice is not predictable, but through hindcasting we can see what it was 10, 20, 30 years ago. There is a pattern. Although the Arctic ice has definitely reduced significantly, this year there was no clear route through the North West Passage. Last year, there were some open-water routes for just a few days, and the year before there was a completely open route. This year, the ice was not conducive to through transit. Last week, we sent the first ever unescorted vessel through the North West Passage. It is interesting that it was only the second commercial vessel that had transited the North West Passage for more than 100 years. Fifteen years ago, it was asked whether the North West Passage was going to become the next Suez Canal or Panama Canal. It will not. As my colleague said, the Arctic is a destination to load or discharge, but with the ice being so unpredictable—it moves south or north depending on the winds—you cannot possibly plan your voyage. The most important thing to understand is that the newspaper clips we see of Chinese vessels going from China to New York via the North West Passage or through the northern sea route to Europe are not going to happen. I would not use the word “probably”; it is not going to happen because it does not make money. The Arctic is a destination to go to load—to come from the east and go to the west or to come from the west and go to the east—but the capital cost of the ships is two to three times higher, and for nine months of the year when you are not working in the Arctic you are going to lose money in the open water, so the ice is the problem.

Lord Soley: That is a very confident statement: “It is not going to happen”.

Tom Paterson: The question was whether it is going to increase significantly, and the answer is no. There will be increased traffic, but it is something like 0.02% of world trade. It is such a small number.

Lord Soley: Lord Fairfax, you have a lot of experience of the Russian trade, which is significant, to put it mildly.

Lord Fairfax of Cameron: Yes. I first went to Russia in 1982, when I was still a Member of this place, and I have gone a lot. Indeed, I have done an Arctic voyage. I mention that because I have personal experience. That was on one of our Arctic shuttle tankers from Murmansk to an offshore platform called Varandey, which is 500 miles due east. I did it in 2010 on board one of our specialised Arctic icebreaking shuttle tankers. Having seen it, including a force 10 storm on the way home, I am able to appreciate a bit some of the challenges up there.

Before I comment on the question, would it be helpful if I said a couple of words—I will try to restrict them—about what Sovcomflot does?

Lord Soley: I looked it up because I was interested. If you could.

Lord Fairfax of Cameron: If it will help. I will try to keep it brief. On the northern sea route, which is alternatively known as the North East Passage, and in the Arctic, we are considered one of the major players, along with Fednav on the Canadian side. We have various involvements. First, apart from the northern sea-route transits, when we are going across from, say, Murmansk to China, we also have various projects in the Arctic. I mentioned one called Varandey, which is basically an offshore platform. We have three specialised icebreaking—as opposed to ice-class—vessels. This means that they can break ice themselves without the need for an icebreaker. We have three Arctic shuttle tankers that service that platform. They go from Murmansk to Varandey, collect 70,000 tonnes of oil and come back. It is like a moving pipeline, in a way.

We also have a second one, which you might have seen recently, for the wrong reasons, called Prirazlomnaya. It is a huge Gazprom platform. I say “for the wrong reasons” only because it was targeted by Greenpeace. The platform is not Sovcomflot’s but Gazprom’s, and we have two Arctic shuttle tankers—both, I think, classed with LR.

Then, subject to current geopolitical events, there is a huge Yamal gas project, of which some of you may have heard. We might be involved in that in providing very specialised icebreaking, ice-class LNG carriers to service that. So those are three projects we are involved in. Then you have the northern sea route and a seismic mapping vessel that we are just starting to use in ice. Oil companies use this to map the sea floor, not to find the depth or anything but to chart it to try to find where the oil is. We are experimenting with new technology, which we may be able to use in ice. I mention this, although it is not strictly to do with the Arctic, but as far as ice trading is concerned, Sovcomflot is very heavily involved in two projects on Sakhalin Island, Sakhalin 1 and Sakhalin 2, one of which involves just oil and the other oil and gas. I mention that just to give you some idea of the extent to which we are players not just in the Arctic but in ice conditions.

Turning to your question, if I may, you have heard a perhaps rather realistic view already. As probably the No. 1 player, certainly on the Russian Arctic and ice side, all the way down to Sakhalin Island, it is in our interests to look at the northern sea route. You have heard that it has changed recently because of climate change. There is obviously a big debate about the extent to which it is happening and there are all these predictions that the Arctic is going to be ice free in the summer, perhaps even as soon as 2020, as someone has said. I do not know whether that is realistic, but, because of what has happened already, we put our first tanker across the Arctic in 2010 and then a bigger one the following year, all with icebreaker assistance. This was all in the summer. This year, for example, we are slated to do nine transits. As you may be aware, the season is normally July to November, depending on particular ice conditions. Just superficially, I was having a chat while we were waiting outside—

Lord Soley: Can I ask you to be brief, as otherwise we will be squeezed for time?

