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    Gas in Russia’s Arctic [NGW Magazine]

Summary

Russia’s Gazprom Neft and Novatek plan to work together to search for oil and gas in the Chukchi Sea in the eastern Russian Arctic. [NGW Magazine Volume 4, Issue 17]

by: Joe Murphy

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Gas in Russia’s Arctic [NGW Magazine]

Two major Russian oil and gas producers are planning to jointly explore the North-Vrangelevsky block, Gazprom Neft CEO Alexander Dyukov was quoted as saying by Moscow-based Kommersant at the Eastern Economic Forum in Vladivostok.

The block extends across more than 117,000 km2 of water off the Chukotka Peninsula. His counterpart at Novatek, Leonid Mikhelson, confirmed this, saying work at the site would begin next year.

“We need to drill a couple of wells, and additionally carry out 3D seismic,” he said, according to the newspaper.

Gazprom Neft is set to transfer a 49% stake in the block licence to Novatek, Kommersant sources claimed, in a public-private deal. 

Finding a partner

Gazprom Neft won exploration rights to North-Vrangelevsky back in 2013. The remote area covers waters ranging from 20 to 90 metres in depth and holds 140mn mt of oil and condensate and 1 trillion m3 of gas in initial resources, the company estimates. But its value will only be known after drilling.

Gazprom Neft was earlier seeking a foreign partner at North-Vrangelevsky, to secure the technology and know-how necessary to overcome the challenges of offshore Arctic drilling. It considered Shell, its partner at Sakhalin-2 and Salym Petroleum, as a potential candidate back in 2013. However, international sanctions introduced the following year restricted companies from the US, EU and other countries from providing any assistance to Russian Arctic oil and gas projects, forcing the withdrawal of ExxonMobil from a Kara Sea project in 2014. This explains Gazprom Neft’s decision to reach out to a domestic partner instead.

Novatek has limited experience of offshore exploration, although it will be able to help Gazprom Neft shoulder the drilling costs. It has also proven itself a capable onshore Arctic operator on the Yamal Peninsula. Russia is unable to produce most of the equipment needed for offshore drilling itself. With Western sanctions in place, the two companies are likely to tap Chinese equipment suppliers, as Gazprom has done in the Kara Sea.

If the partnership is finalised, Novatek would become the first private Russian company to gain rights to offshore Arctic resources, which Moscow views as strategically valuable. Russian legislation prohibits non-state firms from operating Arctic shelf licences, though there is nothing to stop them partnering with state operators at blocks.

Gazprom Neft has been receptive to working offshore with Novatek, already its partner at several Western Siberian projects. The pair are understood to be discussing joint activities in the Kara Sea as well.

Russia’s other leading state oil company, Rosneft, has shown no such inclination, with its powerful head Igor Sechin having lobbied aggressively over the years against calls to liberalise access to the Arctic shelf. 

Liberalisation

Moscow is now rethinking its policy, however. Officials plan to draft a bill that would allow independents to hold Arctic shelf licences, with reports indicating that the legislation enjoys broad support in government.

Russia’s energy ministry is also considering plans to give a state entity, possibly exploration agency Rosgeologiya, the responsibility for overseeing the activities of private explorers on the shelf, Kommersant reported on September 4. This agency would assume control of unallocated licences and award them to operators, with state-controlled entities retaining 50% interests. Earlier this year deputy prime minister and Arctic commission head Yuri Trutnev even suggested that Norway-style licensing rounds could be held.

There is a general recognition in Moscow that more needs to be done to spur Arctic development – both to support oil and gas production growth and increased traffic along the Northern Sea Route. Offshore exploration ground to a halt after the 2014 oil price crash, prompting the government to impose a moratorium of new licence awards as state operators were unable to keep up with work obligations at their existing projects. Gazprom has since resumed some drilling activity, although Rosneft is yet to return to its projects, including its Pobeda oil find in the Kara Sea.

Action needed

While reforms to Moscow’s Arctic oil and gas policy will help galvanise development, it is important to recognise that Russia is still some way from bringing any more offshore fields in the region on stream. So far its only producing project on the shelf is Gazprom Neft’s Prirazlomnoye field in the Pechora Sea. Even the most optimistic of government forecasts do not envisage any more project launches before 2030.

The prospects for offshore gas production are particularly dim. Gazprom is yet to disclose development plans for any of its finds in the Kara Sea, and there is reason to doubt that these projects could turn a profit in current market conditions. Even when oil prices were much higher and sanctions had not been imposed, Gazprom was unable to find a way of monetising its 3.9 trillion m³ Shtokman field – Russia’ largest offshore gas find – even with the help of Total and Equinor (then called Statoil). It was however finally killed off by cheap shale gas: the project had been aimed at the US market.

Even so, some offshore gas-prone deposits may become more feasible to develop as Novatek expands its LNG operations on Yamal and the Gydan peninsula, providing tie-in opportunities. Discoveries could also share infrastructure with Gazprom’s new onshore gas projects.