Russian oil and gas offshore

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Russian oil and gas offshore

Most estimates [Granberg et al., 1993; Malovitski et al., 1994] suggest that promising oil- and gas-bearing areas are found on about 90% of all Russian shelves. They cover 5.2-6.2 million square kilometers. Potential recoverable hydrocarbon resources of the Russian continental shelves are estimated within 90 to 100 billion tons of oil equivalent. Natural gas resources account for 80% of them.

Practically everywhere on the Russian shelf, the affinity between the offshore petroleum-bearing provinces and corresponding geological structures of the adjoining inland areas is found. Global experience indicates that in such cases, the oil and gas potential of the shelf fields is higher than that of the onshore accumulations.

The high potential of oil and gas fields of the Russian shelves and thus the security of the hydrocarbon supply in Russia in the foreseeable future are beyond any doubt. At the same time, it is important to stress that these resources are located mostly in remote areas characterized by severe climatic conditions (the Arctic and Far East). The geological and geophysical explorations of these resources have not been extensive enough. They cover, on average, only 0.17 km/km². This is several times less than the scope of exploration on the shelves of the North Sea, Gulf of Mexico, and a number of other regions.

Two giant oil- and gas-bearing basins found in the West Arctic (on the shelves of the Barents and Kara Seas) cover a total area of 2 million square kilometers. They contain potential resources of at least 50-60 billion tons of conventional fuel (in oil equivalent). The region exploration, including drilling, revealed the existence of ten prolific oil and gas fields [Dubinin, 1994; Malovitski et al., 1994]. The resources of only two of them in the Kara Sea (Rusanovskoe and Leningradskoe) are estimated at 5 trillion cubic meters of natural gas. This amount is very impressive when taking into consideration that worldwide gas production at present totals 2 trillion cubic meters a year.

In the Barents Sea, the Shtokmanovskoe gas condensate field and the Prirazlomnoe oil field in the area of Pechora Bay are of special interest. The Shtokmanovskoe gas condensate field is probably the world's largest known offshore gas field. Its reserves total about 3 trillion cubic meters of gas and more than 20 million tons of gas condensate. Geological oil reserves of the Prirazlomnoe field amount to more than 200 million tons. The oil and gas developments in the region have been in progress since 1992. The large-scale industrial exploitation of these fields is planned to begin between 1998-2000. In the future, these activities might lead to significant changes in the world's system of oil and gas transportation [Parfenov, 1994].

Similar large-scale activities are planned in some other areas of the Russian northern shelves. For instance, in the Jamal area, a gas condensate field is estimated to produce up to 80-100 billion cubic meters of natural gas a year [Mazur, 1993].

The shelves of the Far East and Eastern Siberia have especially good prospects for large-scale and long-term developments of the offshore oil and gas fields. The promising areas in these regions (excluding Sakhalin and its shelf) are estimated at about 1.5 million square kilometers. Potential recoverable resources are estimated at billions of tons of conventional fuel. These reserves are concentrated mostly in the Sea of Okhotsk and the Bering, Chukchi, and East-Siberian Seas. Here, more than 20 oil- and gas-bearing and potentially oil- and gas-bearing basins of different geotectonic nature have been discovered.

Similar activities are in progress on the shelf of Sakhalin. Its rich oil and gas resources discovered a long time ago have been intensively explored for the last 20 years. A number of large oil companies (Exxon, Shell, Marathon, and others) have already accomplished the first preliminary steps of oil and gas developments in the eastern and northeastern areas of the Sakhalin shelf within the frame of the Sakhalin-1 and Sakhalin-2 projects.

Geological reserves of only one of five giant fields located here (Odopinskoe) amount to over 200 million tons of oil and 0.1 trillion cubic meters of gas. The projects of oil and gas development of the Sakhalin shelf stipulate to install large offshore drilling platforms, construct undersea pipelines going to the shore, build onshore complexes for the storage and processing of oil and gas hydrocarbons (including a plant for producing liquefied natural gas), and to lay an inland gas main on the island. Realization of these projects may result in Sakhalin becoming a large oil and gas production center and an important oil and, especially, liquefied natural gas supplier.

Exploratory and production developments of the offshore oil and gas fields on the other Russian shelves (the Caspian, Black, Baltic Seas, and the Sea of Asov) have been in progress for a relatively long time although in a smaller scale. The shallow shelf of the Caspian Sea, particularly its northern part, deserves a special mention. The recoverable hydrocarbon resources of this area are estimated to reach up to 2-3 billion tons, with oil accounting for 70%. At the same time, the exploration and drilling activities here are complicated by the very deep location of petroleum deposits (over 4 km), high reservoir drive, and large amounts of aggressive sulfurous gases [Granberg et al., 1993]. Besides, the Northern Caspian Sea has a unique fisheries value as a region for reproduction of the world's largest population of sturgeon.

