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Who Will Fund Russia’s Answer To U.S. Shale?

Russia regards its Arctic oil and gas development in the same way that the U.S. saw its shale oil and gas sector around 20 years ago, which is a truly game-changing opportunity to alter the balance of power in the world’s hydrocarbons markets. The Vostok Oil project, run by state oil giant Rosneft, is the cornerstone of these Arctic ambitions, combining the exploration and development of several huge oil and gas fields. Rosneft is now in talks with various groups of investors on taking part in the Vostok Oil project and whichever groups succeed in securing an interest will say much about the geopolitical balance in the oil and gas industry in the coming years. 

In broad terms, the Vostok Oil project will unite the largest deposits in the north of Krasnoyarsk Territory, including the supergiant oil and gas fields of the Vankor cluster (Vankorskoye, Suzunskoye, Lodochnoye, Tagulskoye, Ichemminskoye), and the Payakhskoye oil field, and West-Irkinsky site. Overall, according to several senior oil and gas industry sources in Moscow and London spoken to by OilPrice.com last week, Rosneft’s estimates that the Vostok Oil project has 6.2 billion tonnes (53 billion barrels) of oil reserves are realistic.

At full capacity, the project is set to produce up to 100 million tonnes (845 million barrels) of oil per year, which equates to just over another 2 million barrels per day. Given Russia’s ability to currently produce at least 11 million bpd with relative ease, this additional output from the Vostok Oil project would bring its average daily crude oil production to between 13 and 14 million bpd. This would be on a level with the current upper limit projections for the U.S. in the next five years and way above Saudi Arabia’s true crude oil production, which has averaged 8.162 million bpd from 1973 to yesterday. 

All of these developments – and other elements of Russia’s Arctic sector exploration and development in the Yamal and Gydan peninsulas, lying on the south side of the Kara Sea - are within close proximity of the Northern Sea Route (NSR). The NSR, the coastal route of which crosses the Kara Sea, is already in operation but is being built out further to be the primary transport route to monetise these resources in the global oil and gas markets, especially to China.

Recently, Rosneft chief executive officer, Igor Sechin, told Russia’s President Vladimir Putin of the formal commencement of operations on the Vostok Oil project, stating: ‘The prospecting and exploration work are now underway, in accordance with our timetable,’ and adding that the design work for a 770-kilometre oil pipeline and a port had been completed. In this context, Sechin also promised Putin that the scheme would create a ‘new oil and gas province’ on Siberia’s Taymyr peninsula, with the complete project representing a total investment of RUB10,000 billion (US$135 billion), including two airports and 15 ‘industry towns.’ 

Russia’s efforts in the Arctic and through the NSR are being bolstered by Gazprom Neft, the country’s third biggest oil company by output and the oil arm of state gas giant Gazprom. July 2020 saw Gazprom Neft ship its first cargo of oil produced in the Arctic to China via the NSR, adding to its existing Western exports via the NSR to Europe.

According to Gazprom Neft, it took 47 days to deliver a full cargo of 144,000 tonnes of sweet, light Novy Port oil – that comes from the Yamal peninsula developments – to the Chinese port of Yantai on the Bohai Sea from Russia’s north-western city of Murmansk. ‘Successful experience in the sale of Arctic oil in the European market and in-depth insight of Asia-Pacific markets allow Gazprom Neft to offer Novy Port oil with a unique year-round logistics scheme to Asian partners,’ said Gazprom Neft’s deputy director general for logistics, processing and sales, Anatoly Cherner. A month later, Gazprom Neft announced a new joint venture (JV) with Anglo-Dutch super-major Royal Dutch Shell, focused on the exploration and development of oil and gas resources along the Gydan peninsula area, particularly at the Leskinsky and Pukhutsyayakhsky licence blocks. 

Related: U.S. Rig Count Ticks Higher Amid Oil Price Slide

The China side of these Arctic projects is fully in line with the US$400 billion or so 30-year deal signed in 2014 for Russia to export vast quantities of gas – through the ‘Power of Siberia’ pipeline project – to China over that period (managed on the Russian side by Gazprom and on the China side by China National Petroleum Corp). The agreement delivers some 38 billion cubic metres of natural gas a year to China’s burgeoning economy (having formally started in 2018), totalling over 1 trillion cubic metres of gas being supplied during a whole contractual period.

