For all of Russia’s talk about oil drilling in the Arctic, most Arctic oil will likely go untouched

Arctic_oil_platform Oil platform in the Arctic Ocean. (Photo: ThinkStock)

By Anna Kireeva

Despite owning some 80 percent of the oil and gas resources tucked under the Arctic shelf, as well as a bulk of explored reserves, Russia has so far failed to significantly develop these holdings. Does that mean that Moscow’s offshore fields will undergo future development — or will they be shelved like other oil projects the country has tried to undertake in the cold, harsh far north?

It’s a question participants in St. Petersburg’s Arctic Forum considered last week during a panel discussion called “Mastering the Arctic Shelf: Potential and Risks.”

Early this decade, Russia’s intentions to drill oil and gas in the Arctic became a clarion call for environmentalists. In 2013, Greenpeace activists boarded the Prirazlomnaya oil platform in a dramatic bid to stop Russia from towing the rig to the Kara Sea. Yet years later, the Prirazlomnaya has produced only a trickle of poor quality crude.

Other oil and gas projects in the Arctic haven’t gotten even that far. The Shtokman field in the Barents Sea, once a signature project for Gazprom, Russia’s natural gas monopoly, was shelved in 2012 thanks to upwardly-spiraling expenses. That same year, a number of oil majors like France’s Total and Russia’s Lukoil swore off drilling in the Arctic in a gesture of concern for spilling oil in the frozen northern reaches.

Since then, high-profile environmental anxiety over oil and gas projects in the Arctic’s waters has been muted. It’s not clear if Gazprom will ever dust of its plans for Shtokman, which are now more than two decades old. And the Prirazlomnaya field, for all the thunderous protest that greeted its arrival, has not spilled any oil — at least according to its operators.

But while environmentalists may cheer the fact that nothing much is happening on Russia’s Arctic shelf, the politicians and industry figures gathered at the Arctic Forum were intent on figuring out why so many of these projects seem to stagnate.

The potential would seem to be in Russia’s favor. Indeed, among Arctic nations, Russia’s resource base is the biggest: About 80 percent of Arctic shelf resources belong to Russia. Compare that to the United States, which holds only 10 percent of shelf resources, followed by Canada, Denmark, Greenland and Norway, which divide the remaining 10 percent among them. Russia’s estimated explored offshore oil reserves add up to 5 billion tons of oil equivalent. Norway is a distant second with 1 billion tons of proven reserves.

But for a number of reasons — both economic and environmental — those resources may go unrecovered. According to many estimates, global demand for oil could plateau as soon as four years from now, in 2023. Enormous government investment funds that were themselves built on oil are also pulling away from investments in the oil sector – a move that could spur a global capital shift away from fossil fuels as governments and institutional investors pour funds into renewable energy.

Earlier this year, the sovereign wealth funds of both Norway and Saudi Arabia — two of the world’s biggest oil producers — announced they would dump stocks they hold in oil exploration companies that don’t maintain renewable energy divisions. This month, Norway went a step further, saying its sovereign wealth fund will now invest in renewable energy infrastructure projectsan investment class worth trillions of dollars – giving an enormous boost to green energy projects worldwide.

Arctic oil campaign header Gazprom's Prirazlomnaya Rig, (Photo: Gazprom)

At the same time, natural gas consumption is expected to grow over the next 20 to 30 years — and gas constitutes a bulk of Russia’s resource holdings not only on the Arctic shelf, but on land as well. President Vladimir Putin has said he aims to make Russia the world’s largest supplier of natural gas — an unlikely prospect given Moscow’s competition from the Middle East. Nevertheless Russia still aims to maintain its dominance in piping LNG to Europe. And Moscow is trying to gain a foothold in the ultra competitive Asia Pacific region, which represents 72 percent of the world’s LNG demand.

But experts at the Arctic Forum said a number of factors weighed against making the development of Arctic oil and gas deposits profitable — factors like environmental risk it entails, and sanctions levied against Moscow by a number of Western nations.

Sanctions and bureaucracy

Pavel Sorokin, Russia’s deputy minister of Energy, says Russia’s oil and gas projects have to maintain a competitive edge or it is Arctic reserves will remain in the ground. In order to do that, he says the country’s oil industry needs affordable and modern technology, infrastructure — and financing.

But he said that Western sanctions had impacted Russia’s technological development.

“We don’t expect to develop technologies from scratch,” told the forum. “If over the next five to seven years we can bring our own technologies up to the required technical and economic level, then our Arctic fields will find their place in the market.”

