Identification of the Optimal Conditions for Functioning of the Arctic Marine Services Market

Today Arctic is in the centre of politicians’, economists’ and scientists’ attention, firstly drawing attention to unutilized resources and unlimited vastitude for realization of the most chal--‐ lenging projects. Nevertheless, specialists acknowledge that Arctic is considered to be the high risk area because of its natural and climatic conditions’ characteristic, character of its territories’ industrial development and remoteness from the main industrial centers [1]. Conditions of market growth development of the maritime Arctic service in terms of the world globalization are studied in the article. Main stages of formation and modernization of Arctic transfer system’s infrastruc--‐ ture and also barriers for exploitation of the Northern sea route are determined. For building a scenario forecast of the services market’s development and a risk assessment of its business ex--‐ ploitation new methods must be suggested. These methods must be based on the elements of mathematical model method and self--‐optimizing control.

Perspectives of the Northern Sea route usage

It is mentioned in the “Development strategy of the Arctic zone of the Russian Federation and national security for the period up to 2020”, that imperfection of the transport infrastructure, its maritime and continental components, aging of the ice--‐routing fleet and lack of small aircrafts’ resources are considered to be basic risks of the social--‐economic development of Arctic zone. Though the main hopes of the problem’s solution are related to revival of Northern sea route1.

For the purpose of modernization and development of Arctic transfer system, which guards against loss of the Northern sea route as the only main traffic artery of the Russian Federation, it is provided in the “Development strategy…”

• a)    development of the only main Arctic transfer system of the Russian Federation in the capacity of the national maritime traffic artery, which is oriented on the year--‐round functioning, comprising Northern sea route and gravitating to it meridional river and railway communications, and also airport network;

• b)    restructurisation and cargo traffic volume growth through the Northern sea route, including account of State support of the construction activity of icebreaker, wrecking and auxiliary fleets, and also development of coast infrastructure;

• c)    improvement of the Russian regulatory framework concerning state regulation of navigation throughout the Northern sea route’s water area, promotion of its safety, tariff regulation of services in the area of icebreaking and other ways of supporting, and also development of insurance mechanisms, including required insurance;

• d)    improvement of organizational structure of management and provision of the Russian Arctic zone navigation’s safety;

• e)    modernization of Arctic harbors and build--‐up of new harbor--‐industrial complexes, realization of dredging operations on Arctic River mains;

• f)    development of effective system of Arctic region’s air services.

From the viewpoint of economic effectiveness the perspective of intensive usage of the Northern sea route is appreciated by experts in different ways. It is worth mentioning that water carriage still plays an important role and occupies 60--‐70 percentage of the whole world cargo turn--‐over. Air carriage can be considered to be an alternative to water carriage, though the competitive ability of the water car--‐ riage is higher, which is based on higher cost of air carriage and a low total quanta of cargo traffic [2].

As a rule, six main factors, which are used for initial estimate of availability one or another means of transport with conditions of concrete carriage (acceptance of a permanent solution must be substantiated with cost--‐benefit analysis), are marked. When appreciating them according to the five--‐point grading scale (the best point corresponds with one), we can see, that with factors carriage charge and capability to transport different cargoes water carriage is considered to be the most effective (table 1). Though, in modern conditions, such factors as safety of delivery timekeeping and time of delivery play also the most important role.

• Table 1 Factors, which influence means of transport’s choice

  Means of transport	Factors
  	Time of delivery	Frequency of shipment	Safety of delivery timekeeping	Capability to transport different cargoes	Capability of carriage cargoes anywhere	Carriage charge
  Railway	3	4	3	2	2	3
  Water	4	5	4	1	4	1
  Auto	2	2	2	3	1	4
  Pipe--‐line	5	1	1	5	5	2
  Air	1	3	5	4	3	5

Analysis of world traffic volume in the second half of the 20th century (table 2) confirms the water carriage utilization efficiency. It suggests a stable growing trend (pic. 1).

• Table 2

Water carriage cargo turn--‐over and traffic volume in the 2nd half of the 20th century

Year	Cargo turn--‐over, bl.t/km	Traffic volume, mln. t.
1950	3570	550
1960	7500	1110
1970	18145	2840
1975	23300	3050
1980	32160	3650
1985	27500	3190
1990	28100	4000
1995	29015	4650
2000	31000	5100

Pic. 1. Dynamics of sea freight in the second half of the twentieth century.