Lord Fairfax of Cameron: I am so sorry. I was just going to say that superficially, of course, the attractions are considerable. The distance saving is massive. When we did our first shipment, we might have saved as much as 50% in mileage, and therefore you have saved fuel and emissions. I will just mention that you also avoid the piracy problem in the Gulf of Aden and the Indian Ocean as well—I say that as an aside. Against that, there are considerable challenges, as we will hear later. You have to invest heavily in the hardware in the specialised ships, as we do, and in the software: namely, the masters and crew. The insurance is also challenging, and so on and so forth. We will probably discuss that more later. So, yes, there are distance savings and so on, but there are also massive challenges.

Lord Soley: Thank you. First I will ask Lord Hannay and then Lord Tugendhat to comment.

Q133 Lord Hannay of Chiswick: I would like to ask you to look at an aspect of this question which none of the three of you has mentioned so far, which is the possibility that the advantages of the northern transit route—I am talking here only about transit, not about destination—could, of course, be drastically affected by developments elsewhere in the world, such as the Egyptian decision recently to double the size of the Suez Canal and the fact that they have, I think, successfully raised the initial funds necessary to start building that. That, presumably, would affect the sort of figures that we have been given on the advantages of using the northern channel route over the alternatives, although not as regards the distance, of course, and you could have negative consequences if there was a huge flare-up of piracy. Listening to you, I get the impression that things like the Suez Canal development reinforce your view that the northern transit route is not going to become very attractive any time soon.

Tom Paterson: I would say so, absolutely. For example, going from New York City to Shanghai, the saving, if you reduce your speed, which you have to do through ice, is about three days going through the Panama Canal. If you look at the North West Passage versus Panama or Suez, you would go through the Panama Canal. Why would you risk damaging the ship to save three days? That is unlikely. Going from Rotterdam to Shanghai through the Suez Canal means travelling for 33 days as opposed to 36 days, so why would you take the risk to save three days? Yes, you save some fuel but you have to go slower. Container ships today are in real-time inventory. Given the larger Suez Canal and the larger Panama Canal, quite frankly I do not see why the shipowner would take the risk of going north; it is just too high a risk. Unless you have ice class on your vessel, you are not allowed to proceed. That is the first thing. In order to have ice class, you have to pay a premium for the vessel. A standard Panamax vessel, which carries about 75,000 tonnes of bulk cargo, will be 10% to 30% to 40% more for ice class. For polar class, it is three times the cost, so the capital cost does not work. Therefore, the northern routes will not be competitive on the transit side.

Lord Soley: Do Lord Fairfax and Mr Hindley agree with that broadly, or would you like to add any important points?

Rob Hindley: I completely agree with the assessment that has been made, but I would just like to add to that. You mention the potential new Suez developments and the new Panama locks that are coming on stream soon. That only reinforces the possibilities for using more southern routes, because you now have the opportunity for deeper draughts with the new Panama Canal. As regards the difference in constraints on shipping size, if you continue to operate on a northern sea route in anything but the very open water season when there is access to a deeper draught route, you will be constrained. Of course, shipping is always based on economies of scale, and where you can use larger ships that will obviously affect the economics of the decision as well.

Lord Fairfax of Cameron: I would just add a comment on the type of ships you are talking about, because certainly in our case we are talking about oil and gas tankers. If you talk about container ships, for example, I think it is probably out of the question that it would ever be attractive for them to use the northern sea route. One of the things about container ships, as you probably know, is that they are like a bus service. You get these round the world container services and they just stop off at places, discharge containers and load other ones. Of course, you are not going to get that going across the top of Russia at the moment. Apart from all the other problems that we have heard about, such as draught, I certainly would certainly rule out container ships.

Lord Soley: We are going to come to types of shipping in a few moments, but first let us hear from Lord Tugendhat.