For thousands of years, the continental shelf has been used mainly for landing various valuable sea products, including fish. At present, it provides annually over 80 million tons of sea products (in Russia - about 5 million tons). At the end of the twentieth century, the continental shelf has become a place for another large-scale and vitally important activity - oil and gas production. How can these two industries coexist together? Is it possible to extract oil and gas from the sea bottom to the fullest extent without disturbing the ecology of the shelf zone and its priceless biological resources? These and other related issues discussed in Environmental Impact of the Offshore Oil and Gas Industry are extremely important for the stable and environmentally safe development of many countries. The answers to these questions are vital for Russia, which is in the very beginning of developing the world's richest offshore hydrocarbon reserves.

The quest for Arctic oil and gas resources is not for the faint of heart, nor for those with less-than-deep pockets. Rather, Arctic resource development is both high-cost and high-risk. More specifically, the major challenges include:

Harsh climate: The intense COW for much ol Ihe year, long periods of near-total darkness, (he potential ice-pack damage tooffshore facilities, the marshy tundra dictating seasonal activity in many areas and the limited biological activity an will take a huge toll on equipment and personnel.

Limited existing infrastructure: New "gieenlield" development will be very expensive and carry large environmental risks, and special equipment wii be required (such as special tankers and ice-breakers), with K>nq supply lines and with supplwloqistical issues compounded by (he harsh clanate.

Gas-on-gas competition: The booming global gas supply, Doth from conventional and unconventional sources, will challenge Arctic qas development, especially shale gas. but increasingly coal seam gas<CSG) and liquefied natural gas (LNG) as well. There are ever-increasng estimates of non-frontier resource potential, almost ai of which could be developed at less cost and with lower environmental risk compared with Arctic natural gas. For example, offshore East Africa has seen tremendous recent gas discoveries, while US Arctic gas development costs may be as much as douote those of comparable iower-48 developments.

Exceptionally long protect lead times: Witn the drawn-out time lues, the risk of cost overruns increases dramatically. The investment cycle will necessarily be long and gaining funding to these types of projects may prove challenging m the current economic climate.

Spill containment/spin recovery: Both from a plannaig and an equipment perspective, containmentfrecovery contingencies will be both different and more difficult compared with "conventional" as well as other "frontier" develop projects, due to both climatic and logistical considerations.

Overlapping/competing economic sovereignly claims: There are substantial political and jurisdictional issues with the 1982 United Nations Convention on the Law of the Sea (UNCLOS). wtuch set seemingly conflicting rules f« sovereignty claims, particularly for the Arctic seabed that may or may not be an extension of a continental shelf. Notably, the US has signed but not ratified UNCLOS. Under current international practice, countries have exclusive rights to seabed resources up to 200 miles beyond their coast, an area called an Exclusive Economic Zone (EEZX Beyond the EEZ, countries must demonstrate that the seabed is a "natural prolongation" ol the continental shelf in order to claim seabed rights. These practices have led to several overlapping claims between countries. For example, Russia has made a claim that Us shell extends all the way to the North Pole along the Lomonosov Rkjge, a claim that the Canadians (as well as others) vigorously reject. Additionally, the long-running US/Canada dispute over the boundaries ol the Beaufort Sea continues, while the other long-running dispute, between Russia and Norway in the Barents Sea, was resolved in late 2010.

Country-specitic environmental laws/regulations: Country-specific action may restrain or constrain A»ctic development and/Or further complicate the economic sovereignty issues (e.g.. Die US ban on Arctic National Wildlife Refuge(ANWR) development, or the environmental challenges to Arctic drilling plans). There are also increasing protests and objections from non-governmental organizations (NGOs). noting that the Arctic environment is a unique ecosystem and warring of potential irreversible ecological chain reactions.

Russia

Russian Arctic opportunities may in fact be the big prize. Over the last few years, Russia has intensified the development of the vast hydrocarbon resources of its continental shelf, through state incentives aimed at stimulating offshore oil and gas production. The area of Russia's shelf and continental slope totals 6.2 million square kilometers, with the vast majority in the Arctic area. The defined area of the continental shelf may be increased as Russia prepares an application to extend its borders over 1.2 million square kilometers of Arctic waters, an application expected to be finalized by the end of 2013.

The Government of Russia is also completing development of the state program on exploration and development of mineral resources of the Arctic continental shelf for 2012-30. Intensifying geological/exploration activity is one of the program's main priorities, to be supported primarily by investments from private Russian oil and gas companies.

