Related Articles
Forward article link
Share PDF with colleagues

Russia seeks to revive offshore Arctic ambitions

New oil finds and melting ice are helping to reignite interest in the region

The cost and complexity of offshore drilling in the Russian Arctic have proved a headache for oil companies over the years. But with Gazprom keen to revive the giant Shtokman project and the Kremlin offering generous tax breaks, it may be time for another look.

Western sanctions on Russia and low energy prices have been a hindrance to activity, but the main problem has been that most of the deposits in the region are gas, rather than more profitable oil. The abandonment of the Shtokman gas project back in 2012 showed that even the collective clout of Gazprom, Statoil and Total couldn't make the region viable at that time.

But now things could be changing, especially in light of fresh oil discoveries in the region, which Rosneft now suggests could account for up to 30% of Russian oil production by 2050.

"The Russian government believes that a combination of tax incentives, ample oil resources and clearing up the Northern Sea Route could lure back investors," said Alek Fak, senior oil and gas analyst at Sberbank CIB in Moscow.

Both Gazprom and Rosneft, Russia's domestic energy champions—and the only companies permitted to explore in the region—seem motivated to give it another shot. In a recent strategy document on Arctic shelf development until 2040, Gazprom indicated that the Shtokman gas project could be revived and come into production by 2028. The company's new development program also includes the far eastern Yuzhno-Kirinskoye fields, which are to be developed by 2023, and the Leningradskoye in the Kara Sea, which is to be ready by 2034.

Shtokman is located to the west of archipelago Novaya Zemly, about 550km north of the Kola Peninsula. It holds an estimated 4 trillion cubic meters of gas and has been called the "mother of all fields". Despite the collapse of the previous joint venture, both Total and Statoil have hinted that they could be interested if circumstances permitted.

Meanwhile, Rosneft said in October that extractable oil reserves in its newly-discovered Khatanga offshore oil block in the eastern Arctic stood at 81m tonnes (636.9m barrels). The firm owns 28 blocks in the Arctic offshore area with combined estimated resources of 34bn tonnes of oil equivalent. The state-controlled company's chief executive Igor Sechin said foreign partners could yet join Rosneft in exploring the deposits targeted by Khatanga's Tsentralno well.

Rosneft is expected to shift its exploratory work to the Barents Sea in 2018 and the Kara Sea in 2019. The latter project was initially planned in conjunction with ExxonMobil, but Rosneft insists that, despite the sanctions that forced the US company out, it is proceeding as planned.

Combatting sanctions

US sanctions prevent Western companies from participating in the exploration and development of deepwater projects in the Russian Arctic—classified as being those over 500 feet (152 metres) deep—and shale oil deposits. However, the Kremlin is offering low taxes to incentivise development in the region. Operators are being offered a 5-15% base mineral extraction tax and zero export duties, among other incentives.

Arctic offshore oil production this year is projected at about 4.5m tonnes, just 16% of Russia's total production, according to Sberbank CIB. This all comes from two fields: Gazprom Neft's Prirazlomnoye and Novatek's Yurkharov. Prirazlomnoye was initially expected to produce up to 7m t/y, but this estimate has since been scaled back to less than 5m tonnes.

Russia's offshore gas production is much more significant and ranges from 50bn-60bn cm/y, or about 8-10% of Russia's total gas output. Most of that comes from Novatek's Yurkharov gas and condensate field and the Sakhalin-1 project.

"There was a time when the high gas content of offshore reserves was seen as a positive," said Sberbank CIB's Fak. "This was back when it was thought that this gas was going to be the main source of Russia's future LNG exports."

A collapse in gas prices since 2012 has changed that view, but Fak said offshore reserves from the Arctic still had potential due to the Kremlin's tax incentives and the warming effect of climate change on the region. He also suggested that punishment for environmental mishaps was "likely more lax" than in other countries.

Russia, the US, Canada, Denmark and Norway have been trying to assert jurisdiction over parts of the Arctic as polar ice cap shrinkage creates new exploration opportunities. But Russia has been the most strident in advancing its national interests.

In March 2017, Vladimir Putin underscored his commitment to the region's rich natural resources by travelling to the Franz Josef Land archipelago, a sprawling collection of islands where the military has recently built a new runway and a new base. During a shipbuilding conference in November, the president also put forward a proposal to ban non-Russian vessels on the Northern Sea Route across the Arctic.

Also in this section
Rosneft strikes again in the Arctic
13 August 2020
The Russian oil firm has added more reserves to its ambitious Vostok Oil project
Latest licensing rounds
13 August 2020
The industry's most comprehensive list of current and recent rounds for onshore and offshore licences
Inaugural Somali regulator plots confident course
11 August 2020
Newly appointed Somali Petroleum Authority chairman and CEO Ibrahim Ali Hussein speaks to Petroleum Economist about his hopes for the Somali oil and gas industry