Q134 Lord Tugendhat: I remember, very much along the same lines as Lord Hannay, back in the late 1960s, paying a visit to BP drilling operations in Alaska, and very interesting they were, too. We were told that of course there was not a great deal of future for that sort of oil operation because, as oil was available in so many other places where it was much cheaper to extract, the Arctic would not have much of a future. Of course, what has happened in the oil industry has been governed very much by what the economists call exogenous events: people drill in very deep waters in very unfavourable circumstances because the political conditions in areas where it would be much easier to drill have deteriorated and become very risky. Therefore I suggest that the certainty with which you speak about what is going to happen in the Arctic is questionable. Everything will depend on what happens politically in other parts of the world, which will change the calculations to which you quite rightly draw attention.

Secondly, one thing we have all learnt about climatology in the last few years is that forecasts of what is actually going to happen and the speed with which things are going to happen are very unpredictable. Some things have happened more quickly and some things have happened more slowly, and even if there is a trend it is an imprecise science. It seems to me that what one needs to think about here are the conditions that might arise that would lead to these routes becoming more attractive, rather than to speak with certainty to suggest that they will not.

Lord Soley: So, are you overegging the pudding with your certainty, or not?

Tom Paterson: That is a very good point. Can I just add something technical? People talk about “ice free” and “open water”, but there is a significant difference. “Open water” means that there is still about one-tenth of ice. What does that mean? It could be a bergy bit, which is a small iceberg that has broken off, or a growler, which is a smaller piece about the same size as a Mini. If you hit a Mini—this growler—at 16 knots or 17 knots, you will sink the vessel pretty quickly.

Lord Soley: You mean a Mini car?

Tom Paterson: Yes, it is the size of a Mini car, and it has the same molecular structure, under the microscope, as titanium. So it wins over the steel. Unless your ship is really highly designed to cope with this, which costs a lot of money, the standard ship is not able to come in contact with this type of ice.

To refer to your point, of course we must have an open mind. Referring to the transit route specifically, we are saying that the transit route economically does not make sense except for maybe two, maybe three, months of the year. For the rest of the year that ship would be carrying a financial penalty, first because it has the heavier steel weight, secondly because it has a bigger propeller, and thirdly because it has a bigger engine. That is not efficient in the open water. As we said earlier outside, you would only run a race car on a race track; you would not run a truck on that race track. You must keep ice-class and icebreaking vessels close to the ice to be economical. So the transit route becomes economical, and of course ship owners are in the business to make money. That is why the transit routes are not happening.

I completely agree that destinational traffic is increasing. Next year, in Canada, the Baffinland Project will start producing, and we intend to ship about 2.5 million to 3 million tonnes of iron ore. So, yes, from a destinational point of view, the Arctic is increasing. In the northern sea route, the trip from Murmansk is a destination across to China. But again, going back to the transit routes, it does not make economic sense for the ship owner.

Lord Soley: Thank you. I am going to ask Lord Fairfax to come in on this, but I am going to ask both my colleagues and you to recognise that we have moved on a bit from the first question: we are covering a bit of question 2 and a bit of question 3. I will adjust it accordingly. Lord Fairfax, you are anxious to say something on this point.

Lord Fairfax of Cameron: Thank you, my Lord Chairman. All I was going to say is that obviously Sovcomflot are rather more believers, perhaps, than some of my colleagues on my left. I would agree that there is a massive distinction to be made, perhaps, between transit shipping and what we have called destination shipping. In our case, destination shipping, as you heard from my little introduction, includes some of these very important energy projects up in the Arctic. There is an estimate that maybe as much as 25% of the world’s undiscovered gas reserves may be in the Arctic. That is the game in which Sovcomflot is involved—about getting that gas to market from extremely challenging environments. So I would make that point. We are investing very heavily in that. I have spoken about the Varandey Project and Prirazlomnaya. Yamal may, subject to current events, come on later, and others too. There is that big distinction between transit and Arctic energy projects, I would suggest.

Lord Soley: I am beginning to be clear about that myself from some of the other questions we have asked. Can I bring in Viscount Hanworth? I think he wanted to deal with question 2 and with this. Then I will bring in Lord Hunt. In a way, we are also overlapping with question 3, which I think you were going to lead on.

Q135 Viscount Hanworth: Much of what we started with has been answered, but there are still some issues. Mr Paterson has told us about the difficulties of Arctic shipping in the current circumstances, and his account has been affirmed by Lord Fairfax. We should also like to speculate about the future. Might I therefore ask our panel to further categorise the types of shipping operations and the types of cargo that might be attracted by the opening of the Arctic sea routes both east and west. I now understand that we should be talking primarily about destination, so it is a question of origin and destination and the types of cargo. Of course the answer must depend on presuppositions regarding the extent of the polar ice summer. I fully understand that. Beyond that, if you are prepared to speculate, how competitive might the Arctic sea routes become with other available sea routes, albeit that I now understand that we have heard conclusively that they are not going to be very competitive for transit shipping?

