Russia and the Arctic Oil

The U.S. Geological Survey estimates there are between 44 and 157 billion barrels of undiscovered oil and between 770-2990 TCF of undiscovered natural gas in the Arctic Circle, with 61 percent of the total belonging to the Russian Federation.

Arctic is attracting renewed attention among Arctic coastal nations because the world is facing the end of “cheap, easy oil,” while much of the remaining “expensive, difficult oil” is now accompanied by heightened security and economic risks. From that perspective, the Arctic offers a new frontier. The Arctic, is a relatively unexplored region, with only about 270 wells having been drilled offshore in an area of more than 13 million square kilometers.

Russia is now focusing on offshore resources in the Arctic Circle, in continental shelves under less than 500 meters of water. The Russian Arctic offshore includes the Barents Sea, Kara Sea, Laptev Sea, East Siberian Sea, Chukchi Sea and Bering Sea. While there is no production in the Arctic yet, the Russian Federation sees these latent resources as strategic assets, which accordingly fall under Russian Strategic Law. This law states that only companies in which the Russian Federation has at least 51 percent ownership have the right to control offshore blocks. Companies must also have five or more years of offshore experience in order to be considered. Within these strict parameters, only Rosneft and Gazprom have qualified thus far for offshore operatorship.

Russian government is expected to soon give private companies the right to explore within the offshore blocks. In addition, the Government will likely introduce more tax incentives for Arctic projects in order to make them more palatable for investors. Multinational collaboration, it seems, will be critical for filling technological gaps, distributing the risk, and supplying sufficient capital. For instance, Rosneft has been seeking outside partners for its development efforts in the Barents and Kara Seas even within the current constraints. In 2012, it entered into three major agreements, one with a U.S. company and two with European companies.

Russian companies are interested in “an exchange program”for technical and management employees that would encourage knowledge sharing and strengthen the relationship between the companies so they can grow together in the international arena.