Russia’s Lukoil says it will not drill in the Arctic

Lukoil Vice President Leonid Fedun told the paper that the risks associated with drilling the Arctic seabed are far too high, and that the profits would be outweighed by the hazards.

He argued instead that it was far cheaper for Lukoil to develop untapped land-based oil fields in Siberia.

“You don’t have to build pipelines, water pipes, electricity, or bring workers,” the Fedun told the Financial Times.

This could also be environmentally alarming: According to a 2012 study by the Associated Press, land-based oil drilling operations in Russia spilled one percent of Russia’s annual 5 million ton production. But Lukoil was also commended as being the fastest oil company working in Russia to respond to spills

Yet, with the breadth of interest Lukoil still holds for the Arctic, it remained unclear whether Fedun’s statements reveal a wholesale abandonment of drilling on the Arctic shelf, or whether – like other oil majors – mean only a temporary halt until the company considers Arctic drilling to be profitable remains to be seen.

Nonetheless, in making the announcement, Lukoil joins a growing consortium of oil giants that have this year backed off various Arctic drilling plans.

“I am happy but not surprised by Lukoil’s announcement,” said Bellona adviser Sigurd Enge. “I am happy because Lukoil has made calculations and see the risk [of drilling the Arctic shelf] as an economic risk.

Enge added, however, that: “This will not change anything dramatically because it is the Russia government that licenses offshore drilling, meaning that companies less concerned with risks could take Lukoil’s place.”

Enge also said that Lukoil’s land-based interests also concern the environmentally questionable practice of hydraulic fracturing, a practice that threatens water supplies and released methane, the most potent of the seven greenhouse gases.

Buying time for the Arctic

Enge did note, however, that the recent trend of oil majors who have postponed Arctic activities was encouraging and buys the Arctic ecosystem some time.

Shell announced in late February that it would postpone its activities off the coast of Alaska in the Chukchi and Beaufort Seas for the remainder of 2013 following a laundry list of technical problems that Shell encountered last year.

Statoil North America followed suit in March, stating that it, too, would hold off on drilling projects off Alaska’s coast – although Statoil Norway intends to keep pursuing exploration in the Barents Sea off Russia’s northwestern coast as part of a deal it sign with Rosneft in May.

France’s Total has similarly made known its reservations about Arctic drilling. Total’s vice president for Northern European operations, Patrice de Vives, told Norway’s August ONS Conference that, “There are many places in the world we can drill, and the Arctic is not a place we want to be,” he said, adding, “”We are concerned about the consequences of an oil spill in these areas. Accidents can always happen, even with the best technology.”

Yet, Total also continues to hold interests in the Arctic, so its August announcement may only be good until technological issues of drilling the harsh Arctic climate are ironed out.

Lukoil’s continued Arctic ambitions

Lukoil still holds major Arctic shelf ambitions.

The company announced earlier that it is anxious to acquire a piece of the Russian Arctic Shelf, but has been prevented from doing so by current Russian legislation, which stipulates that only state-owned companies – meaning Rosneft and gas monopoly Gazprom – can compete for offshore licenses, the Barents Observer news portal reported.

As recently as February, said the news portal, Lukoil expressed interest in drilling Khatanga Bay in the Laptev Sea north of Siberia.

And last fall, Lukoil representatives visiting Oslo said the company was cooperating with Norwegian partners in a bid for oil fields in Norway’s sector of the Barents Sea. In 2011, Lukoil became the first Russian oil company to be prequalified for operations on the Norwegian shelf, the Barents Observer said.

Fedun’s announcement may therefore only amount to a temporary halt in Lukoil’s Arctic aspirations.

A spokesman for Lukoil reached in Moscow by Bellona said he was not authorized to comment on Fedun’s remarks. More senior officials did not immediately return requests for comment.

Oil companies operating in the Russian Arctic

Russia’s Rosneft is developing potential operations on the Arctic shelf with a host of cooperative financial agreements with foreign firms.

Statoil spokesman Bård Pedersen told Bellona that despite the decision of Statoil North America to postpone its activities off Alaska that Statoil would continue exploration activities in the Barents Sea with Rosneft.

“We are starting a nine well drilling campaign in the Norwegian Barents [Sea] this year and will also drill exploration wells on the east coast of Canada,” said Pedersen. “We will continue to expand our Arctic portfolio.”

Italy’s Eni is partner with Rosneft in the southern part of the Barent’s Sea, and ExxonMobil has partnered with Rosneft in the Kara Sea.

And two weeks ago, according to the Barernts Observer, a joint Russian, Chinese energy agreement was signed to allow China National Petroleum Corp. to pay for the initial exploration of three offshore Arctic areas. 

UN pleas with oil companies to back off the Arctic

In February, United Nations Environment Program Executive Director Achim Steiner issued a plea to oil majors worldwide to lay off the Arctic.

“[T]he rush to exploit these vast untapped reserves have consequences that must be carefully thought through by countries everywhere, given the global impacts and issues at stake,” said Steiner at a news conference.