Tom Paterson: Our company, Fednav, owns the largest fleet of ice-class tonnage and icebreaking tonnage in the world. We are investing heavily in the future, because, as you rightly point out, there are tremendous projects coming, both in the oil and gas sector and in the bulk sector. It is going to increase substantially. We have been operating in the Arctic for 50 years, and at the moment we ship about 2.3 million tonnes a year from the Arctic. That is mainly base metal concentrates: lead, zinc, nickel, copper. Inbound we take fuel, mainly to run the mines; there is still no alternative energy. We also need a lot of fuel for the gold mines. Of course, the gold comes out in an airplane, as the diamonds from diamond mines do. All these mines are expanding because the ice is receding and allowing them to operate through a longer summer season. Iron ore is the next big increase, certainly in the Canadian Arctic. Next year we will start operating the ArcelorMittal deposit; it owns 50%. That is starting at 3 million tonnes next year—three million tonnes in 75 days, summer shipping only. In order to increase that tonnage, there must be massive investment. That investment comes in the form of a 90,000 tonne polar class 4 self-unloading vessel that will do trans-shipping off the coast of Greenland into market vessels, non-ice class. To be competitive, again the icebreaking vessel needs to stay close to the ice. Then it will increase to two and three ships, and their intention is to go to 18 million tonnes a year by 2022 and to operate all year round. At the moment we are operating all year round unescorted, with icebreakers, in the Canadian Arctic, with three vessels. We go on our own and we load nickel, because of the very high value of the product, not to keep it trapped in the Arctic.

Viscount Hanworth: That is a very cogent answer. May I ask something that is perhaps not directly related: the question of the extent to which the submarine topography dictates the size of the ships, their draught? Would the problems of shallowness, if you adhere close to the coastline, affect this scenario?

Tom Paterson: In Canada, no, because there is very deep water pretty close. Certainly Greenland is very fjord-like. Unfortunately, it is very unforgiving because it is not sandy beaches—it is very rocky—so it has to be done precisely. Navigational aids are a challenge, but today, with differential GPS it is pretty easy to have your ship accurate within a few metres. Today’s technology allows a lot of things to happen. We also have very precise satellite imagery from space to show us where the ice is, and this year we are using drones for the first time to check the ice: we can get a bird’s eye view. With today’s technology we can go further.

Viscount Hanworth: The satellites would not help you with Mini-sized growlers, though, would they?

Tom Paterson: No they would not. I am afraid the only thing that helps you with that is to slow down.

Viscount Hanworth: Okay, you have gone west; what about east to the Russian coast?

Tom Paterson: My friend here is much more versed on the Russian Arctic. We are certainly no experts on that route.

Lord Soley: Do you have a brief answer to that, Lord Fairfax?

Lord Fairfax of Cameron: I agree that draught is a big challenge. I know from one of the first two transits we did with laden tankers that draught is an issue, not least because some of the charts still require updating and so on. They may be unreliable. We obviously took enormous care when we did our first two laden voyages. The first was with an Aframax tanker, which is about 100,000 tonnes, the second with a Suezmax tanker, which is even bigger at 170,000 tonnes. It is vital that we get the draught right. The fact is that draught is definitely a challenge.

Lord Soley: We have heard problems about mapping the ocean and the ocean floor there. We understand that.

Q136 Lord Hunt of Chesterton: Lord Fairfax commented that if you took one of these long voyages from lower-latitude places to lower-latitude places that you might have 50% fewer miles and therefore significantly less emissions. One of the important issues before us is the exogenous issue that Lord Tugendhat said: the question of carbon emissions. As you know, shipping currently produces about 15% of global emissions of greenhouse gases. There is every expectation that that might rise, even to 20%. One of the suggestions to reduce the big emissions by shipping is for ships to go slower. If ships went at half the speed the carbon emissions of shipping would be not halved, but would be lower. All these things are good reasons why ships going slower over a shorter distance may be a very significant contribution to the global climate problem. Would you like to comment on that? Suppose following a world meeting in Paris or something, which is perhaps a bit optimistic, they introduce a carbon tax; that would impact shipping. I wonder whether the shipping world is getting its mind round the kinds of pressures that will be put on it. It seems to me that it should be thinking in a much more positive way than Mr Paterson suggested—maybe he can comment.

