FEATURE | Addressing the challenges in Russia’s maritime infrastructure sector

Port of Ust-Liga (Photo: MarineTraffic.com/Anton A. Karakulin)
Port of Ust-Liga (Photo: MarineTraffic.com/Anton A. Karakulin)

The list of phantom projects in Russian ports has not changed a lot over the year although some projects have been restructured and given a second wind. Dramatic changes in global logistics affected the plans of those investing in port infrastructure of Russia.

Ust-Luga hit the gas

Baltic LNG, which used to be on the list of phantom projects, is now replaced with a more ambitious one: gas and chemical cluster in the port of Ust-Luga and within a special economic zone of industrial type. Investors in the cluster are Gazprom and RusGazDobycha (Baltic Chemical Complex and Gas Processing Complex). The construction works will be performed by a Chinese company.

The cluster aims to produce 13 million tonnes of LNG and up to 2.4 million tonnes of LPG per year, as well as other gas products that will be used by the Baltic Chemical Complex for production of polyethylene. BCC foresees the construction of a polyethylene production facility with annual production capacity of three million tonnes. Investments into the project in 2022-2031 are to exceed RUB2.2 trillion (US$30 billion).

In our opinion, this project is more viable compared with the previous one focused only on natural gas liquefaction. Gas-to-chemicals is a new promising segment of industry with a good added value, while staking on gas alone was risky amid the volatility of global commodity markets and implementation of large-scale gas projects in the Arctic. Besides, the project will lay the foundation for the development of industrial zones near ports (a project of that type is planned for implementation in Taman) focused on processing of raw materials. That will lead to the diversification of the export cargo base having expanded it with products of higher added value, which is expected to ensure a synergetic effect on the entire chain from production to supply. Hopefully, the project is not going to become a new phantom existing only on paper.

Obsky: from LNG to gas chemical complex

A similar situation exists with the earlier announced LNG project known as Obsky LNG, which was converted into a gas chemical complex (Obsky GCC). According to the latest data, the project is to be implemented by 2027. Obsky GCC is expected to produce 2.2 million tonnes of ammonia and 130,000 tonnes of hydrogen per year. However, it seems that no final investment decision has yet been made under the project.

Meanwhile, Novatek and RWE Supply and Trading have signed a memorandum of understanding (MOU) to mutually cooperate in the field of LNG supply and decarbonisation. The MOU envisages the supply by Novatek to RWE of low-carbon ammonia and hydrogen to be produced at the company's planned project Obsky GCC. Besides, Novatek and Uniper have signed a term sheet on long-term supply of up to 1.2 millionn tons of low-carbon ammonia per annum primarily to the German market. The product price will be indexed to relevant European and global benchmarks. Thus, Obsky GCC will help Russia in transition to zero-carbon types of fuel.

Is the Murmansk Transportation Hub still obscure?

The comprehensive development of Murmansk Transportation Hub is a well-known never-ending construction project. The concession agreement approved in October 2018 foresees the construction of a coal terminal, development of the existing railway infrastructure on the eastern coast of the Kola Bay, and construction of new railway infrastructure on the western coast of the bay. A deep-water berth of 660 metres in length will be able to accommodate two large bulk carriers with deadweights of 20,000 to 150,000 tonnes each.

Investments into the MTH project exceed RUB130 billion (US$1.74 billion) with investments into the Lavna project estimated at RUB34 billion (US$460 million).

According to the Murmansk Region Government, half of the works planned under the project have been completed as of November 2021 with the Lavna port construction proceeding according to the schedule.

However, the global demand for coal and the global logistics market have changed a lot since 2018. Container transportation looks more promising now due to a surge of freight rates on the conventional Asia-Europe routes. In particular, transit of containers across Russia has boosted. DP World and Rosatom are going to join hands in the organisation of a container line along the Northern Sea Route. In view of this, MTH is now to include a container terminal.

As Yevgeny Ditrikh, General Director of State Transport Leasing Company, said during his trip in the Murmansk Region, the master plan for the project has been completed.

"When fully operational, this terminal could ensure some 3.5 million TEUs of annual turnover, said Mr Ditrikh. "We are currently discussing the project economy with all the stakeholders. It will allow the Murmansk Region and the entire country to develop the economy and implement the strategic tasks including the Northern Sea Route."

In our opinion, the figure of 3.5 million TEUs of transit cargo looks exaggerated: total container throughput of all Russian ports is forecast by the analytical agency Infranews to reach 5.7 million TEUs in 2021 and about six million TEUs next year.

Pionersky: bad example

The unfortunate passenger terminal in the town of Pionersky of the Kaliningrad Region, which had been planned to be completed by the 2018 World Cup, finally obtained a new contractor for continuation of construction works. The tender with the maximum contract price of almost RUB5.6 billion (US$75 million) was announced and a contract was signed with Marine Rescue Service which, in its turn, signed a contract for dredging works with Hysdrostroy. The contract worth RUB170.12 million (US$2.28 million) is to be implemented by April 1, 2022.

