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Lecturer, Department of Legal Regulation of Fuel and Energy at the International Institute of Energy Policy and Diplomacy, MGIMO University, RIAC Expert
The continental shelf plays an important role in sustaining global oil and gas production. Over the past ten years, more than two-thirds of the world’s hydrocarbon reserves have been discovered on the continental shelf. All the Arctic states have passed legislation securing the strategic importance of the area, primarily in terms of hydrocarbon reserves. That being said, the Arctic states have barely even begun to explore and develop these resources. Shifting international tensions to the Arctic, and refusing to lift the sanctions, may force the Russian Federation to look at attracting other states to cooperate in the region, primarily those from Asia.
Developing Offshore Oil and Gas Resources in the Russian Arctic Shelf: Now and Tomorrow
The Soviet Union started actively developing its Arctic shelf in the early 1980s. The most promising areas of the Arctic shelf were in the Pechora and Kara seas, which are aquatic extensions of the Timan-Pechora and Western Siberian oil and gas provinces.
Determined to develop oil fields at home and abroad, the Soviet Union commissioned a number of drilling vessels. Investments in the creation of a drilling fleet from 1983 to 1992 in the Barents, Pechora and Kara seas led to the discovery of 10 large deposits.
In the period following the collapse of the Soviet Union, from 1991 to 1998, Russia’s drilling fleet operated almost exclusively on the shelf of Western Europe, Asia, Africa and South America.
The termination of geological exploration work in the Arctic after 1991, coupled with the loss of the Arctic drilling fleet, mean that the Russian Arctic shelf remains largely unexplored: only 20 per cent of the Barents Sea and 15 per cent of the Kara Sea have been explored, while the East Siberian, Laptev and Chukchi seas have not been explored at all.
A total of 25 deposits have been discovered on the Russian continental shelf, all of which are located in the Barents and Kara seas (including the Gulf of Ob and the Taz Estuary). Recoverable commercial reserves in the deposits amount to over 430 million tonnes of oil and 8.5 trillion cubic metres of natural gas.
As a result of amendments made in 2008 to Federal Law No. 2395-1 “On Mineral Wealth” dated February 21, 1992, which placed a cap on the number of companies that can be issued licenses to carry out subsoil work on the continental shelf of the Russian Federation, only Rosneft and Gazprom are currently allowed to develop the area.
The first and thus far only oil and gas project to be carried out on the Russian Arctic shelf is the development of the Prirazlomnoye field, which was discovered in the Pechora Sea in 1989. The field has estimated reserves of 72 million tonnes of oil. Gazprom Neft Shelf holds the license for its development. In August 2011, the Prirazlomnaya offshore ice-resistant stationary platform was delivered to the oil field. It has a design capacity of 6.5 million tonnes per year. Industrial development of the field commenced in December 2013. In 2014, the platform delivered 300,000 tonnes of oil (around 2.2 million barrels) to the Port of Rotterdam. The oil produced at the deposit is called ARCO (Arctic Oil). The company plans to double its production and shipment of oil in 2015. The area where the oil field is located is noted for its complex natural and climatic conditions – ice persists for seven months of the year, ice hummocks can be up to two metres in height, and the air temperature can drop to below −45°С.
Gazprom continues preparations for rolling out another project in the Pechora Sea, namely, the Dolginskoye oil field. Four exploratory wells have already been drilled. Recoverable reserves are estimated to be in excess of 200 million tonnes of oil equivalent (1.7 billion barrels) . Gazprom wants to attract Vietnamese company PetroVietnam to the project. Production is expected to start in 2020, with peak levels of 4.8 million tonnes of oil per year to be achieved by 2026.
As relevant as ever is the Shtokman field, which was discovered in 1988 and is located in the central part of the Barents Sea, 550 kilometres northwest of Murmansk. The sea depth around the oil field is between 320 and 340 metres. It boasts reserves of 3.9 trillion cubic metres of gas and 56.1 million tonnes of gas condensate.
In total, Gazprom owns seven licensed areas in the Barents Sea, three in the Pechora Sea, thirteen in the Kara Sea, eight in the Gulf of Ob and one in the East Siberian Sea.
The other Russian company, Rosneft, owns six licensed areas in the Barents Sea, eight in the Pechora Sea, four in the Kara Sea, four in the Laptev Sea, one in the East Siberian Sea and three in the Chukchi Sea. In order to fulfil its existing license obligations, Rosneft signed strategic cooperation agreements in 2011 and 2012 with Exxon Mobil, Statoil and Eni that envisage, among other things, joint geological exploration and development of hydrocarbon deposits in the Arctic shelf.