Tom Paterson: I would love to comment, if I may. First, the emissions of our standard fleet have reduced by about 35% in the last seven or eight years with new vessels. Coming back to the ice-class vessels, they require much bigger engines. It is a bit of a Catch-22 situation. We can do the transit route with standard vessels that are very fuel efficient in only a very limited period of time: the very short summer. If you build the ice-class vessels so that you can do the shorter route, then that ship will consume more fuel for the other 10 months of the year while it is operating in open water.

The carbon footprint is extremely important. That is why we went north on the last voyage we did from the Deception Bay mine to China: it was 40% less emissions for one voyage alone. We have to remember that the ice-class vessels have much bigger engines. Yes, the footprint is more for the ice-class vessels, but remember that they are taking large quantities of either fuel or bulk materials. On a per-tonne basis things are improving dramatically. Mr Hindley from Lloyd’s will be able to comment further, because today we are moving to tier-3 engines and our emissions have come down significantly. For example, today, our bulk carriers consume between 35% and 40% less fuel than they did only 10 years ago from a new vessel.

Lord Soley: That is good news.

Rob Hindley: I would like to address efficiency, along the lines of Mr Paterson’s explanation. Principally, in recent years we have seen a reduction in emissions from ships. Primarily, one of the drivers, as well as improvements in engines, has been energy savings from hull-form design and from the shape of the ship. Certainly for ships operating on open waters we have seen quite a dramatic decrease in the energy required to move those ships. Those have been primarily hull-form shape and engine tuning-related technology advances. The challenge from an ice-class perspective is that those are almost completely the opposite to what you need for an ice-class ship. An ice-class ship needs a full bow shape to break the ice, whereas you need a fine bow shape to be efficient in open water. I believe Mr Paterson has discussed this already, but unless you use a ship that is designed to operate in ice all year round, you will actually be expending a lot of additional energy moving that ship in open water. That is a cost that makes those types of ships uncompetitive with the ships we are seeing today, which are designed and optimised for open water navigation. You might actually increase emissions because you have pushed people towards using ships on a shorter transit but you have an ice-class ship that is producing more emissions.

Lord Soley: I call Lord Fairfax, and then I want to move on to safety and construction.

Lord Fairfax of Cameron: I do not think I have very much to add here, save to say that Sovcomflot takes emissions extremely seriously. We consider ourselves one of the most technologically advanced shipping companies in the world. We work with a lot of research institutes, in particular for our arctic and ice trading. What has been said about ice-class vessels is right to some extent, but having said that the transit times can be dramatically reduced, as you have heard. I am not quite so black and white as my colleagues are.

Rob Hindley: May I just come back on that point, because I think it is important? If you already have the ice-class tonnage and you can use it in other areas that have ice during the season when you are not transiting, there is then more of an economic argument for it and it makes more sense. However, investing in a ship initially for that short season is the kind of point we are trying to address.

Lord Hunt of Chesterton: We really can rely on several months with really no ice, whether that is in 20 or 30 years. They had a very unscientific vote in the Royal Society meeting on climate change in September, which was most unusual: “Who thinks five years? Who thinks 10 years?”. When that happens, presumably you will be able to use normal ships through the summer months, is that right? If you use normal ships through the summer months they will be travelling shorter distances and therefore emit less carbon.

Tom Paterson: If that is the case, certainly the Russians and the Canadians would have to change the rules, because at the moment that is not permitted.

Lord Hunt of Chesterton: Twenty years is enough to change the rules, is it not?

Tom Paterson: I do not disagree. However, if I may, Lord Chairman, I will come back to the difference between open water and ice free. There is no route through the Canadian sector that is ice free, because that means you would have to go 60o degrees north up the coast of Greenland before you turn west into Lancaster Sound. That entire transit route from 60o north to 70o—10 degrees of latitude, which is 600 miles—goes through bergy waters that are calving off the coast of Greenland. Ironically, because of climate change more icebergs are calving off the glacier, which means that there are more icebergs, more bergy bits, more growlers and more Minis in the ocean to hit. It is not so much the lack of ice that is the key, it is the one piece that you hit. Of course, in the summertime the other phenomenon is fog. We have a lot of fog off the coast of Greenland, which means that ships have to slow down: if you slow down and still hit a growler or a bergy bit, the ship is in a lot of trouble.