Northern Sea Route (later – NSR) is anyway considered to be the shortest water traffic artery between European part of Russian Federation and the Far East. According to the specialists’ research, it lets to save the shipping route in comparison with Southern Route through Suez Canal on 3860 marine miles or on 34% [3]. When analyzing the volume of annual cargo turn--‐over for the period 1933--‐2010 we can notice periods of intensive growth and fall (pic. 2).

Pic. 2. The volume of annual shipments along the NSR during the 1933--‐2010 biennium

Such a periodicity is caused by the fact, that NSR – a backbone of the Arctic Traffic Infrastructure (then – ATI) – was sustainable before the year 1991 and cargo turn--‐over (incl. ridership) achieved 4 mln. tones of cargo per year. Transition toward a market economy influenced all the components of NSR. Privatization resulted in friction of the main subjects, implemented in organization of its exploitation. Foremost it concerns to ocean companies, ice--‐ proof fleet and docking facilities. As a result of these crisis developments the volume of carriage through NSR fell by more than one half in comparison with the year 1991. Today ATI is used for less than 50% of capacity, number of icebreakers fell from 16 in the year 1995 to 12 in the year 2000, and cargo shipping of ice reinforcement fell by practically one half.

Nevertheless when analyzing the dynamics of NSR carriage from year 2000, we can see some positive trend (pic. 3).

Pic. 3. URL: ‐politika/sevmorput--‐vektor--‐

Many countries, who are interested in a cheap fright, encourage the idea of usage NSR as a transit artery. According to the words of a director of Department of State Policy for Marine and River Transport Russian Federation K. Palnikov, 631 requests for passing through Arctic routes were sent in the administration of Northern sea route from the 1st of January to the 20th of September 2013. The most part of requests were sent for navigation of small coastwise navigation2. Earlier, assistant director of Atomflot S. Golovinsky noticed, that 2013 enterprise got more requests for carriage through Arctic waters from foreign companies than from Russian [4]. China begins to play an important role in life of Arctic region — Chinese cargo ship was the first ship, which arrived in Rotterdam when using Russian Arctic sea route. Moreover, it was the first Chinese commercial carriage through Northern sea route. It took 35 days to pass the route in 15 000 km. Though the traditional route through Suez Canal and Mediterranean Sea continues for 48 days3.

Consequently objective preconditions for the future growth of transit traffic through NSR are formed. Creation of through transportation corridors for supplying transit cargo traffics with yield of NSR could let to give a full load of work to Atomic main icebreaker fleet of Russian Federation and to get considerable currency earnings. For foreign companies it could mean a substantial reduction of time and charge of carriage between Europe and Asian region.

Predicting the future development of NSR we must judge by necessity of creation of the--‐ year--‐round functioning Northern Transportation Corridor (NTC) – Russian national transarctic marine artery from Murmansk to Petropavlovsk--‐Kamchatsky. Seasonal Arctic transportation corridor has practically no future.

Nevertheless, the common strategy of the future development of Arctic transportation system will be determined by forecasting volume of annual carriage through NSR. Forecast of annual NSR carriage volume is given in table 3 [1].

• Table 3

Forecast of annual NSR carriage volume up to the year 2020.

Year	Analytical forecast (th. tonnes)	Judgmental forecast (th. tonnes)
2012	2237,73	2300
2013	2289,11	2600
2014	2340,49	2800
2015	2391,86	3000
2016	2443,23	3500
2017	2494,62	4000
2018	2546,00	4500
2019	2597,38	5000

Experts’ forecasts, which characterize the rate of gain of carriage through the NSR up to the year 2020, are ambiguous. According to some sources, carriage of private and transit freights can grow tenfold [5]. According to forecast of specialists in Central Institute for scientific research of maritime fleet, an annual output of freight carriage through the NSR could grow up to the year 2020 one hundredfold and will amount up to 65 million tones [6, V.I. Peresipkin].

