Russia is a country of superlatives. Its energy sector is one of the most important in the world where the country shares the number one position interchangeably with the U.S. and Saudi Arabia. The story of Russian oil and gas goes back to the early days of the industry in the 19th century. This means that relentless exploration and production are required to maintain output. Rosneft's masterplan is the Vostok project that will become the backbone of Russia's oil industry. CEO Igor Sechin announced the implementation in November 2020 during a working meeting with President Putin.
In the early days, when Tsars ruled the Russian Empire, most of the oil was produced on the shores of the Caspian around the city of Baku in what is now Azerbaijan. As an integral part of the empire, the oil industry lay the foundations for the country's massive industrialization. Decades later, the industry's next step would become the development of the Volga-Ural basin in Western Siberia. The slow but steady depletion of the resources in the region necessitates visionary planning. Vostok could be the result.
Moving north also means more hardship and higher costs due to the arctic conditions and distance to major industrial and populated areas. However, the region’s massive underdeveloped resources are a big promise for a country that is still highly dependent on revenues from fossil fuel sales. Russia’s share of the Arctic region contains approximately 7.3 billion tonnes of oil and 55 trillion cubic meters of natural gas. Currently, fossil fuel sales are a third of total exports and provide almost half of the state’s budget.
The Vostok project is a massive undertaking that stretches across the Russian Arctic shores and covers several production areas such as the Vankor and Payakha clusters. Rosneft expects the operation to cost $170 billion over a decade that will employ 400,000 workers, create 15 new industrial towns, and build 800 km of new pipelines. Furthermore, harbors will need to be built including custom-built ships that can ensure access even during harsh winter seasons when the sea is covered with ice. The new Zvezda shipyard in Russia far east will construct at least 12 ice-class super oil tankers. The first ship of its kind was already delivered in June 2020. Related: U.S. Shale Is Gaining Influence Over Oil Markets
The announcement of the construction operations was done in the presence of President Putin due to the strong support of the Russian state. To kickstart the work, a massive incentive was needed. Companies asked and got a huge tax cut for the explicit purpose of developing the Arctic region. According to KPMG, the tax breaks could be worth 2.6 trillion rubles (or $41 billion) over the next 30 years. Therefore, CEO Sechin directed his words to President Putin in a televised meeting: “it is with great pleasure that I inform you of the start of the practical implementation of the project.”
The Vostok projects should already produce 30 million tonnes of oil by 2024 which rounds up to 600,000 barrels per day. This will need to increase to 50 million tonnes after the first phase, and 100 million tonnes after the second, which adds up to one million and two million barrels per day respectively.
Besides the obvious rewards for the Russian treasury, the massive construction activities are a boon to a large section of the domestic economy. Thousands of tonnes of steel are on order and 400,000 people will be employed, to name several economic benefits. Furthermore, new energy centers with a total capacity of 2,500 GW and 3,500 kilometers of power lines need to be constructed.
Therefore, the importance of this project cannot be underestimated. While most international oil companies have set their sights on developments in the renewables sector, Russia is doubling down on fossil fuels. While it’s certain that demand will decrease over time, oil and gas will remain an essential part of the global economy for decades to come. For this reason, Moscow and the Russian fossil fuel industry see enough reasons to spend billion to maintain a high level of production well into this century.
By Vanand Meliksetian for Oilprice.com
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