Breaking the ice

Publish date: December 13, 2001

Written by: Atle Staalesen

Pressure on the Arctic hardens as Russian oil and gas companies go offshore. Meanwhile, problems concerning investments and technological solutions remain unsolved.

By some the Russian shelf is seen as the future of Russian oil and gas industry. Recently, the academician Alexander Lisitsyn from the Russian Oceanology Institute optimistically claimed that as much as 40% of world oil and gas reserves are located on the Russian continental shelf. Only 2% of these reserves are presently “explored”.

There has been a growing interest in Russian offshore oil and gas industry, not only in the Russian Far East and in the Caspian Sea, but also in the Russian Arctic. Twelve offshore oil and gas fields have been discovered only in the south eastern part of the Barents Sea and the Pechora Sea. Another 15-20 fields are expected to be found in this area by 2010. Also the Kara Sea contains considerable reserves. The two so far most prospective fields, the Shtockman gas-condensate field, where Norsk Hydro, TotalFinaElf, Conoco and Fortum are cooperating with the Russian Gazprom, and the Prirazlomnaya oil field, have a planned production start-up in 2006.

Gazprom and Rosshelf

However, a cluster of financial and technological problems cast shadows over the hydrocarbon projects. Not only is the climate extremely hard and the projects most capital intensive. The gas giant Gazprom, which through its daughter company Rosshelf, has acquired control over the major oil and gas production licenses in the Russian Arctic, is strapped for money. The formerly state owned Gazprom has ended up in a difficult dilemma. It controls about 30% of world gas reserves, but is unable to start up production on its major new fields. The company has built up a huge external debt of $11 billion and is by no means able to complete its Prirazlomaya and Shtockman projects by 2006. In addition to this, Gazprom has come under pressure from the Russian state administration for its lack of fulfilling production obligations with regard to the acquired licenses.

Hardening competition

This fall Gazprom started production on the important Zapolyarnoye gas condensate field in the Yamal-Nenets county. However, in the long term this will not solve Gazprom`s problems. Neither will strongly increased tariffs on the Russian gas market, as recently suggested by Russian state officials. Gazprom will have to go through a period of major internal structural changes, and the company must commit itself to constructively cooperate with its international partners. However, the company leadership is reluctant to reform and Gazprom has already got a generally bad reputation what concerns power sharing projects on Russian territory. Gazprom’s international partners want to start commercial production as soon as possible, while Gazprom itself is more interested in retaining its control over the projects.

However, also other Russian oil and gas companies have started to show their interest in the Gazprom arctic offshore projects. This fall the Rosneft oil company acquired 50% of the shares in the Prirazlomnaya project, after a lengthy standstill between Gazprom and its international project partners. Gazprom and Rosneft will now together finish the two oil rigs, which are being constructed at the Archangelsk county shipyards of Sevmash and Zvezdochka. Also the Lukoil company is setting its eyes on the arctic offshore projects. Lukoil has already built up it own fleet of ice-resistant tankers and owns a controlling stake in the Murmansk Shipping Company. In partnership with the Murmansk based company Arktikmorneftegazrazvedka, Lukoil is to develop two minor oil fields in the Pechora Sea. Lukoil wants to use the port of Varandei in Nenets county, from where tankers already transport oil to the Kola Peninsula. On the Kola Peninsula the oil is to be reloaded into bigger tankers, which can transport the oil for long distance export.

Arctic challenges

There are a number of environmental risks connected with the production and transport of oil and gas from the offshore arctic fields. Oil spills and waste will have serious and unpredictable effects on the arctic surroundings. Gazprom evaluates the construction of under-water drilling installations. They also consider to build minor nuclear power plants, which are to supply the oil installations with power. Russian oil companies do not have a good record when it comes to oil spills and protection of the environment. The producers, local authorities and also international participants, there among the importers of the hydrocarbons, must now together face their responsibility to protect the arctic seas.

Oil and gas production on the Russian northern shelf is important not only for Gazprom and the local authorities in the northern counties. Also the European Union is urging Russia and Gazprom to step up its export of hydrocarbons destined for European markets. The European Union projects a major increase of Russian gas export, which might by 2010 constitute 60% of the EU gas market.

The way it is today, Gazprom will not able to complete its offshore projects in the Russian Arctic. It will have to give priority to selected projects and abandon others. However, this will not prevent the development of oil and gas production on the Russian arctic shelf. Other companies are queuing to get involved. The arctic seas will inevitably become a major source of Russian and European energy supply.