Lord Soley: I think what you said about growlers is quite sobering. I had not realised that ice was as strong as you are saying. Perhaps I may move on and ask Lord Oxburgh to take us through the safety and construction issues.

Q137 Lord Oxburgh: Mr Hindley, can you tell us how these polar classes for ships—I think there are seven polar classes—are specified? Are they detailed construction constraints or what?

Rob Hindley: I will start with ice class in general in terms of construction standards. Historically, classification societies have developed construction standards for ships operating in ice. Those are primarily focused on strength aspects and are what we call ice classes. The polar classes that you refer to are the latest generation of those ice-class developments. They were developed by the International Association of Classification Societies and, if you like, are a collection of ice-class rules combined.

Lord Oxburgh: Are they specified in engineering terms?

Rob Hindley: Yes. Simply, they are rules that govern the strength and the amount of steel that you put on the ship to resist ice load.

Lord Soley: Is the UK a leader in the technology generally?

Rob Hindley: I would say that ice mechanics and ice engineering are international; it is a very specialist field. I would hesitate to say that the UK is a leader. The Russians and the Canadians have the bulk of historical experience, but it has been a combination of the classification societies, of which Lloyd’s Register, which is based in the UK, is one, that has contributed to these rules. Fundamentally, the foundation of that work is the Russian and Canadian experience of operating in ice.

Lord Oxburgh: Those are engineering standards, which is fine, but how is it then determined how these ships, which are built to different standards, can operate in the Arctic?

Rob Hindley: Two sets of national regulations are in existence for the Arctic that basically link shipping regulations with ice class. Both Canadian and Russian regulations refer to ice classes and link limitations for operation to ice classes. The regulations themselves are not the ice classes.

Lord Oxburgh: But given that the ice conditions, the sea conditions, change continuously, how is it decided whether a particular vessel can transit through a particular sea?

Rob Hindley: At the moment, regulations for the northern sea route link the ice classes with the type of season. Basically, the season is declared to be easy, average or harsh. The assessment of those ice conditions as a kind of go/no-go will depend on what ice class you have.

Lord Oxburgh: Who declares those seasons?

Rob Hindley: The northern sea route administration.

Lord Oxburgh: So it could be the Russians or the Canadians for their particular areas.

Rob Hindley: The Russian side I have explained. From the Canadian perspective—I am sure Mr Paterson will correct me if I slip up—there are two basic regulatory parts. The first is that the entrance into parts of the Canadian Arctic is regulated based on date, which is based on a hindcast of what ice conditions have historically been in those areas.

There is also a system in place that allows, in a regulatory framework, assessment of the ice conditions in front of the ship. Those are linked to the ship’s ice class. The decision to go or not to go is made on the bridge of the ship. The framework of that decision is part of the regulations.

Lord Oxburgh: Are these real-time assessments available throughout?

Rob Hindley: For the Canadian Arctic, the answer is yes. For the Russian Arctic, it is very much a case of “you can” or “you cannot” go.

Lord Soley: Can I move on to Lord Addington, because it is perhaps a good time to move on to critical infrastructure and safety factors.

Q138 Lord Addington: We have heard about the trying conditions for which you will need specialist ships for the foreseeable future. I think we are all agreed on that. What infrastructure do you need to support these ships to enable them to operate in Arctic waters? I am also thinking about the regional difference and the structure behind the safety of the people on the ship and the safety of the environment, which might include policing as well. Also, what different structures are in place in, for instance, the north-west, the north-east and going through? Which one is the most desirable that we should move towards to support?

Lord Soley: We are getting tight on time, and your time is very valuable to us, so we want to make the most of it. I would be grateful if you could be as brief as you can. We do recognise that it is a very important area.

Tom Paterson: There is very little infrastructure in the Canadian sector. The infrastructure tends to be on the vessel. They are somewhat overdesigned to be very, very safe. They are double-hull ships and all the fuel is away from the side. Therefore, you are your own icebreaker, your own coastguard and your own survivor.

In the Russian sector there are 2 million people between east and west. Therefore, the Russian sector is much more developed in the sense that there are a lot of ships supplying the communities as well as the transit ships. In the Canadian sector, there is only a very small community of about 40,000 people, so there is really no infrastructure. These communities are supplied in a brief two-month season by ships from the south. For the other 10 months of the year, no ships go to these communities. No ships are operating in what we call the North West Passage for 10 months of the year. There is no infrastructure and, quite frankly, not a lot of icebreakers in Canada. The sad reality is that there is one icebreaker in Canada that can follow the commercial ships. The infrastructure is very weak.