The project is expected to annually ensure up to 110 calls of cruise ships with at least 225,000 cruise passengers and 312 calls of ferries able to carry 80,000 passengers and 80,000 Ro-Ro units. It is a question now if the project can be completed by the end of the pandemic period which drastically affected the flow of tourists? If the fortune finally smiles upon the project and the end of the pandemic coincides with the project completion the put-up demand can draw quite a lot of tourists, at least at the beginning. Anyway, such an attractive place as the Kaliningrad Region certainly needs a decent infrastructure for welcoming tourists arriving by sea.

Relocate or leave where it is

One of the most debatable issues, the relocation of the Great Port of Saint Petersburg, has been under discussion for decades already. A new impulse has been given to it this year with President of Transmashholding (TMH) Andrey Bokarev having addressed a letter to President Vladimir Putin with a suggestion to relocate the Great Port of Saint Petersburg facilities beyond the central part of the city. According to Andrey Bokarev, the most reasonable solution is to move the facilities to the port of Ust-Luga.

In December, Maksim Sokolov, Vice-Governor of Saint-Petersburg, said that relocation of the Great Port of Saint Petersburg was not foreseen by any strategic planning document of Russia while shipyards located there would hinder implementation of urban development projects in the area.

"Apart from port facilities and terminals, the Great Port of Saint-Petersburg area is occupied by large shipbuilding plants with defense orders for a decade," said Mr Sokolov. "Therefore, relocation of the terminals alone does not mean a real change of the territory to let developers implement their projects."

Most experts also express their doubts about the prospects of this initiative. Shifting of port facilities beyond the city will mean the loss of thousands of jobs since the port's operation is based on many companies' activities, the personnel of which will hardly prefer leaving of Saint-Petersburg for Ust-Luga. We can discuss only partial relocation of port facilities, mainly to the area of Bronka-Lomonosov which is close to the city, rather than to Ust-Luga.

"In any case, there should be a port in the city," said Andrey Karpov, Director of the analytical centre Dorn. "However, the cargo mix should be changed with the focus on cargo consumed and generated by the city economy and citizens as well as transit cargo, which is systemically important for the city economy and raising its competitiveness (it mostly container, Ro-Ro and refrigerated cargo). Handling of such cargoes should not be interrupted or reduced due to redevelopment activities".

Moreover, the city is interested in building up those cargo flows (including transit ones), which requires the reserve of throughput capacity. The share of containers in the total cargo throughput of the port makes up 44 per cent while the target of the upgraded port should be at least 70 to 75 per cent, Mr Karpov believes.

Heading for Indiga

Yet another project implementation that was considered by various investors is a terminal in the settlement of Indiga (Nenets Autonomous District). The plans to build a port in this area were announced by AEON Corporation of Roman Trotsenko. The area of Cape Rumyanichny was selected as the construction site. Designing works commenced in the beginning of 2021. The corporation is going to begin construction in 2023 and to put the port into operation in 2028.

The port will have capacity for up to 80 million tonnes a year. It is intended for handling of oil, LNG, coking coal, wood, fertilisers, chemical products, and paper. Japan is to be the main consumer. Investments into the ports are estimated at over RUB300 billion (US$4.03 billion).

The project development will be only possible with the construction of the Barentskomur railway. According to the railway transport development strategy, it is to be built by 2030. In this case, the port's potential cargo base can be as high as 120 million tonnes per year taking into consideration crude oil from the fields located along the route. Given the rates of railway infrastructure development in Russia it is too optimistic to expect Barentskomur by 2030.

Chaika flying by

One more paper project is the coal terminal Chaika on the Taimyr peninsula. The current project investor is AEON Corporation, the investor of Indiga. When speaking at the Neva-2021 exhibition, Aleksandr Bengert, General Director of FSUE Hydrographic Company, said the project could be implemented by 2025.

"We are taking part in the development of a declaration of intent to invest and there are all the prerequisites for the project implementation by 2024-2025 if the investor's plans do no change," said Mr Bengert.

The project was launched in October 2016. Initially, it was planned that the first turn with a capacity of 2.5 to 3.5 million tonnes of coal would be put into operation in 2017, five to seven million tonnes in 2018, and over 10 million tonnes in 2019. Total investments into the terminal were estimated at RUB5 billion (US$67 million) at that time. VostokCoal and Arctic Mining Company were known as initial investors. In reality, only a temporary berth with two mooring palls has been built.

In general

This year, port infrastructure investors have faced challenges associated with the crisis caused by the coronavirus and unpredictable changes of logistic chains. In such conditions, it became hard indeed to embark on new long-term projects requiring enormous investments. We expect investors engaged in suspended projects to take a wait-and-see approach.

Meanwhile, a trend towards updating the projects to blend in with the new normal is especially evident in the Baltic LNG and the Obsky LNG projects. However, the gap between the railway infrastructure and the port infrastructure capacity has become dramatic so that even the launched projects hardly reach a break-even point. So the number and the variety of these "phantoms" is rising.

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