Aleksadr Krutikov: Arctic development to continue as planned with inevitable adjustments

In the beginning of 2020, Russia started enactment of fundamental laws on development of the Arctic zone. What changes are expected? How will the coronavirus and oil crisis affect the Artic development? Aleksandr Krutikov, Deputy Minister for the Development of the Russian Far East and Arctic, covers these issues in his interview with IAA PortNews.    

- Mr Krutikov, the State Duma approved the bill on privileges for those investing in the Arctic. What outcomes do you expect in respect of transport and infrastructure projects development?

- In the current situation, we can only make general forecast. First of all, there is a package of bills yet to be passed. Only one bill has been signed into law so far. It foresees privileges for large-scale projects on production and processing of hydrocarbons. Three more bills of the package have been approved in the first reading. However, in view of current changes in operation of the parliament, the documents will be finally approval later than we expected. The newly signed law provides for support of three major activities: offshore production, production of liquefied natural gas (LNG) and gas-to-chemicals segment as well as development of large oil fields in the East Arctic including Talimyr. The impact of all the above-mentioned segments on the transport infrastructure is essential. It is sufficient to analyze the process on the Yamal peninsula with the development of the Yamal LNG and Arctic LNG 2 projects. Other points and directions will develop with the establishment and expansion of production. The experience of countries with highly developed offshore industry shows that more active developments on the shelf will require construction of shore infrastructure facilities, first of all, so called offshore development bases.

The state makes considerable investments into infrastructure of Arctic seaports, dredging projects and construction of hydraulic engineering structures. I would like to mention two Murmansk projects: Novatek’s center for construction of large offshore structures and coal terminal “Lavna”. We include both projects in the Arctic’s only Priority Development Area (PDA) in Murmansk. Then they can be provided with tax and non-tax privileges.

As for draft laws under consideration at the parliament, they actually provide support to projects directly relating to transport infrastructure and logistics. Both tax and non-tax privileges are foreseen. New projects can be exempt from profit tax for a long period of time. The Government is currently developing a mechanism to subsidize insurance premium of 7.6%. Besides, the law will let create free customs zones within the investors’ territories and in ports, that is especially important for the development of ship repair and any activity focused on exports. Provisions are made for round-the-clock operation of checkpoints and introduction of a single window.  Customs clearance in Vladivostok reduced by a half after such measures were undertaken in 2016.

It should be noted that two weeks ago the Government adopted a regulation specifying the conditions of infrastructure support projects in the Arctic. To be eligible for a 20 percent tax subsidy, a project must attract at least 300 million rubles of private investments in infrastructure. We see investors’ interest and hope these mechanisms will facilitate launching of the projects.

- Could you please tell about the transport aspect of the plans on oil fields development in the East Arctic.

- A new oil province is being created for the first time there.  While the development of West Arctic began in the soviet period, everything is to be built from scratch here including roads, pipeline transport, port facilities and aviation infrastructure. Investments of several trillions of rubles are required. The new law gives an impetus to publicly financed construction of such infrastructure. Investors implementing projects within this area will enjoy severance tax deductions corresponding to investments in infrastructure facilities including transport infrastructure.

- What is the total scope of investment in the Arctic projects expected?

- The total amount of investments in large-scale hydrocarbon projects alone is to make about RUB 15 trillion.

- How much has it been affected oil crisis?

- In today’s situation, it is obviously a problem to launch production projects due to their dependence on oil prices. At the same time, we should remember that the recent two decades have seen oil price fluctuations between $10 and $140 per barrel. Even short-term forecasts are pointless today. We expect the situation in the market of hydrocarbons to start stabilizing when the global fight against COVID-19 is over and conditions for implementation of projects will become favorable with the rise of oil price.

-  As we know, the Ministry is looking into raising funds for the Arctic projects through the issue of green bonds. Could you please elaborate on a possibility of that mechanism?

