Defrosting Arctic development

June 1, 2015

Russian arctic oil exploration is facing an uphill battle against international sanctions and low oil prices. But, the country’s oil companies and government are still keen to find produce their icy black gold. Eugene Gerden reports.

The West Alpha semisubmersible drilling rig, used to make the Pobeda discovery in the Kara Sea. Photo by Johnny Johnsen/Flickr.

Since sanctions were first imposed on Russia in 2014, the prospects for Arctic exploration have been dampened. Add a sub-US$60/bbl oil price, and the high cost of operating in the harsh Arctic environment looks an even tougher proposition.

Yet, despite the challenges, Rosneft and ExxonMobil, hope to resume the development of Russian Arctic by the middle of 2016, according to recent statements by analysts in Rosneft’s department of offshore exploration works.

Russia is also considering opening Russian offshore exploration to foreign operators, both for seismic acquisition and exploration drilling activities, which could mean Russian firms lose the exclusive grip they have held in this area to date.

Barents, Kara Seas beckon

Speaking during a press conference at Rosneft’s Moscow offices, Timothy Streltsov, head of Rosneft’s offshore exploration department, the company, together with ExxonMobil and other foreign partners, hopes to resume drilling exploratory wells on the Kara Sea shelf during the next 12-20 months, with preparatory work starting this year.

Exploration drilling in the Kara Sea was suspended in September 2014 due to sanctions imposed on Russia over its involvement in the ongoing Ukraine crisis (OE: November 2014). In late July, the US and the EU imposed sanctions on Russian oil firms and limiting trade relating to the energy sector in Russia. In September 2014, sanctions tightened on the energy sector, with the export to Russia of equipment for Arctic, deepwater and shale oil. In addition, sanctions have limited an access of leading Russian oil and gas producers to long-term funds in the US. Nevertheless, the partners plan to start preparatory work for drilling in the Barents and Kara Seas, Streltsov said.

“This year we will focus on the studying and analysis of materials, obtained during surveying season on the shelf in 2014,” Streltsov said. “At the same time next year we plan to start drilling on the sites of the Barents and Kara Seas.”

The drilling may focus on the recently discovered shallow water Pobeda (Russian for victory) field in the East Prinovozemelskiy license. Pobeda, estimated to contain about 130 million tonnes of oil and 499.2 Bcm of gas, was discovered on the Kara Sea shelf just as sanctions were imposed last September.

Light oil, comparable to Siberian light oil, was discovered in Cenomanian Age and Apy-Alb Age chalk, according to Rosneft, through the Universitskaya-1 well, drilled using Seadrill subsidiary North Atlantic Drilling’s semisubmersible drilling rig West Alpha. The water depth was about 81m, about 230km off the Russian coast. The well, which was cut short of its planned total duration, cost around $1 billion.

The Prirazlomnaya platform in the Pechora Sea.
Photo from Gazprom. 

According to sources close to Rosneft, the partners plan to initially focus on oil production, as gas production may significantly complicate transportation of oil from the shelf.

The partners would also only look to develop a field with no less than 100 million tonnes, due to the large initial investments in infrastructure required for first oil in the area. Temperatures plunge to -46°C and the area is ice-bound roughly 270-300 days a year, Rosneft said.

Sanctions will not, however, prevent Rosneft and its foreign partners moving forward with their Arctic projects, according to recent statements of Alexander Novak, Russia’s Minister of Energy.

“Sanctions resulted in some problems and difficulties in attracting of foreign partners for Rosneft,” Novak said in a statement. “Nevertheless, the Russian government and companies, involved in the project, plan to continue its implementation.”

According to Novak, the partners will procure all the equipment they need for the project from other sources. This may take place as part of a program of import substitution in the Russian oil and gas industry, which was recently approved by the government and involves imports of such equipment and technologies from other regions including Asia-Pacific.

In the case of imports of Western equipment and technologies, one possible option to resume supplies (in compliance with existing sanctions) may involve the use of foreign subsidiaries of EU and US oil service companies. Indeed, an official spokesman of the US Department of the Treasury, recently told Russia First TV that sanctions against Russia do not apply to foreign subsidiaries of the US companies.

This would enable companies such as Schlumberger and Baker Hughes to resume supplies of equipment and technology to Russian Arctic projects. In a sign of moves in this direction, Schlumberger recently agreed to acquire a minority stake in Eurasia Drilling Co., Russia’s largest onshore drilling firm, for about $1.7 billion. However, the deal has not yet been approved by the Russian State Commission on Foreign Investments, headed by Russia’s Prime-Minister Dmitry Medvedev.

Without the aid of international oilfield services companies, Rosneft has been struggling to meet its license obligations. In a letter to the Russian Mineral Agency (Rosnedra), Rosneft requested permission to postpone exploration activities in 12 Arctic licenses, due to foreign partners pulling out and consequent problems with getting the necessary project investments, reported Russia’s Vedomosti news organization. For Chinese firms, the current situation has created an opportunity. An interest in developing oil and gas on the Russian Arctic shelf has already been expressed by some leading Chinese oil and gas producers, including CNPC, CNOOC and Sinopec, which have already started talks with Rosneft, regarding the participation in such activities.

Specific agreements have not yet signed, however. According to an official spokesman of Sergey Donskoey, Russia’s Minister of Natural Resources, Chinese investors will probably bid for a 33.3% stake in Rosneft’s Kara Sea project, which is similar to stakes offered to a consortium of foreign investors of Statoil, Eni and ExxonMobil.

According Vedomosti, Novak is keen to bring in new regulations to allow foreign firms to develop projects in Russia. Part of the reason has been due to lobbying by Lukoil against the monopoly position held by Gazprom and Rosneft.

Costly endeavors

Meanwhile, according to ExxonMobil’s latest annual report, the volume of the company’s losses associated with the suspension of Arctic projects is estimated at $1 billion.

ExxonMobil was attracted by the big numbers attached to the Kara Sea. According to the Russian Ministry of Energy, the volume of resources in just the Kara Sea region significantly exceeds those of the Gulf of Mexico, the Brazilian shelf, the Arctic shelf of Alaska and Canada, and is comparable with the entire resource base of Saudi Arabia.

This is coupled with flexible Russian legislation in the field of offshore operations, which is seen as being significantly lighter than those in neighboring EU countries. According to Denis Manturov, Russia’s Minister of Industry and Trade, due to global warming, the conditions for the development of the Russian Arctic shelf have significantly improved.

However, Russian companies have struggled with the country’s bureaucracy, which is reflected by frequent cases of delays during the provision of working permits, as well as issues with corruption.

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