The Fuse

Russia Ramps Up Arctic Ambitions Despite Low Prices

by Nick Cunningham | April 24, 2017

Russia’s Defense Ministry recently unveiled photos and video of its newly completed military base, billed as the largest manmade structure in the High Arctic. The Arctic Trefoil base sits on an archipelago called Franz Josef Land, north of 80 degrees latitude. President Vladimir Putin toured the 151,000 square foot base last month.

Despite today’s low price environment and the country’s commitment to supply cuts alongside OPEC, Russia is moving forward with its Arctic projects.

Russia is rapidly expanding its presence in the Arctic and has plans to build four more military bases there. The Arctic Trefoil is expected to house nuclear-ready SU-24 fighter jets and will allow the Russian Navy to extend its range. The unveiling comes after launching the world’s largest and most powerful nuclear-powered icebreaker last year. Russia operates 40 icebreakers, a half dozen of which are nuclear-powered, and it has plans to build more in the coming years.

Russia’s military buildup is the largest since the collapse of the Soviet Union. But while the deepening presence in the Arctic is central to Russia’s military strategy, one of the key priorities there is to tap the region’s vast reserves of oil and gas, despite today’s low price environment and the country’s commitment to supply cuts alongside OPEC.

Russian companies become more efficient in Arctic

The Arctic is the last frontier for oil and gas—home to massive oil and gas reserves that have thus far hardly been touched. The region is thought to hold around 90 billion barrels of oil and 1.7 trillion cubic feet of natural gas, according to a 2008 estimate from the U.S. Geological Survey, more than 80 percent of which is located offshore. Needless to say, the Arctic’s extreme temperatures, remote location, and high cost of drilling have prevented extensive drilling from taking place.

Russia has gone farther than any other country into the Arctic. Gazprom began producing oil from the Prirazlomnoye field in the Kara Sea in 2013, with output reaching an average of over 110,000 barrels per day (b/d). Russia is now in the midst of ramping up Arctic development even further. In early April, Rosneft began drilling the Tsentralno-Olginskaya-1 well in the Laptev Sea, the northernmost oil well on Russia’s continental shelf. The development of the project is notable because it was previously thought that Russian oil firms did not possess the skill, expertise, equipment or capital to drill such a highly complex project in some of the most challenging conditions. That was why Rosneft teamed up with ExxonMobil in 2014 to drill in the Kara Sea, retaining the U.S. oil major’s world-class drilling capabilities for a complicated project. The two companies made a large discovery that ultimately had to be shelved because of U.S. sanctions on Russia.

Rosneft’s new well in the Laptev Sea reflects Russia’s ability to develop the technical expertise to go it alone in the Arctic.

But Rosneft’s new well in the Laptev Sea reflects Russia’s ability to develop the technical expertise to go it alone in the Arctic—it is no longer at the mercy of Western oil companies. As the FT recently reported, the well is arguably the most complex ever undertaken in Russia. Rosneft will drill in waters that are navigable only two months out of the year because of sea ice, and the company will deploy horizontal drilling techniques thousands of meters below the surface. The well is also the first of its kind in the Laptev Sea, a region that Rosneft believes holds 9.5 billion tonnes of oil equivalent.

Western sanctions have forced Russian oil companies to become more efficient and improve drilling techniques on their own. According to an estimate from Gazprom Neft, cited by the FT, average production per well jumped by about 11.5 percent since Russia was hit with sanctions, resulting in additional output of 25.3 million barrels in 2016.

Arctic is a key Russian priority

Rosneft plans on spending up to 250 billion RUB (US$4.5 billion) in the Arctic over the next five years. The Russian oil giant is currently drilling in the Laptev Sea, but will expand into the Barents Sea in 2018 and will return to the Kara Sea in 2019, where two and a half years ago Rosneft’s joint venture with ExxonMobil was put on hold.

Rosneft says that by 2050, the Arctic will account for 20 to 30 percent of Russia’s total oil production. While that time frame is so wide that it renders the estimate somewhat meaningless, it does offer a window into the company’s—and the Russian government’s—strategic thinking. The Kremlin views developing oil and gas reserves in the Arctic as a national security priority. Indeed, the only companies that are even allowed in the Russian Arctic are state-owned, with the government having granted licenses so far to only Rosneft and Gazprom.

The Arctic’s strategic importance to Moscow also helps explain why Russia can move so aggressively there while the economic case for doing so is questionable. Outside of Russia, there is scant interest from private companies in venturing so far north to develop high-cost reserves at great risk.

Norway’s Statoil is hoping to arrest its declining output by going north, aiming to drill five to seven wells in Norway’s Barents Sea this year.

Norway is the only other country that is developing the Arctic at the same level as Russia. Norway’s Statoil is hoping to arrest its declining output by going north, aiming to drill five to seven wells in Norway’s Barents Sea this year. The Korpfjell prospect, which will be Norway’s northern most oil well, has been billed as a potential “elephant”—holding more than 10 billion barrels. Statoil’s Executive Vice President Tim Dodson tried to downplay expectations, telling Bloomberg in February that while Korpfjell is “huge,” he’d be “very happy” with 500 million to 1 billion barrels.

The Korpfjell prospect is also important because the field could stretch across Norway’s maritime border with Russia. As such, Statoil’s success could actually spur even greater Arctic oil development in Russia. “For the Barents Sea, this is a very decisive year,” Statoil’s Tim Dodson said earlier this year to Norwegian news outlet Dagens Næringsliv.

“Natural resources, which are of paramount importance for the Russian economy, are concentrated in this region.”

Arctic exploration is stalled pretty much everywhere else amid prices hanging around the $50 per barrel level. The U.S. Department of Interior is crafting an executive order for President Trump to reverse the Obama administration’s ban on offshore exploration in the Arctic. However, it is unclear if reopening the Arctic will actually be met with interest from the industry in the short run. In the current price environment, oil executives are much more comfortable tying up their money in shorter-cycle projects.

For the Kremlin, the Arctic is critical. “Natural resources, which are of paramount importance for the Russian economy, are concentrated in this region,” President Putin said when he visited Russia’s new Arctic Trefoil military base last month. Expect Rosneft and Gazprom to have ambitious plans for the Arctic in the years ahead.

ADD A COMMENT