Twenty major oil and gas provinces and basins have been discovered on the Russian shelf, 10 of which have proved oil and gas reserves. The largest Arctic sedimentary basins are the East Barents, South Kara, Laptev, East Siberian and Chukchi basins.

The majority of local resources (around 94% of the total) have been found in the western part, while the hydrocarbon potential of the eastern part, along the slope and in the deep Arctic basin, is mostly regarded as inferred or contingent.

Gazprom and Rosneft are currently the only companies allowed to receive new licenses to explore Russia's continental shelf. The two companies hold the majority of licenses (29 for Rosneft and 16 for Gazprom), with the licenses mainly located in the Okhotsk, Kara and Barents seas. However, according to Russia's Arctic shelf development program, more companies may gain the right to explore and produce oil and gas in the offshore strip, including some smaller, private companies or subsidiaries of state-controlled companies. A number of Russian private companies are interested in participating in the Arctic shelf and are lobbying for liberalization of access to shelf projects. Among them, LUKOIL has proposed the concept of a National Company, which might cover many private companies and grant such companies the right to participate in shelf projects. Currently Russian authorities are considering changes in the legislation on foreign investments in strategic sectors, including the oil and gas industry, to lighten procedures for foreign companies to participate in development of such projects.

Gazprom's proposed mega-LNG project in the Russian Arctic, the Shtokman development, to be developed jointly with Statoil and Total SA, faces increasing uncertainty. With cost estimates rising sharply and the expected market for much of the LNG -- North America -- effectively evaporating with the shale boom, Gazprom and its partners are “rethinking” the project. Statoil has since withdrawn from the Shtokman project, choosing not to renew its participation when the original agreement expired in June 2012. As a result, Gazprom has postponed any final investment decision until 2014. Notably, in the middle of December 2012 the company announced it would continue developing the project.The recent agreement between Rosneft and ExxonMobil for joint offshore development in the Kara and Black seas, signed in August 2011, is a significant new step in exploring and producing hydrocarbons on the Russian shelf. This deal demonstrates that both domestic and international companies are interested in cooperating in this area. The total investment required in the project is estimated at US$500 billion. Rosneft would control a 67% stake in the joint venture, while ExxonMobil would control the rest. Similar JVs are in place with Eni, to focus on Barents Sea exploration, and with Statoil, focusing on exploration in the Barents and Okhotsk seas.

Looking forward to 2020, it is expected that Rosneft and Gazprom will remain the main drivers in developing Russia's continental shelf. According to our estimates, based on information from public sources attributed to the Ministry of Natural Resources and Environment and the Ministry of Energy, licenses to exploit subsurface resources in the Arctic and Far East seas will be split between these two companies in 2020, with about 41 licenses belonging to Rosneft and 32 to Gazprom. The main targets for Rosneft are expected to be the Barents shelf (including its southeastern part, named the Pechora Sea) and Okhotsk seas (31 licenses), while Gazprom is expected to concentrate on Kara Sea projects (21 licenses).

Canada

Canadian geologists long believed that the Arctic north had significant potential for petroleum discoveries. In 1967, a partnership between government and industry resulted in the formation of Panarctic Oils Ltd., and in the 1970s and early 1980s, the Canadian government invested in Arctic oil and gas exploration. Important discoveries were made in the Mackenzie Delta region, the Beaufort Sea Basin and in the Arctic islands. Exploration drilling in Canada's Arctic offshore began in 1972, and since then, approximately 90 wells have been drilled in the Beaufort Sea. In addition, 34 offshore wells have been drilled in Nunavut's High Arctic Islands, and another three wells have been drilled in the Eastern Arctic offshore. Most of this activity occurred in the 1970s and 1980s when a combination of increases in fuel prices and federal incentives made the Arctic an attractive place for companies to invest in exploration. 5Changes in market conditions for oil and gas, the end of government exploration incentives and the absence of infrastructure to ship oil and gas to markets, resulted in the withdrawal of companies from exploration drilling in the Arctic offshore during the 1990s. Since 1991, when the National Energy Board (NEB) took over the regulation of oil and gas exploration and production activities in this area, the only offshore well that has been drilled in Canada's Arctic was the Devon Paktoa C-60 exploration well. It was drilled in the Beaufort Sea during the winter of 2005-06 and was abandoned in March 2006.5. Natural Resources Canada, “Arctic Oil and Gas,” undated. Canada Exploration interest in the Canadian Arctic offshore has increased in recent years. Six significant discovery licenses were issued in 2007 and 2008 to three companies exploring in the Beaufort Sea, and there has also been an increase in the number of active exploration licenses issued in the Mackenzie Delta-Beaufort Sea region. However, the NEB noted in its December 2011 report, there is currently no offshore drilling in Canada's Arctic, nor are there applications for drilling before the board, although a number of companies hold exploration licenses for areas in the Beaufort Sea.6 Following a regulatory update on oil and gas drilling regulation in the Canadian part of the Arctic Beaufort Sea, industry heavyweights Chevron and Statoil have joined forces to explore leases in the area this year. Chevron, previously the sole leaseholder, has farmed out a 40% stake to Statoil for an undisclosed amount but will remain the operator. The companies plan to launch a 3D seismic program for a 2,060-square-kilometer area on the back of strong confidence in significant resources being buried under Canada's Arctic ice and recent clarification on drilling safety regulation in the region.