Lord Fairfax of Cameron: This is a huge topic, but I will try to deal with it in about 90 seconds.

Lord Soley: You can always send in more written evidence after this if you feel that we have missed things out. You are right: we have been worried about the search and rescue aspect, and the infrastructure, for some time.

Lord Fairfax of Cameron: I have done enough preparation for about 10 hours.

Lord Soley: You will have to compress that!

Lord Fairfax of Cameron: Along the northern sea route, Russia is the littoral state and therefore has primary search and rescue responsibility, and de facto has such responsibility. That is my first point. It has marine rescue co-ordination centres along the northern sea route. Currently, if you exclude Murmansk, there are four at Dickson, Tixie, Pevek and Provideniya, which is just by the Bering Strait. I think I have read that it has ambitions to get to as many as 10 co-ordination centres covering these different sectors and seas. Although it is called the Arctic Sea, it has different names along the way.

In terms of search and rescue, recognising the paucity of facilities at the moment, even though they may increase in the future, when we took our first big tankers across they were escorted by very powerful icebreakers, which had very specialised equipment on board. One of the approaches is that if you recognise that along this vast area you do not have land-based search and rescue facilities, perhaps they should be ship-based and on some of the icebreakers themselves. I am just trying to remember the statistic. Russia has something like 40 icebreakers. It is building more, particularly very, very big ones, which might be able to provide mobile search and rescue.

Q139 Lord Addington: Going on from what you said about the potential environmental and pollution disasters out there, it is incredibly difficult to get anything there to deal with a big disaster. There would be very little capacity for taking immediate action in any part of this, even including some comparatively minor things, such as ship discharges of waste. There is virtually no way of getting anything down to deal with it.

Tom Paterson: In the summertime, there are coastguard ships there. In the wintertime, there are not. At the moment, very few ships operate in the winter. In the summertime, the Canadian coastguard is there, as are the Russians. As far as discharges are concerned, there is zero discharge. We have a zero-discharge policy. Yes, accidents happen. In the summertime, there are ships available to assist, but if transits start to occur in the wintertime, the infrastructure is not there.

Lord Soley: Fine. Can we move on to Baroness Symons now?

Q140 Baroness Symons of Vernham Dean: I think we have dealt quite a lot with the environmental factors, so I would like to turn to some of the other factors that constrain shipping in the Arctic. You are all businessmen, and as such in your various capacities you have to keep an eye on the business potential of what you are doing. What constraints do you see in the bureaucracy around shipping in the Arctic—the insurance, the licensing, the permit requirements? Do you regard those as unnecessarily bureaucratic? Are they inhibiting factors? Moving on a little from that, we touched briefly on the geopolitics of the region and also of other regions producing valuable minerals, oil and gas. How might geopolitics limit what you are able to do in the Arctic? There are two points—the bureaucracy point, and the changes in the market because of geopolitics elsewhere and within the region.

Lord Soley: Can I ask Mr Hindley to start on that, because a very important point which Baroness Symons has touched on is insurance? Presumably if insurance costs are too high or it is not there, a ship does not go, full stop.

Rob Hindley: I am afraid that I am going to pass that question to my right because we do not deal directly with insurance. I will talk about the technical issues. I believe Lord Fairfax can probably help you in this regard.

Lord Fairfax of Cameron: If I can, because I have an insurance background. Insurance is critical. Without getting too technical, there are two types. One is called “hull and machinery”, which is the insurance of the object itself, the piece of metal that floats and has a value, and the other is P&I, which is protection and indemnity, which is liability insurance for all the things a ship can do, including causing oil pollution or being susceptible to wreck removal. You might have seen from the “Costa Concordia” how incredibly expensive that can be. Insurance is incredibly important. That is the first point. It is a barrier to certain things. RCO has a favourite expression about the Arctic. He refers to “Arctic tourists”. He does not necessarily mean people on a cruise ship going up to Greenland. He is actually referring to shipping companies which might not be suited to going up to the Arctic. We like to think of ourselves as being so suited. Insurance is a barrier because if you are one of these Arctic tourists, it may be that your ship, your crew or whatever are simply completely unsuited to Arctic navigation, and your underwriters, your insurers, will assess your risk in a certain way which may make it prohibitive for you to go there at all, or they may not even give permission. Frankly, you need hull and machinery and P&I insurance, so if your insurers are not going to give you permission, you simply will not be able to go there anyway. I could speak for much longer about that. I do not want to advertise Sovcomflot, but because we have invested so much in this Arctic and ice-trading thing, we do not have any such problems. Indeed, I can say that our underwriters do not charge us any additional premiums because our vessels and our crew, in particular, are considered suitable.

