More than 60 percent of Arctic oil and gas resources are deposited in areas which belong to or are claimed by the Russian Federation. It accounts for 375 billion barrels of oil. The general development of the hydrocarbon-driven economy in the Arctic must deal with energy security. It creates an ‘Arctic paradox’ whereby an increased utilization of off-shore hydrocarbons will contribute to climate change.
More than 60 percent of Arctic oil and gas resources are deposited in areas which belong to or are claimed by the Russian Federation. It accounts for 375 billion barrels of oil. According to BP's
Statistical Review of World Energy
, this is much more than the oil reserves of Saudi Arabia and the gas reserves of Qatar taken together. More than 200 prospective (D1, D2, and D3 categories) and more than 20 proved or expected (A, B, C1, and C2 categories) oil and gas fields are located in the Arctic Ocean, primarily in the Barents Sea and Kara Sea.
According to the current Russian legislation (Federal Law 1992), only state-owned (more than 50% of the shares are owned by the state) oil and gas companies are allowed to participate in the development of offshore fields. Thus, the main players are Gazprom, Rosneft and Zarubezhneft. In the Arctic, Gazprom is mainly responsible for gas fields, and Rosneft for oil fields.
Experts differ in their views regarding the prospects for oil and gas offshore extraction by Russian companies. As far as the gas sector is concerned projects like Shtockman will take several years to develop, but progress seems to be very modest. In February 2008, Gazprom (Russia), Total (France) and Statoil (Norway) established the Shtokman Development AG (SDAG) in order to implement the first of three phases of exploration of the Shtokman field, discovered in 1988 with total estimated reserves of 3,9 trillion cubic meters of gas (C1 category) and 56 million tons of gas condensate (C1 and C2 categories). The gas recovery process is expected to start in 2016 (production of liquefied natural gas – in 2017).
In 2011 a sort of Shtokman’s “soap opera” began: in June 2011 Gazrpom submitted a request to the Federal Agency for Subsoil Use to postpone the start of gas recovery for one or two years. At the time the SDAG board of directors decided to postpone the final investment decision until July 1, 2012; and later on, Total announced that the company would not be ready to take the final decision until 2013.
On August 7, 2012, as a result of Statoil leaving the Shtokman project, its shares went up by 2,19% on the Oslo Stock Exchange ( http://barentsobserver.com/ru/energiya/gudbay-shtokman-08-08 ). While Gazprom did not overestimate the importance of the Norwegians leaving the project (for example, Shell could easily take Statoil’s place: the companies are at least equal in terms of experience in this field), the secession of Statoil meant inevitable financial and reputational losses for the SDAG. The announcement that the "investment decision on Shtokman is being put on hold" (Vsevolod Cherepanov, member of the board of Gazprom, said on August 30, 2012) seems to be a natural sequence to the whole story.
In order to revive the Shtokman project, a set of conditions has to be fulfilled: first, the appearance of new, meaning more cost-efficient and environmentally-friendly, technologies for offshore drilling; second, positive trends and a favorable outlook on the world gas market; and third, improving and adapting the tax legislation in Russia for offshore projects ( http://barentsobserver.com/ru/energiya/novyy-podhod-ko-shtokmanovskomu-proektu-25-10 ).
As long as these conditions are not met, the gas from Shtokman will not come to the mainland. This will not happen even though it has great social significance for the development of the Russian Arctic Zone, in particular, the Murmansk Region. The Murmansk regional socioeconomic development strategy is entirely dependent upon the Shtokman project; nowadays, 81% of the energy in the region is derived by burning heavy oil ( http://barentsobserver.com/ru/energiya/shtokmanovskiy-proekt-do-2017-goda-31-10 ). In contrast with Vladimir Putin’s optimism on the Shtokman project (for example, in October 2012 he announced that "the investment decision will be taken in the near future, and work will begin in 2017”, http://www.kremlin.ru/news/16736 ), Gazprom has no plans to extract gas from the Shtokman field until 2020 ( http://top.rbc.ru/economics/08/02/2013/844337.shtml ).
While the first, technological, condition is only a matter of time, the second condition, i.e. a favorable market outlook, is more uncertain. The main factor of confusion is the “shale revolution” in North America, particularly in the USA, albeit the prospects of shale gas shipment to Europe are rather vague. Thus, of the three conditions listed above, only the third is under the full control of the Russian government, namely, changes in the tax legislation.
The tax regime for offshore drilling is one of the most challenging issues of oil and gas extraction in the Russian Arctic. In response to Gazprom’s and the SDAG’s declarations on the postponement of the oil ( Prirazlomnoe ) and gas ( Shtokman ) projects, in spring 2012, then Prime Minister Putin announced the list of prospective tax benefits for offshore projects. All potential offshore projects will be divided into four categories according to the “integral index” covering the depth of the sea, technological complexity, infrastructure and ice conditions. All new offshore fields will be exempted from export duties; for the most complex projects—those in the northern Arctic—a Mineral Production Tax of 5 percent will be set. It was expected that the new tax legislation for offshore projects would come into effect by 2013, but the benefits will only apply to projects started after 2016.
This means that Gazprom's ongoing projects, such as Prirazlomnoe and Shtokman , did not fall within the new legislative proposals. The company's management voiced the demand that benefits should also be accorded to projects launched before 2016, otherwise, Gazprom threatened to delay the first oil from the Prirazlomnoye field (according to Gazprom, oil reserves of the Prirazlomnoe field in the Pechora Sea come to 72 million tons). However, despite the fact that in July 2012 this project was provided with preferential export duties on crude oil (1.5 times lower than the standard rate), the beginning of oil production at the Prirazlomnaya platform was first postponed until the beginning of 2013, then – up to the end of 2013 ( http://barentsobserver.com/ru/energiya/eshchyo-odnu-zimu-bez-dobychi-21-09 ).
