At this year’s St. Petersburg International Economic Forum (SPIEF), held May 22-24, industry insiders seemed confident that Russia’s oil and gas sector will live through the night and successfully shrug off Western sanctions.
Despite a lower attendance than last year’s conference, the 2014 SPIEF again attracted a good number of multi-nationals. Sanctions or no sanctions, many Western companies came out to support Russia, as some of the world’s most prominent global players sent their CEOs, including Total, E-ON and Philips. With an air of cynical confidence, Total’s Christophe de Margerie even quipped that it was “business as usual.”
As at previous meetings, the highly sensitive oil and gas sector was the principal topic of debate at the SPIEF.
Gazprom’s CEO, Alexey Miller, was riding high just days after the state-owned energy giant signed a deal with China worth over $400 billion. Undeterred by the continued talk of a Russian economy in shambles under the weight of Western sanctions, Miller sent a strong message to European leaders and businesses: We still got our game.
One recurring topic kept popping up throughout the forum: Moscow’s desires to emulate the American shale boom. And for good reason: Russia’s current pumping capacity, which stands at an impressive 10.5 million barrels of oil per day (bpd), comes mostly from the almost depleted western Siberian deposits. Even as Gazprom’s China deal sent geopolitical shockwaves across the world, concerns were circulating that the company might not be able to honor the deal if new, unconventional reserves are not tapped into soon.
From bust to boom?
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Unlike in the U.S., Russian companies will have a harder time pumping out the considerable offshore deposits locked inside the continental arctic shelf. Why? Because capitalism à la russe has proven to be quite a harsh mistress.
Private Russian companies, such as Lukoil, have been battling for several years to convince the Kremlin to give them individual licenses to explore the Russian continental shelf. As it stands now, by law only companies with a state participation greater than 50 percent and a minimum of five years experience in the industry are legally entitled to partake in these exploration efforts.
Translation: the law is tailor-made for state-owned giants Gazprom and Rosneft, leaving them as the sole inheritors of the offshore cache, even if they lack the technology to extract it.
Addressing this technological gap has pushed Gazprom and Rosneft to wisely sign joint ventures with international players such as ExxonMobil, BP, TOTAL and Royal Dutch Shell.
As a direct result of these issues, the shale gas boom has been much slower in Russia, which is about five to seven years behind the U.S. in mustering the technology required for drilling, according to Gazprom Nefts’ CEO Alexander Dyukov. While Russia has known about the arctic shelf for quite some time, low global oil prices and lack of adequate technological equipment have hindered Moscow’s ability to fully dedicate to the cause.
Drawing lessons from the U.S.
A representative of the largest privately owned Russian oil company, Lukoil, told the St. Petersburg forum, “Russia might not be in the middle of delivering a new shale revolution, but for sure it’s at the start of it.” He emphasized that Russia should draw from the U.S. example, where small-medium private firms with expertise in drilling were at the forefront of the shale revolution and were largely responsible for the success of these projects, rather than big guns such as ExxonMobil.
Lukoil’s President Vagit Alekperov has long been arguing that the Russian government should give private companies a seat at the table. The company has illustrated, through successful offshore projects in the Pechora and Caspian seas, for example, that it has both the ability and technology to develop tough offshore fields. Alekperov has emphasized the limits of the law, as it does not allow free and fair access to the arctic shelf and hinders competition at a time when Russia needs development and growth more than ever.
These statements seem not to have fallen completely on deaf ears, as Lukoil and Gazprom signed a contract that will allow Lukoil, through a joint venture, to put its expertise to the test in the arctic shelf. The deal has been widely welcomed by leading Russian newspaper Kommersant, hailing it as a step in the right direction, since it improves the general economic situation and Russia’s energy capability.
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While the move is certainly a step in the right direction, is it enough to reassure the survival and competitiveness of the Russian energy market on the global sphere?
Lukoil still remains in the stranglehold of Gazprom. In reality, the joint venture is simply an exercise in window dressing, since the government refuses to budge and allow private companies to obtain individual licenses. Ideally, awarding permits should be a decision taken only on pragmatic terms, such as the company’s acumen and capacity to deploy the technology needed for the continental shelf.
Only by increasing participation and allowing private companies that have significant expertise in the industry to explore the continental shelf can we bring about the long-sought American-style shale boom. Moreover, increased sectorial competition breeds innovation and can ultimately strengthen the players in the market, which will be forced to adapt in order to preserve their positions. Taking a long-term view, changing the law would certainly benefit both state giants and private players, while increasing investment and Russia’s standing in the international energy sphere.
The situation is still unfolding, but President Vladimir Putin himself has said that Russia’s goal is to “become one of the leaders of starting transformation of the global energy.” The Russian government needs to step up its game, or step aside.
By Scott Belinksi for Oilprice.com