Russia limits access to Arctic

Eugene Gerden

March 27, 2014

Global oil majors continue to lobby concessions for opertations on the Russian Arctic shelf; Eugene Gerden reports.

Amid the fierce critics from the global environment organizations, the Russian government continues to create conditions for the attraction of foreign investors for the development of the national Arctic shelf.

Following the unprecedented tax benefits that were granted to Rosneft and its foreign partners for the development of the Russian Arctic shelf at the end of last year, the Russian government is currently considering approving additional measures, aimed at creating more a favorable regime for the company’s operations on the domestic Arctic shelf.

The need to provide additional benefits for Arctic offshore projects was announced in February by Igor Sechin, head of Rosneft, in an official letter addressed to Russian President Vladimir Putin.

According to Sechin, amid the forthcoming active development of the domestic Arctic shelf, Rosneft and its foreign partners, in particular, ExxonMobil, Eni and Statoil, are not happy with the existing national legislation covering shelf development, which restricts some of the planned activities of the partners.

According to Rosneft, operations on the domestic Arctic shelf still require a large number of formal approvals from ministries and departments, which need to be granted at various stages of the companies’ work. Rosneft says the receipt of approvals for some of the activities may take up to two years and require more than 60 approvals from different state agencies.

Rosneft formally commented:

“Simplification of the procedures does not mean their abolition. We are talking about the acceleration of completion of these procedures. Currently their total number is about 60, while their completion may take up to two years.”

Sechin believes that some issues hamper the development of the national Arctic shelf and should be resolved as soon as possible. These include the problem of importing drilling waste to Russia, the long procedures of passport and visa control for workers on offshore drilling platforms and ships, and the existing ban on foreign companies using their own equipment for operations on the Russian Arctic shelf.

According to the Kremlin’s press service, Vladimir Putin has already received the letter from Rosneft and generally supports the latest claims of Rosneft. It is reported that Putin has sent them for further consideration to the Chief of Presidential Administration, Sergei Ivanov, and to Prime Minister Dmitry Medvedev.

Russian analysts believe that the pressure of Rosneft and its foreign partners on the national government is quite understandable. According to Valery Nesterov, a senior analyst of Sberbank CIB, one of Russia’s leading agencies in the oil and gas market, the partners have focused on the fight for licenses. However, now that all the licenses have been distributed, the companies are trying to eliminate other obstacles that may prevent full-scale development of the shelf.

If the latest claims of Rosneft and its foreign partners to be met, this will be a second major success of the shelf’s operators for the last several months and will make the Russian shelf one of the worlds most favorable and liberal, in terms of taxation and ecology.

The latter will be also mainly due to the recent adoption of the federal law, On tax and customs tariff stimulation of production of hydrocarbons on Russia’s continental shelf, approved by the Russian Parliament late last year and which divided all of Russia’s offshore projects into four categories based on the level of complexity.

Unlike to other offshore projects, where mineral extraction tax is set at 30% of the cost of raw materials, in the case of the Arctic projects, this rate is set at the record low figure of 5%.

In addition, all operators of Arctic offshore projects will receive a guarantee of permanency of the tax regime for up to 15 years, and will be exempted from payment of export duties, as well as import duties and VAT on imported technical equipment. The law also exempts operators from property and transport tax.

In return, the companies have provided guarantees for the start of production on the shelf beginning in 2016.

The Russian government explains the decision for the provision of such preferential tax regime to the companies is based on harsh climatic conditions of the Arctic region, which is associated with high production costs for them and require investments, estimated at a total of $700 billion.

The decision to provide benefits to the companies was taken despite the opposition of Sergey Donskoy, Russia’s Minister of Natural Resources, who also proposed to introduce tax on additional income for the companies. The proposal, however, has not received any support from the Russian government.

According to an official representative of the Russian Presidential Administration, providing these benefits will create conditions to encourage more active participation of foreign investors in the development of the Russian Arctic shelf.

This has not gone unnoticed by major partners of Rosneft in Russia, and in particular ExxonMobil, which recently announced plans to leave similar Arctic projects in Greenland, in favor of the Russian Arctic, due to cost issues. ExxonMobil decided not to participate in a bid round of 50,000sq km of Greenland shelf area, where reserves are estimated at 31MMboe.

Instead, the US company, together with Rosneft, plans to focus on developing the North-Kara, North Wrangel-1, and East Prinovozemelsky-1 oil-prone areas. These are spread across nearly half a million hectares of three protected areas: Great Arctic, Wrangel Island, and Russian Arctic, which has brought criticism from many ecology organizations.

If the first projects are successful, Exxon has not ruled out the possibility of expanding cooperation with Rosneft in the Arctic region, taking into account that at present Rosneft owns 46 licenses for exploration and production of hydrocarbons in the Russian Arctic shelf, with total reserves of 34.6 billion tons of oil equivalent.

In addition to Exxon, other major IOCs, such as Statoil and Shell, apparently prefer Russian projects to similar projects in Alaska and Norway.

But constant concessions to oil majors from the national government has sparked protests from many Russian and global environmental organizations, as well as some Russian officials.

According to a representative of the World Wildlife Fund (WWF), Rosneft plans to start developing the Arctic shelf without having any technologies to contain and clean up oil spills.

WWF says that Rosneft is not even able to utilize associated gas produced from traditional oil fields, and must flare, although this is not really comparable with liquidation of oil spills in ice conditions.

An official representative of WWF, comments:

“There is no doubt that requirements for operations on the Russian Arctic shelf should be tightened…due to high threat of floods and especially in the protected areas. Russian environmental regulation currently remains one of the world’s most liberal in this field, which attracts foreign investors.”

In the meantime, Rosneft said that the company and its partners use the latest and the most modern technologies in oil and gas production. They say that dealing with a possible oil spill is an integral part of the company’s corporate program for environmental and industrial safety work on the Arctic shelf.

Analysts of the Russian Oil Union believe that global majors’ interest in the national Arctic shelf will continue to grow, due mainly to recently tightened legislation for offshore oil production in the US and other countries.

They also believe that, thanks to big political influence of its top management, Rosneft will be able to lobby its latest claims announced by Sechin.

The investments of the consortium of Rosneft, ExxonMobil, Eni and Statoil in exploration work on the shelf is estimated at $14 billion, while the total investments in the first phase of the shelf’s development is $500 billion.

So far, Rosneft and ExxonMobil have identified the first structure to be drilled in the Kara Sea, known as Universitetskaya. Work is scheduled to begin this year using the West Alpha semisumbersible drilling rig.

According to the partners’ plans, drilling the Universitetskaya structure may lead to the discovery of a new petroleum province on the Arctic shelf, with potential reserves of more than 35 billion boe.

According to Igor Sechin, Exxon has already promised to fabricate most of the equipment needed at local production facilities and shipyards.

Yuri Shafranik, chairman of the Union of Oil and Gas Producers of Russia said that cooperation with foreign partners is very important for the Russian fuel and energy complex, as local companies currently experience a lack of technologies to develop the Russian Arctic shelf.

Eugene Gerden is an international writer based in St. Petersburg, Russia. Since 1999, he has written for Downstream Today, Oil and Gas International, Chemistry World, and other oil and gas industry publications; he is also a correspondent for WardsAuto, Aviation Pros, and Shepherd Media. Gerden can be reached at [email protected]

images courtesy of Rosneft (top) and Gazprom (bottom)