BMI View : Rosneft and Gazprom have retained their monopoly on offshore Arctic licences, for now. However, a political battle over their exclusive access rights is certainly brewing, pitting the two state-owned energy giants against political figures such as Natural Resource Minister Sergei Donskoy and Prime Minister Dmitry Medvedev. Russia's need for additional revenue s and the heavy cost of exploration and production in the Arctic could eventually lead to a loosening of policy, though we believe this is unlikely to take place in the near future.
National oil company (NOC) Rosneft was officially awarded 12 offshore licences in the Russian Arctic in February 2013 - five in the Barents Sea, one in the Kara Sea, three in the Chukchi Sea and three in the Laptev Sea. The confirmation of the award ing of another 17 licences to state-owned gas behemoth Gazprom is also expected in the near future. This will see both firms take up 80% of the available acreage in the Russian Arctic and ent rench the state's position in this prime region .
|Source: Russian Government|
|Barents Sea||North Pomorsky-1|
|Chukchi Sea||South Chukotka|
|Kara Sea||North Kara|
Such developments have dispel led hope s that exploration of the Arctic shelf would be liberalised and opened up to private and international players in the short term . Legislation passed in 2008 limited offshore exploration and production (E&P) to majority state-owned firms with at least five years of relevant experience - effectively restricting access to the prospective Russian Continental Shelf (RCS) to Gazprom and Rosneft. Lukoil , Russia's largest private crude oil producer, has lobbied hard against this restriction, but as demonstrated by the latest licence awards, its efforts have yet to pay off.
Liberals Fight On
Lukoil is not alone in pushing for the regulatory reform that would open up the Arctic to non-state-owned players. It is joined by several government officials, who are also ratcheting -up the pressure. In August 2012, Prime Minister Dmitry Medvedev advocated a revamping of the government's development plan for the Russian Continental Shelf to include non-state firms. In an interview with the Financial Times on October 4 2012, Energy Minister Alexander Novak revealed that the ministry was considering a proposal to allow foreign firms that are 'environmentally safe, technologically advanced and financially robust' to become co-owners of Arctic licences and grant them access to production (see our online service, 'Long March Toward Arctic Liberalisation', October 8 2012).
Natural resource minister Sergei Donskoy is one of the fiercest proponents of Arctic liberalisation. At a high level energy meeting in January 2013, he once again exerted pressure on the state to confiscate Gazprom and Rosneft's licences in areas which remain underexplored and offer them to the private sector instead. Donskoy has been particularly vocal about his displeasure with the 'extremely low' level of knowledge on the Russian Arctic shelf, which he attributed to the failure of these state-owned firms to conduct seismic studies on the licences they are sitting on.
Donskoy's frustration at the lack of progress in oil and gas development in the Arctic is not surprising. The country's Federal Agency for Subsoil Use admitted in October 2012 that there are no remaining large proven deposits left to be developed, after it auctioned off three large remaining fields discovered during the Soviet era - Imilor, Severo-Rogozhnikovskoye and Lodochnoye. More recently, ratings agency Fitch warned that Russia's hydrocarbons production could have reached its peak. A fall in output is likely if the country fails to prove-up more resources. This decline in production may have already begun; in December 2012, total crude oil production failed to hit another post-Soviet high for the first time in a year, and continued falling to 10.47mn barrels per day (b/d) in January 2013 on the back of lower output from TNK-BP's mature fields.
The Russian Arctic provides a large resource base which could be used to prop up future growth. Our estimates show that Russia's proven hydrocarbons reserves at end-2012 were about 368.1bn barrels of oil equivalent (boe), while the Russian Arctic could hold as much as 550bn boe according to AFP.
|Arctic Could Multiply Hydrocarbons|
|Comparison of Russia's Proven Hydrocarbons Reserves & Russian Arctic Resource Estimates (bn boe)|
If developed by 2030 , as targeted by the Ministry of Natural Resources , the government expects output from the Russian Arctic shelf to generate US$1.7trn in revenue for the country.
Awaiting A Political Thaw
However, due to the current slow rate of exploration and technological development it could be too ambitious to expect Arctic production to contribute significantly to the country's income by 2030. This is particularly true if upstream rights are reserved for Rosneft and Gazprom, which may be constrained by growing capital expenditure (capex) burdens.
In January 2013, Rosneft's chief executive Igor Sechin promised to invest RUB1.2trn (US$40bn) in exploring the geology of the Arctic shelf over the next 10 years, but the company's financial capability could be compromised in the short-term by the need to service a US$13bn loan it has taken to acquire TNK-BP. Similarly, we have warned that Gazprom's capex is looking increasingly unsustainable. It is already tied up with expensive projects in the Arctic and the Far East. With the company now undertaking construction of the South Stream pipeline as well, and its gas pricing regime being challenged in its core European markets, it is questionable as to whether it can carry out further Arctic E&P on an increasingly tight budget.
As much as these state-owned companies and conservatives in the Kremlin would like to keep the Arctic's lucrative rewards to themselves, practical realities could force them to accept that private capital and expertise will be needed to fully tap the Arctic's commercial potential. On a positive note, Rosneft appears to be aware of its limitations and has roped in high-profile partners such as ExxonMobil, Statoil and Eni ( see 'Full Picture Of Rosneft's Arctic Deals Starts To Emerge', June 25 2012). In justifying the firm's exclusive rights to the Arctic shelf, Sechin insisted: 'We have the financial resources to do this - and our partners do too.'
However, joint ventures (JVs) with private partners appear to be as far as the Kremlin is willing to go when allowing private companies access to the Russian Arctic shelf - for now. Prime Minister Medvedev and Natural Resource Minister Donskoy's attempts to push through Arctic licensing reforms were knocked back by Gazprom and Rosneft, with the companies enjoying considerable support from conservative factions within the Kremlin. The two state-owned firms will be loath to lose their upper hand when establishing JVs; in return for allowing private firms to enter the Arctic, the Russian firms will often gain privileged access to prime overseas acreage and place full financial undertaking and exploration costs at the door of their partners. Consequently, it is our view that a liberalisation of the Arctic will only take place when budgetary pressures - due to falling oil production - demand that conservatives face up to the urgent need for reform.