Consultations on tax legislation changes used to be rather painful and always lagged behind the declared terms. In January 2013, the State Duma passed in its first reading a bill exempting companies that develop gas deposits on the Arctic shelf from property tax. The Chairman of the State Duma Budget Committee Andrei Makarov has promised that in the second reading some additional benefits for offshore projects will be proposed, ( http://barentsobserver.com/ru/energiya/2013/01/na-podhode-nalogovye-lgoty-dlya-shtokmanovskogo-proekta-05-01 ). In March 2013, Deputy Finance Minister Sergei Shatalov said that companies operating offshore will pay a lower mineral extraction tax and receive exemption from export duties from 2014, privileges which the SDAG has actively sought and lobbied for in the past ( http://www.vedomosti.ru/companies/news/10155101/minfin_obeschaet_lgoty_rossijskomu_shelfu_s_2014_g ). As a result, in late March 2013, Gazprom and Total agreed to prepare a “roadmap” for the Shtokman project. It is expected that the roadmap will aim for the signing of a new agreement on Shtokman ( http://barentsobserver.com/en/energy/2013/04/roadmap-shtokman-development-03-04 ).
Unlike Gazprom, which seemed to be very self-confident and sure about the success of the Prirazlomnoe project, Rosneft is actively promoting an internationalized model for Arctic offshore drilling. Rosneft has acquired the right to explore and extract oil resources from most of the fields on the Russian Arctic shelf. In 2012, Rosneft bought three blocks in the Barents Sea − Fedynsky, Perseevsky and Tsentralno-Barentsevsky/Central-Barents —for almost 925 million rubles (ca. USD 32 million).
After that, Rosneft engaged several foreign and Russian oil companies in the exploration of 12 offshore oil fields in the Barents Sea and Kara Sea by offering them 33.3 percent stakes in each of the 12 projects. The Italian Eni has got two blocks − Fedynsky and Tsentralno-Barentsevsky − in the former “grey zone” or disputed (between Russia and Norway) part of the Barents Sea. The Norwegian Statoil has got the third, and the northernmost, part of the former “grey zone” − the Perseevsky block . The Admiralteyskaya and Pakhtusovskaya structures in the Barents Sea, as well as other potential oil fields owned by Rosneft, will be or have already been proposed to Russian oil companies—Lukoil, TNK-BP, Bashneft, and Surgutneftegaz.
The Vostochno-Prinovozemelsky (East Prinovozemelsky) block of the Kara Sea, as well as several other blocks in the Kara Sea, Chukchi Sea and Laptev Sea are going to the American ExxonMobil. As reported on the Rosneft website, “in the Kara Sea plans are under way to undertake seismic and environmental programs of East Prinovozemelsky blocks later this year in anticipation of a potential exploration well into 2014”. The project development cost is estimated to reach USD 500 billion.
After submitting applications for the new licensing round in late 2012, and obtaining the right to develop 12 and 17 blocks respectively (new licenses will put under the control of two state-owned companies of as many as 80% of the prospective deposits on the Russian shelf), Rosneft and Gazprom have looked for new partners.
In March 2013, Rosneft signed an agreement to explore the West Prinovozemelsky area in the Barents Sea and the South-Russian and Medyn-Varandei in the Pechora Sea with the Chinese company CNPC (China National Petroleum Corporation) ( http://barentsobserver.com/en/energy/2013/03/china-drill-barents-sea-25-03 ).
Gazprom Oil has also signed a surprise contract to drill a well
North Dolginskaya No. 3
on the Pechora Sea shelf with the Romanian company Grup Servicii Petroliere SA, which has not so far been involved in sinking wells in the Arctic (
However, there is a reverse side to the ‘shelf coin’. After securing their “sovereignty” over the potential Arctic resources, the two monopolists have very quickly turned from former allies to ‘sworn enemies’/competitors. Gazprom is jealous of Rosneft’s plans on gas, while Rosneft has objections to Gazprom’s oil business. Paradoxically, in addition to international competition there is a domestic tug of war for the Arctic hydrocarbon resources.
The state program on exploration of the continental shelf and exploitation of its mineral resources, a document which should be developed in accordance with the federal law On the Continental Shelf, could hold the key to unlocking the situation. An ambitious program anticipates an increase in annual offshore production to 66.2 million tonnes of oil and 230 billion cubic meters of gas by 2030. Hypothetically, the program could include a number of innovative proposals. However, under pressure from Gazprom and Rosneft the government withdrew some of its proposals to liberalize the offshore regime. Thus, the Russian private oil and gas companies will only obtain offshore blocks if the two state-owned monopolists give up their licenses. As was the case before, foreign companies can only participate in the shelf projects as sub-partners in a joint venture with the two Russian companies.
All in all, the development of the Russian hydrocarbon-driven economy, and consequently the maintenance of political stability, is highly dependent on the exploitation of the new production fields. Consequently, despite the fact that substantial changes in the tax legislation have not yet been approved, it is expected that under pressure from Gazprom and Rosneft the Russian Government and Parliament will find a way to provide even more attractive incentives for the offshore Arctic projects. The “tax problem”, once successfully resolved, would be one of the major factors allowing Russia to “remain an Arctic power”. Finally, the general development of the hydrocarbon-driven economy in the Arctic must deal with energy security, which is a global and geostrategic issue. Furthermore, it creates an ‘Arctic paradox’ whereby an increased utilization of off-shore hydrocarbons and better access to resources will contribute to climate change.
The authors are laureates of the Valdai Club Foundation Grant Program.