The Economic Impact of open Arctic Routes on Global Maritime LNG Trade

As the Arctic ice level retreat due to global warming, (trans)arctic sailing routes become economically more viable. Several recent estimates predict the fist ice-free summers in 2030-2040. Shipping on the Northern Sea Route can reduce sailing distance by 40% for European-Asian trade and even more when shipping directly across the North Pole becomes feasible. The Arctic routes are particularly interesting for LNG shipping due to the high sensitivity of this form of transport to time. While many studies have investigated the economic viability of the Arctic routes, research on the economic impacts is barely undertaken. This thesis investigates the economic impact of increasing navigability of Arctic shipping routes on global maritime LNG trade. Through the Global Simulation Model (GSIM), the effects on trade values, directions, prices, route use and welfare effects have been analysed. This research uses four feasible scenarios. These four navigability scenarios are combined with two main scenarios, climatological and aggregated, giving a total of eight analyses. The main scenarios are used to evaluate the impact of supply and demand locations on the impact of more open Arctic shipping routes. The climatological scenario takes only into account current import and production capacity, thereby isolating the effect of higher navigability. The aggregated scenario takes into account expected new locations and capacity of supply and demand among which are a strong increase in Australian production, production in the Kara region (Russian Arctic) and the shift of the US from importer to exporter of gas. We find that locations of supply and demand are of critical impact on the use of the Arctic routes. At current locations, i.e. the climatological scenario, only Norway as exporter and Japan, China/Taiwan and South Korea as importers slightly benefit in terms of welfare. Only for Norway, due to its small market share, this is a significant effect while impacts on other actors and global trade in general is negligible. Taking into account future projects, a larger role of the Arctic routes can be expected. The NWP, with a total traded value of $1.64 billion (0.47% of global LNG trade), will only be used for Northeast America to Asia trades. The NSR will be used more extensively for multiple importers and exporters (approx. $4.36b and 1.32% of total traded value). Regions that directly benefit are Norway, Russia Kara region and Northeast America as exporters and Japan, China/Taiwan and South Korea as importers. This at the expense of surplus for exporting regions Australia, Arabian Peninsula and the Malay Archipelago, which are exposed to more competition. European markets have to cope with higher consumer prices because a part of supply moves to Asia. Interestingly, some non-Arctic exporters, of which Algeria significantly, enjoy higher producer prices and surpluses as a result. Overall a very small (-0.04%) decrease in total traded value is observed. It is counterintuitive that when trade becomes less restricted, traded value decreases but it is explained by a stronger net effect on prices than on quantities. This is supported by the fact that the net producer surplus effect is negative. The opening of the Arctic routes has a slightly negative impact on Suez and Panama Canal transits.