-  It is too early to speak about that. Unfortunately, our nonbank financing is poorly developed both in the Arctic and in the whole country. There is a shortage of competence and cautiousness of investors. There were cases of using bonds in large-scale concession projects but very few.  We did hold several discussions with VEB representatives who suggested working out of instruments as part of a system of privileges for the Arctic. Such instruments are supposed to make nonbank financing mechanisms including bonds more attractive for investors. We are considering that but we are far from making any decisions. By the way, no additional legislative measures are require for launching of such mechanisms – everything can be regulated by governmental decrees.

- What is your opinion about the prospects of the Belkomur project, construction of a deep-water port in Arkhangelsk, a port in Liinakhamary and a port hub in Petropavlovsk-Kamchatsky?

- Each of these projects has its limiting factors. Let’s take the Belkomur project and a deep-water port in Arkhangelsk which are interconnected. The key problem of both projects is the absence of confirmed cargo base. We had several discussions of the railway project with the region and we expressed our readiness to support it provided that we see a clear cargo base and customers ready to invest. So far, there is nothing of that with the same about the deep-water port.

The situation with the port of Liinakhamary is similar to that of Petropavlovsk-Kamchatsky. The Kola peninsula and Kamchatka are considered as possible hubs for functioning of an international container line on the Northern Sea Route. We have recently discussed the prospects of this project with our Rosatom colleagues. They analyzed over 30 sites along the route of the northern transport corridor. The shortlist now numbers 6 or 7 sites including the above-mentioned ports. A thorough economic analysis is needed as well as a simulation model allowing for defining of points reasonable for construction of hubs so that the northern route could compete with the southern one. Preliminary estimation results will be ready by the end of the year as well as the decision on the hubs. Apart from Liinakhamary and Petropavlovsk-Kamchatsky, the ports of Murmansk, Sakhalin and the Primorsky Territory are under consideration. We will analyze all the alternatives.

To a great extent, the results of estimations depend on dredging required. That means heavy expenses. There will be a competition between the regions and we’ll see which of them are actively involved. The situation will clarify by the end of the year. Perhaps, the number will be shortlisted to two or three locations.

- What regulatory changes are required additionally, in your opinion, for state tasks to be executed in the Arctic?

- Regulatory framework for the Arctic zone development has just begun shaping. The first law and the first government decision have been adopted. With the launching of the mechanism, new directions will be revealed and related by-laws will be developed and adopted to start producing effect for the economic development. Over the recent six years, the Ministry initiated some 47 federal laws and over 200 by-las for the Far East. All of them were enacted gradually while immersing into social and economic processes in the territories. As of today, our priority mission is to finalize the package of bills on support of business activities. The agenda includes certain economic sectors in the Arctic that require regulatory changes: tourism and aquiculture. Development of some solutions is underway.  In-depth analysis of the social situation conducted in the end of the last year revealed the need to amend principles of financing. The key task now is to approve the basic package of laws and carry it into effect.

- Do you see the prospects for the development of cruise tourism in the Arctic? What is needed for that?

- Two weeks ago, together with representatives of nine Arctic regions we completed the work on identification of priorities in development of tourism and defining priorities among tourism projects. The discussion involving our colleagues from Rosturism (Russian Federal Agency for Tourism – Ed.) showed that we have a common perspective on the strategy of tourism development in the Arctic zone and that regulatory changes are required for launching of some projects, especially those in the sphere of cruise tourism. The newly made decisions are evidently not sufficient for the development of cruise tourism. One of the limiting factors is the administrative one. The barriers should be lifted, first of all, for providing permits to ships entering certain points of the Arctic zone. It is necessary to change rules for approving the list of tourists visiting border areas and areas with restrictions for foreigners and to amend regulations for multiple crossing of borders by seagoing ships. The scope of required changes is essential.

Fortunately, the level of these documents is below federal, governmental and ministerial levels would suffice. We are currently working to this end with our colleagues from Rosturism and interacting with all companies operating in the Arctic zone.