Baroness Symons of Vernham Dean: Are the costs rising? You must have an idea about the sort of costs for the different sorts of vessels.

Lord Fairfax of Cameron: Which costs?

Baroness Symons of Vernham Dean: For both types of insurance; particularly, I suppose, for protection and indemnity.

Lord Fairfax of Cameron: In general, the hull and machinery market seems to be in a permanent state of softness—if you really want to know—which is very good for ship owners. There seems to be too much insurance capacity and therefore the hull and machinery market is extremely soft. P&I costs are rising because of things such as the “Costa Concordia”, which has nothing to do with the Arctic. You can get massive claims which rebound on the sector.

Lord Soley: Thank you. We are getting very tight on time now. I am going to ask Lord Hannay to ask a very brief but important question on the Polar Code, and then I fear we are going to have to leave the session and I am going to ask for written evidence on what would have been Lord Tugendhat’s question.

Q141 Lord Hannay of Chiswick: You mentioned the cost of the “Costa Concordia”. If there were to be—and there has not yet been, thank heavens—a really bad disaster somewhere in the Arctic which involved huge costs, like the cost of the “Costa Concordia”, would it affect the whole structure of the insurance of polar transit? I will go on because we are short of time and the Chairman is anxious to go on. When do you expect the IMO’s Polar Code to become operational? What difference do you expect it to make to Arctic shipping and to the prospects for the future? Who is going to enforce the Polar Code, if it is properly constituted as an international legal obligation?

Rob Hindley: I will add just one sentence on the other factors. In terms of costs, fundamentally, when we are talking about destinational shipping, we are talking about economics. If you can recover that premium for exporting from the Arctic, then technically we can export from the Arctic. When talking about increased insurance costs, if you can recover them in your economic model, then it is a viable prospect.

I sit on the Polar Code working group. I anticipate that we will be seeing the Polar Code on 1 January 2017. I think we will have a completed draft by the end of the year. Certainly, the text should be relatively complete. In terms of the difference I expect it to make, I am pleased that I am surrounded by probably the two best practitioners from the Canadian Arctic and the Russian Arctic respectively, because there is not going to be a significant amount of change for shipping operating there at the moment, because the Polar Code builds on the experience of operators who are there at the moment and are doing the right thing. The Polar Code will raise the baseline and draw attention to Arctic tourists, which Lord Fairfax alluded to, in terms of ensuring that there is a minimum standard which will encourage ship owners to think twice before entering the Arctic areas to identify the issues that are required.

In terms of enforcement, the Polar Code, as you are probably aware, is basically set up within the IMO as amendments to SOLAS and MARPOL, which are statutory regulations for shipping internationally. As they are amendments, they will come into force once they are agreed, so there no question of ratification or of waiting until a certain percentage of the world fleet signs up. They will come into force once agreed. As they are amendments to SOLAS and MARPOL, they will be enforced in the same way, which is through a survey and certification regime which is how international shipping is regulated anyway. The enforcement will be done by flag states where the ships are registered or on their behalf by recognised organisations, such as classification societies.

Lord Soley: If our two other witnesses have anything to add or wish to embellish any other areas, please do it in writing to us, and in response to Lord Tugendhat’s question, which he has not had the opportunity to ask, about benefits to the UK. I would like to clarify something Mr Paterson said right at the beginning. You referred to the expansion of shipping in the Arctic as a non-starter. Were you referring to the North West Passage or to the whole of the Arctic?

Tom Paterson: I was referring to transit from southerly latitudes north and back to southerly latitudes, either through the northern sea route or the North West Passage. Economically, it does not fit.

Lord Soley: That is all I needed to know. I want to thank all three of you. You have a great deal of knowledge and I am afraid we have only skimmed the surface of it. It was very important. I know you have some written evidence and that from Lloyd’s Register is a very impressive read. If you have more to add, please send it in writing. You will see a transcript of these notes, so you will know any other areas you want to build upon. It has been very helpful and important. Thank you very much indeed.