NSR service market

Despite the evident profit of transit carriage through NSR, there is a number of unsolved problems and one of the main is lack of qualified and accessible marine service market. Following substantial barriers for cropping of business at the service market can explain the situation [7]:

• a)    High operational expenses which include icebreaker support (charges for which foreign ship--‐owners consider to be overestimated), high border administration and custom registration fees, rating up insurance and other extra risks

• b)    High investments, which will be oriented to buying or lease of specialized ice--‐class vessels (in winter — of substantial ice--‐class vessels) and tankers (only double--‐skin).

• c)    Underdevelopment of port infrastructure.

• d)    Opportunity of dumping prices imposition by Suez Canal’s and Panama Canal’s administration.

• e)    Bureaucratic barriers, lack of information.

Organization of commercially viable market of Arctic marine service is possible when removal all these barriers. First for it a port infrastructure must be developed, which will allow to refit ships in a proper way and to arrange the crew--‐exchange. Organization of traditional cargo traffics through the NSR must also be accompanied by continual monitoring of salvage service.

For analyzing dynamics of cargo carriage volumes through the NSR and for making a scen--‐ ery forecast of possible development of service market, we can use elements of mathematical method approach and of self--‐optimizing control. Let’s equate a process of cargo carriage volume dv change during some period of time ( di ):

j\p,x,y')- HO’SO)

where — volume of cargo carriage through NSR, — function, which reflects dependence of carriage through Northern sea route and carriage charge, quantity of cargo, organ--‐ izations, who want to carry the cargo,^(0 — function, which characterize probability of emer--‐ gency event.

When investigating the forming of Arctic service market through the forming of corresponding enterprise we can see that as each enterprise it will possess factors of production (resources, human labor), which must intercommunicate [8]. To render services (in this case repairing service and technical assistance) with limited factors of production utility function must be maximized, by given resource level, which is expressed in quantitative characteristics of cargo carriage through NSR (^).

, depends on the cargo carriage through NSR volume (^)) and probability of emergency event (^(0 ), that is

^(ИОЛСО). It is also worth mentioning that not all the ships, which pass through NSR, experience emergency situations⁴. We can take this fact into account when including a terminal summandа Ф(Г), whereа — some coefficient, which characterizes cost of repairs in a terminal time, that is when ships reach point of destination. As a time interval ( I ) we use interval, in terms of which carriage is being carried out (cabotage or international transportation). Currently cargo carriage is carried out only in “open water”, which contains 4--‐5 months as usual. Nevertheless, many experts are of the opinion that for carriage volume gain globally it is important to overview the year--‐round functioning of NSR (that is У =365 days, or Т = 2пл, nEZ ).

Consequently, objective functional or utility value functional is as follows:

jF(v(t),5(t))dl + а • Ф(Т) — sup

When choosing as a control parameter one of the considered factors, which influence the dynamics of the cargo carriage volume, for example, cargo charge, we will get the matter of the optimal process control of Arctic service forming. Evidently, cargo charge must be regulated at the national level and must not go over the fixed limit (^Х), that is О 5 Р^ S Р^ , by .

Analyzing the statistic data and using methods of statistically distributed data manipulation, and also theory of inverse problems we can get model parameters (1) and view of functional interrelation for objective functional (2), functions fW)^ , , и .

When using the theory of optimal management and methods of tabular integration we can get an approximate answer of the optimal management:

jF(v(t),5(t))dl + а • Ф(Т) — sup

^ = )Vx,y)- v(OI(O а»

v(0) = v0 > О

О 5 р(О 5 Р_пмх

Variability of the main parameters of the model lets to get a number of decisions, which we can introduce in the way of scenery forecast

Conclusion

It is difficult to make forecasts of carriage through the NSR volumes, but we can surely confirm the increasing interest to this component of Arctic transport system on the part of companies, who consider the possibility of usage of NSR for transit traffic. They focus on following advantages: 1) fuel savings; 2) sailing duration reduction, respectively — cost savings on job compensation and charter of ships’ reimbursement; 3) non--‐payment for canal dues (as through Suez Canal), but involving icebreaking dues; 4) no--‐queue state (as with Suez Canal); 5) lack of pirates’ aggression risks.