29 January 2018
Exploring why company turf wars and Western sanctions are preventing Russia from extracting oil and gas from the Arctic.
Stanislav Pritchin

Stanislav Pritchin

Academy Robert Bosch Fellow, Russia and Eurasia Programme

Rosneft oil rig - first well in the Khatanga Bay

The Rosneft oil rig drills the first exploration well in the Khatanga Bay as part of the East Taimyr oilfield. Photo by Vladimir Smirnov\TASS via Getty Images.
The Rosneft oil rig drills the first exploration well in the Khatanga Bay as part of the East Taimyr oilfield. Photo by Vladimir Smirnov\TASS via Getty Images.

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Russia has vast oil and gas reserves in the Arctic, but is unable to exploit them due to sanctions, the technological shortcomings of state-owned companies Gazprom and Rosneft, and their unwillingness to cooperate with private Russian companies with the relevant experience.

The current price of crude on international markets should make extraction from the bed of the Arctic Ocean profitable, but sanctions are precluding Russia from engaging Western companies with the necessary technological capacity to explore Russia’s Arctic resources.

However, Russia has its own self-imposed restriction - private companies in Russia with specialist experience and technology are also unable to support the exploration of Russia’s untapped Arctic reserves. Only Gazprom and Rosneft have access to Russia’s Arctic shelf.

Russian zone has largest share

In terms of what is technically recoverable, the Arctic may contain as much as 90 billion barrels of oil and 47 trillion cubic meters of natural gas (according to estimates by the US Geological Survey). And the Russian zone of the ocean has the largest share – its potential reserves amount to approximately 48 billion barrels of oil and 43 trillion cubic meters of natural gas.

That is equivalent to 14% of Russia’s oil and 40% of its gas reserves. However, so far only the Barents, Pechora and Kara Seas have begun to be explored.

Despite high production costs, the trend towards decarbonization in world energy markets and near-universally accepted environmental risks, the Russian government considers the resources of the Arctic Ocean an important strategic investment.

However, Russia remains unable to realize these oil and gas projects in the Arctic. The only example of Russian hydrocarbon production is Gazpromneft’s project in the ‘Prirazlomnoye’ field of the Pechora Sea. This is relatively simple to develop since it is 60 kilometres from the shore in a depth of about 20 metres of water.

Western sanctions are partially designed to curb Russia’s ability to extract resources from the Arctic, and they have also halted projects with Western partners that were already underway.

For example, just after the imposition of US sanctions in 2014, ExxonMobil was forced to stop its work in Russia with Rosneft. Without the assistance of Exxon, Rosneft suspended its exploration of the Victory oilfield in the Kara Sea. 

The lifting of sanctions is unlikely in the near future, with relations between the West and Russia remaining tense. A possible solution would be if Rosneft and Gazprom partnered with private Russian energy companies that have greater experience and technology in underwater projects.

Lukoil has been developing offshore projects on the shelf of the Caspian Sea since the early 2000s, when Russia, Azerbaijan and Kazakhstan first divided up the northern part of sea.

Lukoil has discovered six major multilayer fields in the Russian sector of the Caspian Sea, thanks to its self-propelled drilling rig ‘Astra’. The company successfully accessed the ‘Yury Korchagin’ field, 180 kilometres from Astrakhan, which boasts around 29 million barrels of oil and nearly 64 billion cubic metres of gas.

Armed with this experience, Lukoil has long tried to gain access to the Arctic. Russian Energy Minister Alexander Novak supports granting private companies the right to work in the Arctic shelf, but, unsurprisingly, Rosneft is in favour of maintaining the existing policy. For Gazprom too, competitors in their privilege zone of commercial interest are unacceptable.

Losing much-needed investment

Lukoil’s limited opportunities at home have led it to pursue projects abroad in Central Asia, Iraq and Nigeria. Another private company, Novatek, has similarly opted to work on offshore projects outside Russia. It is working with France’s Total and Italy’s Eni to develop two offshore projects in the Mediterranean.

Novatek has been successful in shifting to LNG exports using technology that could be pivotal for oil and gas production in the Arctic. Its LNG project in Russia’s Yamal Peninsula started on time despite difficult conditions, technological challenges and sanctions.

Western sanctions are a long-term hurdle for developing Russian Arctic energy resources, and joint ventures with private Russian companies are part of the solution. But while that is not recognized, Russia is losing much-needed private investment and the opportunity to exploit its potential Arctic riches.

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