In 2020, we set ourselves a task to make and enact all decisions required in respect of cruise tourisms. Besides, we have developed special measures to support investment projects in the field of tourism infrastructure which is not satisfactory today. The document is under consideration at the parliament.

- How big is the tourist flow foreseen by the plans on development of cruise tourism in the region?

- Rigorous calculations are unessential for making decisions in cruise tourism sector. Today, the figures are very low. For example, Frantz Josef Land is visited by some 1,300 tourists per year. As a comparison, tourist flow to Alaska is about one million people. We do not aspire to boost our cruise market to a million since it would mean an excessive anthropogenic impact on the environment. However, we believe that the growth to 10,000 tourists in the foreseeable future can be achieved. We see the readiness of foreign cruise companies, especially those working with the Spitzbergen, to extend their routes to Russia’s Arctic seas. Yet, lifting of barriers I have mentioned is needed for that purpose.  

- What prospects do you see in development of transport links between the Arctic zone and other regions of the country? How possible is it for Sabetta to become a multipurpose transport port?

- Obviously, it is strategically essential to develop transport routes allowing for transportation of products northwards with their further transportation by the Northern Sea Route to Asia, if economically reasonable. However, there are few project so far. Intense development of the NSR began several years ago. A decade back nobody could expect it to be so rapid: the result of 2019 is 31.5 million tonnes.

The regions have just started looking into its capabilities. Among the well known initiatives is the project of the Omsk Region on shipment of grain by river transport and then by the Northern Sea Route. So far, the only real project backed by a decision is the Northern Latitudinal Railway (NLR). Its implementation has begun. No decision has been made yet on NLR-2 with shipments from Sabetta. There are many aspects here related to ownership of the new infrastructure and ability of Sabetta to handle other types of cargo in view of boosting LNG shipments and certain restrictions.  The port certainly has a transport potential but not in the nearest term. Most likely, it is a prospect of ten years.

Admittedly, the Northern Sea Route is not competitive today. There are many infrastructure challenges that need to be addressed. There is no infrastructure required for safe shipping, communication and navigation. Much is to be done yet. However, the northern route will attract more and more attention of the regions as the tasks are solved gradually.

- What is your outlook on river shipping in the context of Arctic projects?

- Under the strategy for the Arctic zone development we make a separate focus on the development of river shipping. In my opinion, the potential of rivers is underestimated while they represent natural transport ways and there are many of them with some regions, like Yakutia, hardly having other alternatives. Quite possibly, that rivers can be a more economically efficient solution for cargo delivery to the Arctic seas as compared with other thoroughfares. Therefore, we designate river shipping development, dredging and construction of infrastructure as a separate task. Nobody actually paid attention to rivers and the economic estimates should be revised.

- When will the river strategy be ready?  

- The comprehensive plan for upgrading and expanding core infrastructure in the Arctic foresees the increase of river throughput capacity but no specific solutions have been found yet. For a half of a year we will watch our colleagues from the Ministry of Transport being engaged in the issue and if we are not satisfied with the work rate we will opt for other approaches. It is important that river shipping development plans should be reflected by the Strategy for the Development of Russia’s Arctic Zone till 2035 the work on which is nearing completion. It is to be issued and approved in a couple of months.  

- How has the oil crises and the COVID-19 pandemic affected the general implementation of the Arctic programme?

- There is no impact so far. The situation has not affected the financing. Actually, we do not rule out certain implications in the future. We should understand that state measures aimed to prevent the coronavirus and related changes in the market of hydrocarbons will anyway touch the Arctic development measures. Our key efforts today are focused on detecting risks that can appear in the Arctic zone, primarily social and economic ones. The Ministry is developing a separate package of measures to support the regions and the business. Of course, that distracts our resources from elaboration of the strategy.

One should understand that the Arctic zone development is an ambitious and long-term project. We set ourselves tasks for the nearest 15 years.  I believe that present problems are temporary. The goals remain constant. We are set to proceed while adjusting our plans according to the situation development.

Interviewed by Yevgeny Pankratyev