Although a relatively reasonable deal for Russia economically, the political benefit is huge, giving it a major second market for its gas in the event of further sanctions from the U.S. over its already significant gas dealings with Europe. It also opened the way for massive Chinese investment in Russia’s power and transportation infrastructure and for a much broader and deeper co-operation between the two countries (including militarily) over the 30-year period.

It is highly likely, therefore, that China’s investment into Russia’s Arctic exploration and development efforts will not just be focused on its gas (and resultant LNG) projects but also on its oil ones. It is also interesting to see that despite the remnants of the U.S.-led sanctions against Russia (as a result of its annexation of Crimea in 2014 and later its poisoning in the U.K. of former GRU colonel, Sergei Skripal, and his daughter Yulia) – many international oil companies are still active in Russian oil and gas projects, including in the Arctic. Aside from Royal Dutch Shell’s stake in the Gazprom Neft Gydan projects, Japan’s Mitsui and Japan Oil Gas and Metals National Corporation stake in Novatek’s Arctic LNG 2 project, perhaps the most overt signal that the oil business goes its own way when possible, regardless of all other considerations, is the fact that U.K. supermajor BP sold its TNK-BP Russian joint venture for cash and a 19.75 per cent stake in Rosneft.

According to initial – but vague reports out of Rosneft – potential investors in the Vostok Oil project (aside from the obvious Chinese candidates) include oil traders, international integrated oil and gas companies, and national or neo-national oil companies, including firms from India. A 10 per cent stake in the Vostok Oil project was already acquired by international trader Trafigura in 2020, and Rosneft and a consortium headed by Vitol signed a letter of agreement for the sale of a 5 per cent stake in the Vostok Oil project, according to a statement from Rosneft in June. 

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on August 24 2021 said:
    The Arctic is, in my opinion, Russia’s ‘Wild West’ to borrow a phrase from America’s history. Its The oil and gas potential is far bigger than US shale oil.

    President Putin has long ago recognized the great importance of the Arctic for the Russian economy and the Russian oil industry. That is why he has been pouring hundreds of billions of dollars into the region. Thanks to the Arctic, Russia will maintain its position as the world’s energy superpower throughout the 21st century.

    Despite the most intrusive US sanctions since 2014, Russia has achieved great success in the development of the oil and gas resources in the Arctic with the Vostok oil project being the cornerstone of its Arctic ambitions.

    Crude oil reserves in the Russian Arctic are estimated at 17 billion tons of oil (equivalent to 124.6 billion barrels of oil) while natural gas reserves are estimated at 85 trillion cubic metres (3004 trillion cubic feet) based on current extraction technology according to Russia’s Ministry of Natural Resources.

    If these are added to current proven oil and gas reserves, then Russia’s oil and gas reserves will mushroom to 231.8 billion barrels and 4375 tcf respectively. This means that Russia’s oil reserves will last until 2080 while gas reserves will last until 2101 at 2019 production levels and with current technology. Moreover, advances in oil extraction technology in coming years and a stepping up of exploration in the Arctic could lead to an upward revision of these reserves.

    Along the Arctic resources, Russia is also developing the Northern Sea Route (NSR) to become the primary transport route to monetise these resources in the global oil and gas markets, especially to China. By 2024, Russia intends to boost oil shipments via the NSR to 1.61 million barrels a day (mbd) rising by 2030 to 3.0 mbd.

    From the start President Putin insisted that the bulk of the financing for the Arctic projects should come from Russian sources and that a state-of-the-art home technology should be developed to avoid dependence on Western technology. Nevertheless, Russia has been inviting Western oil supermajors to invest in the Arctic and use their advanced technology there. Another major contributor is China which is already an investor on Novateck’s LNG production and could be interested in investing also in oil projects. After all, China is the largest market for both Russian oil and also gas exports. Russia is the largest recipient of Chinese investments under the Belt and Road Initiative (BRI).

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • George Doolittle on August 25 2021 said:
    "hyperinflation" will finance this resource extraction endeavor in Russia of course and as with everything else in Putin's Russia!

    Just like Venezuela, Libya, Argentina... Australia, Canada...Mexico of course.

    All of "euro-land."
    Historically Brazil being the same way.
    South Africa, Zimbabwe, Zaire, Indonesia.
    China too obviously and of course.

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