In August 2014, exploratory drilling work carried out by the Rosneft–Exxon Mobile joint venture Karmorneftegaz in the East-Prinovozemelsky field 1 licensed area in the Kara Sea resulted in the discovery of an oil field with recoverable reserves of 130 million tonnes of oil and 500 billion cubic metres of natural gas . It should be noted that the region where the drilling is taking place is marked by extremely difficult climatic conditions: 1.2–1.6 metres of ice covers the sea for 270–300 days of the year, and temperatures routinely drop to as low as −46 ˚С during winter.
In order to fulfil its existing license obligations, Rosneft signed a long-term agreement in 2014 with the Norwegian company North Atlantic Drilling for the use of six offshore drilling rigs in its shelf projects, including its Arctic shelf projects, until 2022 . To increase access to its drilling fleet, Rosneft also signed a framework agreement in 2014 with Seadrill Limited and North Atlantic Drilling Limited on the exchange of assets and investments.
The political tensions brought about by the situation in Ukraine led to a number of governments, including those of the United States, the European Union and Norway, imposing sanctions against Russia in various sectors of the economy during the second half of 2014. These included embargoes on the supply of equipment and technology, as well as bans on companies providing services for projects to develop offshore oil resources in the Arctic – Rosneft and Gazprom (including Gazprom Neft). In addition, restrictions were placed on the ability of Russian oil companies and banks to attract financing from abroad.
These sanctions have already led to a number of foreign oil companies, including Exxon Moblie, suspending their participation in Russian Arctic shelf projects.
The level of dependence on “Western” equipment and services to carry out projects on the Arctic shelf – offshore drilling rigs, pump and compressor equipment, downhole equipment, electric power generation equipment and computer software – is particularly high. At the same time, import replacement is only possible in the long term, that is, by 2020–2025 at the earliest.
At the same time, using equipment and services from third-party countries, primarily China, carries greater risks of accidents because the quality is noticeably poorer.
As a consequence, there is a risk that Rosneft and Gazprom could default on their license obligations. This is why they have asked for state support, including extending the license terms.
On the whole, despite the current difficulties, developing arctic oil and gas reserves remains a strategic priority for the Russian Federation, considering that the total recoverable resources on the Arctic shelf are estimated at 106 billion tonnes of oil equivalent and 70 trillion cubic metres of natural gas.
Having said that, implementing plans to develop the Arctic shelf (to reach annual production levels of 65 million tonnes of oil and 230 billion cubic metres of natural gas by 2030), which could require investments of more than $1 trillion, are significantly hampered by the economic sanctions.
The continental shelf plays an important role in sustaining global oil and gas production. Over the past ten years, more than two-thirds of the world’s hydrocarbon reserves have been discovered on the continental shelf.
All the Arctic states have passed legislation securing the strategic importance of the area, primarily in terms of hydrocarbon reserves .
That being said, the Arctic states have barely even begun to explore and develop these resources. At present, only a handful of isolated projects are being carried out on the continental shelf of the United States, Norway and Russia. Experts predict that, by 2030, geological exploration will primarily be conducted in the Arctic shelf, and deposits in the area will be prepared for further, large-scale development.
The ability of the Arctic states and oil companies to develop the Arctic’s offshore oil resources will depend on the following factors:
1. Technological development.
The oil and gas projects that are currently being implemented on the Arctic shelf differ greatly in terms of the technology they use. This is due to the fact that climate conditions vary in these areas. As a result, new technologies must be developed and technological solutions found for practically every single project. This increases project timeframes and costs.
2. Infrastructure development
At present, the number of on-land infrastructure facilities (repair stations, supply depots and rescue centres) for carrying out offshore oil and gas operations is extremely limited.
What is more, the capacity and configuration of existing pipeline systems and ports (terminals) in the region limits the ability to deliver higher volumes of hydrocarbon to consumers outside the Arctic.
3. Climatic and natural conditions.
Low temperatures, pack ice and icebergs are distinctive features of the climatic and natural conditions in the region. They significantly reduce the available time in which to perform drilling and other offshore operations, and additional requirements in terms of equipment and personnel thus need to be put in place.
4. Environmental safety.
It is clear that any anthropogenic activity in the Arctic should have a minimal effect on the Arctic ecosystem, causing as little harm as possible. Sections of the Arctic Ocean are officially protected, and any kind of mining activity is prohibited there.
