The late senator John McCain once said about Russia, “the country is a gas station masquerading as a state." Although the politician is speaking from a biased American position, the truth is that Russia's massive hydrocarbon reserves give some truth to his opinion. Since the early days of the industry more than a century ago, oil and gas have been flowing from wells in Western Russia and Siberia. To maintain its position globally, Moscow is putting all its cards on the development of the Arctic.
The Russian part of the Arctic contains the lion’s share of the resources with more than 48 billion barrels of oil and 43 trillion m3 of gas. Export could ensure a steady supply of revenue for the state coffers on which Moscow is heavily dependent. Several factors hamper the quick development of the region including arduous conditions, Western sanctions, and now also Covid-19. Moscow, however, is adamant on its energy strategy towards 2035.
When Western sanctions were imposed after the conflict in Ukraine and the annexation of the Crimea, the liquefication technology required to develop Russia’s LNG industry was out of reach. The country’s first massive project in the Arctic, Novatek’s Yamal LNG, was completed only after Chinese financiers provided the funds when Western sanctions took a bite.
Novatek, however, has been developing its technology to lessen dependence on foreign suppliers. The homegrown capabilities will be applied to the fourth train at the Yamal LNG facility that is launching somewhere this year. It could be vital for the company’s other two projects starting operations between 2023 and 2025. In five years Novatek’s capacity could have tripled when Obskiy LNG and Arctic LNG 2, both in the Yamal Peninsula, are launched.
Moscow’s assistance in the form of tax exemptions could spur investment in the Arctic. Starting from this year, investments in the region concerning LNG projects are excluded from the mineral extraction tax for the first 12 years. Also, the tax for offshore oil projects has been reduced by 5% for the first 15 years.
Despite the hurdles, Russia's oil and gas industry is moving ahead. Although the challenges are significant and the risk of failure is real, Moscow seems adamant on making the Arctic the next big region of production.
Also, Covid-19 is impacting developments in the region due to spiraling infection rates. However, equally negative effects on other LNG projects globally could benefit Novatek’s plans. The strong backing of the Russian state means that developers in the Arctic have an advantage over their competitors.
The tax breaks benefit companies that are feeling the pain of low energy prices due to reduced demand. Rosneft, for example, started drilling as part of its massive Vostok oil project, which is supposed to increase output from an initial 25 million tonnes per year in 2024 to 115 million tonnes in 2030. Financial support is an important cushion in a time when the oil and gas industry is facing significant challenges.
Gazprom, also, is still on track with its Arctic projects. Although the investments are under review, no delays are yet announced. The energy giant has also started drilling at its Kharasaveyskoye gas field in the Yamal Peninsula.
Pivot to the East
Western partners are hesitant to commit to large Russian energy projects as a result of sanctions. Apart from some exceptions such as the joint venture with Shell in the Russian Far East, Western oil majors are treading carefully due to the threat of American sanctions. Instead, Moscow has been forced to enact its own 'pivot to the east' policy.
The growing partnership with China is, among others, the result of the inability of Russian companies to access technology and funds in the West. The proliferation of essential technologies and Beijing's significant financial capabilities, however, weaken the ability of sanctions to isolate Moscow and change its behavior.
For the West to reach some tangible results, the road of confrontation will lead to growing entrenchment. Real policy changes during peacetime won't happen unless the stick, sanctions, is supplemented by carrots such as diplomatic talks and trade ties.
By Vanand Meliksetian for Oilprice.com
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