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Rosneft strikes again in the Arctic

The Russian oil firm has added more reserves to its ambitious Vostok Oil project

Rosneft chalked up another oil discovery in the Russian Arctic in late July, adding volumes to a megaproject it hopes could produce up to 2.3mn bl/d of oil within a decade. It found over 20mn t (147mn bl) of crude after drilling at the border between Russia’s Yamalo-Nenets and Krasnoyarsk regions. The field, named Novoogennoye, also holds some 1bn m³ of gas.

The state-controlled producer is searching the northernmost reaches of Russia’s prolific Western Siberian basin to further build the resource base underpinning the Vostok Oil project. It already comprises fields with some 5bn t (37bn bl) of crude, according to Rosneft, although it is unclear how much of this volume is recoverable.

Big plans

Vostok Oil could yield up to 25mn t/yr (500,000bl/d) of oil by 2024, rising to 1mn bl/d by 2027 and 2.3mn bl/d by 2030, Rosneft estimates. If achieved, the development would contribute c.20pc of Russia’s projected overall output at the end of the decade.

The project unites Rosneft’s Vankor oilfields with additional deposits further north. Its main focus will be the 8.8bn bl Paiyakhskoye field on the Taymyr Peninsula, first identified in the Soviet era. But the latter is not owned by Rosneft, rather by a little-known private firm called Neftegazholding, belonging to a former Rosneft president called Eduard Khudainatov. The two firms are yet to specify how any partnership will work.

“Vostok Oil is feasible in the sense that, at some point, they are going to have to do it if they want to maintain overall Russian production” Smith, BCS GM

At Vankor, Rosneft is partnered with Indian companies—which may be able to provide both capital and a market for the project’s oil—while some of the other Vostok Oil assets are operated by its joint venture with BP.

Rosneft CEO Igor Sechin told Russian president Vladimir Putin in February that Vostok Oil investment could exceed RUB10tn ($140bn)—likely referring to total capex over the project’s lifespan. Its infrastructure will include a new seaport, thousands of kilometres of pipelines and c.2,000MW of power generation capacity.

Although ambitious, Russia will inevitably have to take on such developments to maintain production levels in the longer-term. Western Siberia’s anchor fields are now in decline, prompting producers to push further north.

“Vostok Oil is feasible in the sense that, at some point, they are going to have to do it if they want to maintain overall Russian production,” says Ronald Smith, an analyst at Moscow-based investment bank BCS GM. “And if oil is reasonably priced–call it $50-60/bl–there is no reason it could not work.”

Geological complexity, something on which Rosneft has not commented, will be a key factor. But, generally, Western Siberian fields have very attractive geological characteristics, including high porosity and high permeability.

State aid

Government support, though, will also be vital. “You need the tax breaks because the tax regime is so heavy. The government takes 90-95pc of the economic rent out of every barrel that comes out of the ground,” says Smith.

2.3mn bl/d – Vostok oil output by 2030

Tax breaks are exactly what Rosneft looks set to receive. It reached an agreement in principle with the finance ministry last year on switching Vostok Oil to Russia’s new excess profit tax (EPT) regime, currently under trial. EPT largely substitutes mineral extraction tax and is favoured by producers, partly because it enables them to deduct historic losses from their tax base.

In its plea for lower tax, Rosneft says Vostok Oil will export its crude via tankers—helping develop Putin pet project turned national priority the Northern Sea Route. But this does not ring true for the Vankor fields, which are already connected to Russia’s oil pipeline system. In Smith’s view, Rosneft likely brought these fields into the project to widen the tax break scope, improving the economics for the project’s more northern greenfield developments.

LNG ambitions

The Vostok Oil deposits also contain considerable amounts of gas, which Rosneft may opt to link to the national gas system via new pipelines. But depending on gas reserves, it may look again at an LNG export scheme.

The firm has long aspired to join domestic rivals Gazprom and Novatek on the global LNG stage, but its ambitions remain unfulfilled. The 4.3mn t/yr Pechora LNG scheme in Russia’s northern Nenets region was abandoned two years ago after Rosneft concluded that its regional resource base was insufficient.

A proposed Far Eastern liquefaction plant with ExxonMobil and its other Sakhalin-1 partner remains under lengthy discussion. But any move towards FID is unlikely while LNG market conditions are poor.

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