Still, investment in Arctic shelf projects is risky for investors given the difficulty of developing deposits. One of these difficulties, Sorokin said, is the level of bureaucracy involved.

“To launch a field on the shelf you need to get more than 180 permits from 20 different bureaucracies,” he said. “This is to say that we know what the problem is, –– we only need to solve it. Everything depends on us. This is the wealth of the country, which should be the driver of the entire industry.”

A lack of drilling

Yet most of those gathered at the forum agreed that there was another, more important factor holding down demand for Russia’s hydrocarbons: A lack of actual test drilling, without which all estimates of the country’s hydrocarbon resource base are merely hypothetical.

“We lack one important element — drilling,” Denis Khramov, Russia’s first deputy natural resources minister, told the forum. “If we don’t begin large scale drilling, then when oil reaches peak consumption in 20 years, our land-based fields will run empty, and we will be left behind.”

This absence of actual knowledge gained from drilling can be accounted for by a number of things, Mikhail Grigoriev, the director of Gekon, a mineral resources consultancy.

The first of these is Russia’s ill-conceived licensing process. According to Grigoriev, only state owned companies get licenses to drill. Private companies are left out of the process unless they are at least half owned by the Russian state.

Moreover, said Grigoriev, some 80 percent of the estimated hydrocarbon reserves under the Arctic shelf are accounted for by gas – and this points to a fundamental mismatch between Russia’s two biggest hydrocarbon companies. Rosneft, Russia’s oil monopoly, which has some experience with shelf projects like the Prirazlomnaya, knows how to drill oil on the Arctic shelf— but there’s not much to be had there. Meanwhile, Gazprom, Russia’s gas monopoly, is so tied up by land-based projects that it has little experience with Arctic shelf project – as witness the failed Shtokman endeavor.

But Grigoriev said Gazprom would be unwise to cast its lot with Arctic gas.

“Some 47 percent of Gazrpom’s reserves haven’t even been put into production,” Grigoriev told the forum. “At its current capacity, Gazprom has the resources to boost annual production to 200 billion cubic meters per year — why would it need the Arctic shelf now?”

As for oil, Grigoriev forecasts that by 2035, Russia will still only have one platform operating in the Arctic shelf — the Prirazlomnoye. The rest of Russia’s hydrocarbon activities will be, then as now, on land.

Further, said Grigoriev, the geological obligations companies have when exploring for oil are skewed. Under current regulations, those companies who have licensed plot are required to drill merely two exploration wells before moving on. This doesn’t yield much knowledge about the reserves, however, when the plots are roughly twice the size of Belgium.

“In my opinion, you could call this a freeze of state mineral resources and a postponements of its capitalization,” Grigoriev said.

He noted that such a shaky approach to exploratory drilling wasn’t exclusively a Russian problem. Canada has essentially abandoned its Arctic hydrocarbon program and the United States has limited its own to the American coastal zone. Norway has meanwhile not made any discoveries of commercial significance in its so-called gray zone.

Lack of drilling rigs and support vessels

According to Russian licensing obligations, exploration companies must aim to drill at least 130 test wells on their plots by 2030. The regulations likewise require them to drill as many as 27 test wells in 2021 alone — a number Grigoriev doesn’t anticipate they will be able to meet.

The biggest obstacle, he say, are weather conditions on the Arctic shelf, which really only allow for a rig to drill one test well per year. Russia meanwhile, only has two drilling rigs in service on the shelf.

But it takes more than just rigs. For instance, drilling the Pobeda plot took not only a rig, but 15 additional support vessels drawn from countries as various as Norway, Sweden, England and Estonia.

Building drilling vessels was once the responsibility of the Zvezda shipyard near Vladivostok, which was charged with producing all manner of rigs, from semi-submersible and self-elevating — and their support vessels as well. But production has fallen off, and now the ratio of oil drilling rigs to support vessels is a dismal one to eight. At present, Zvezda isn’t building a single drilling rig.

Yet, if Russia’s oil companies and lease holders are planning on drilling 27 test wells in 2021, they will need 27 drilling rigs and 216 support vessels – and this discrepancy is built into the license obligations.

“We have a strange situation in our country – we won’t stop talking about the need to develop the Arctic shelf, but we do nothing for this,” said Grigoriev. “We do not understand that nothing can be done without drilling. Yet if there are no drilling operations […] the general stagnation of the situation on the shelf increases. The problem is that the state support of the program for the creation of drilling capacities in order to conduct real research on the shelf is completely absent.”