The increased activity of environmental organizations that oppose resource development activities in the Arctic could significantly complicate the plans of oil and gas companies and Arctic states to carry out their respective projects.
It is also necessary to take into account the risks associated with the consequences of possible offshore oil spills, which could not only lead to the company responsible for the spillage going bankrupt, but also to all offshore development activities being halted as a response to pressure from environmental organizations
5. Financial and economic conditions.
According to a number of experts, Arctic offshore oil projects are only profitable if the price of oil is between $40 and $90 per barrel, depending on the region. As such, the decline in world oil prices that began in 2014 forced many oil and gas companies to announce that they were suspending their operations in the Arctic because they were not profitable. At the same time, several other oil and gas companies that have already invested significant resources in Arctic projects have continued their work in the region. They are waiting for a favourable change in prices once commercial operations start.
Tougher national and international regulations on industrial and environmental safety may exert an additional financial burden on Arctic projects, particularly the requirements that state that companies should have the necessary equipment to drill relief wells quickly in the event of a spill.
Amusing Delimitation: How to Neatly Split
the Arctic Shelf
Sanctions have been imposed against Russia by a number of western countries, including all the Arctic states, with regard to supplying technologies and services to the Arctic shelf. This seriously hamstrings Russia’s ability to carry out projects in the region.
At the same time, it should be noted that restricting access to proven technologies and solutions increases the risk of accidents, and we have already talked about the possible consequences of offshore spillages and accidents.
It is clear that each of the factors described above carries its own risks of uncertainty. For example, it is difficult to predict what oil prices will be in the long term, what breakthroughs will be made in offshore drilling technology in the Arctic, and whether the polar ice caps will increase in volume by 2040, as some scientists have predicted.
In this context, we should bear in mind that it can take from five to ten years or more to move from the decision to carry out exploratory work to actually producing oil commercially. That is why we need to start building cost-effective technologies and technological solutions that can ensure safe and effective production of oil and gas, and set up the accompanying infrastructure, right now. Given the sheer size of the task at hand, it would be wise to organize this on the basis of a public-private partnership.
The Arctic states should also start working on a set of unified standards that will allow oil and gas companies to develop and use the same equipment and technological solutions in all the countries in the region, without the need to spend time and money adapting them to the rules and requirements of each individual state.
Work is currently under way in these areas, although it is largely fragmented and non-systemic in nature.
In these circumstances, the need to strengthen cooperation among Arctic states and oil companies to develop joint approaches to tackling these issues becomes all the more relevant.
It would be wise to use a proven high-level intergovernmental forum as a platform for carrying out such work, namely, the Arctic Council.
Since the establishment of the Arctic Council in 1996, international cooperation in the Arctic has strengthened significantly, as a number of successful joint projects prove. What is more, international agreements on aeronautical and maritime search, and cooperation on marine oil pollution preparedness and response were prepared by the Arctic Council, as was the Framework Plan for Cooperation on Prevention of Oil Pollution from Petroleum and Maritime Activities in the Marine Areas of the Arctic.
It should be noted that strengthening international cooperation in the Arctic has helped ensure high levels of security and almost eliminate confrontation in the region.
However, if the Arctic states do not avoid politicizing cooperation in the Arctic in terms of the general geopolitical situation, then it will have a huge impact on the prospects for carrying out a coordinated policy and implementing joint projects.
In this context, shifting international tensions to the Arctic, and refusing to lift the sanctions, may force the Russian Federation to look at attracting other states to cooperate in the region, primarily those from Asia.
If this happens, it could change the face of international cooperation in the Arctic and significantly reduce the number of orders placed with western manufacturers of equipment for the development of the Arctic shelf.
1. http://www.gazprom-neft.ru/press-center/news/1102430/ (in Russian).
2. http://www.rosneft.ru/news/news_about/04122014.html (in Russian).
3. http://www.rosneft.ru/news/pressrelease/21082014.html (in Russian).
4. Russia adopted the State Policy of the Russian Federation in the Arctic for the Period until 2020 and a Further Perspective on September 18, 2008; The United States passed the National Strategy for the Arctic Region on May 10, 2013; Canada put through Canada’s Northern Strategy: Our North, Our Heritage, Our Future in 2009; Norway passed the Government’s High North Strategy in 2006 and published the report “A Strategic Vision for the North” in 2011; and Denmark adopted the Kingdom of Denmark. Strategy for the Arctic 2011–2020 in 2011.
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