Greenland

Sparsely populated Greenland is in some ways an oddity. Geographically, it is part of the North American continent, but geopolitically, it is part of Europe. Nationally, Greenland is part of Denmark, but is a self-governing colony following 300 years of Danish rule. The Government of Greenland encourages oil development because it is keen to find another source of income outside of fishing and wants to reduce its reliance on subsidies from Denmark. A fully fledged oil industry could lead to full independence from Denmark, as well as economic development.Oil exploration in Greenland dates back to the late 1970s, but six test drillings in 1976, 1977 and 1990 failed to prove the potential for profitable exploitation, and the high cost of accessing reserves in waters and land that are icebound for most of the year deterred investors. But the potential for profitable exploitation changed in the summer of 2010 when British independent oil company Cairn Energy discovered hydrocarbons in Greenland for the first time. Following the Cairn discovery, in November 2010, Greenland awarded its first offshore oil and gas exploration licenses Greenland to oil companies, opening up this Arctic frontier to future oil and gas production. While the Greenlandic Government welcomed the Cairn discovery and the results of its first licensing round, Greenpeace, the international environmental group, embarked upon an aggressive campaign to stop any more exploration in the area dubbed “Iceberg Alley.”7 Cairn has interests in eight offshore areas spanning more than 85,000 square kilometers and had budgeted US$1 billion for its eight-well drilling campaign spread over 2010-11. But drilling results have been disappointing, with some hydrocarbon “shows” across multiple basins, but no commercial discoveries. Cairn is evaluating its next steps, while other existing acreage-holders, Shell and Statoil, are expected to ramp up their exploration activity in 2012-13. Statoil notably bought into Cairn's Pitu license in late 2011. While disappointed with the Cairn results, the Government has already planned a second licensing round. In 2013, blocks will be offered in the Greenland Sea and offshore northeast Greenland.8

Norway

Norwegian oil and gas production is concentrated on the Norwegian Continental Shelf (NCS), with activity in the North Sea, the Norwegian Sea and the Barents Sea. The country is the world's fifth-largest oil exporter and the second-largest exporter of natural gas. After first starting production from the North Sea some 30 years ago, output peaked in 2001 at just over 3.4 million b/d and has declined since then -- a situation reflected more generally across the region -- even though recent significant discoveries have boosted confidence in slowing output decline rates. The Norwegian Government's overall aim for the oil and gas sector is to ensure full exploitation of NCS resources within acceptable environmental limits. Even though the Norwegian fiscal regime requires higher taxes on oil and gas production than many other exploration and production centers in the world, Norway has continuously attracted high levels of investment through adhering to fiscal policy stability that sets the country apart.9The Norwegian authorities opened the Barents Sea in the Arctic for exploration in 1981, and Statoil, the majority-state-owned oil company, discovered the huge Snшhvit gas fields that same year. Over the course of the next 30 years, Statoil and a number of other international players have developed fields and a strong foothold in the North, in part through the drilling of more than 80 exploration wells. In the Russian sector of the Barents Sea, Statoil participated in exploration drilling activity in the 1990s, and the company partnered with Total SA on the Arctic land-based Kharyaga field.More recently, together with Gazprom and Total, Statoil had been taking part in the evaluation of the gigantic Shtokman gas field, located 600 km from shore in the Barents Sea.10 Expansion of 9. IHS Global Insight, Inc., “Country Energy Profile: Norway,” accessed February 2012.10. Hege Marie Norheim, Statoil ASA, “Petroleum Activities in the Arctic,” speech to the Nordic Council of Ministers, 26 May 2010.the Barents Sea as a petroleum province is set to be a key focus in the coming years; Norway's 21st licensing round has seen 12 production licenses awarded in the Barents Sea, on equal footing with Norwegian Sea licenses and confirming significant levels of interest in the area. The resolved border delineation between Russia and Norway will see more Barents Sea acreage become available in 2013-14, pending parliamentary approval. Nevertheless, the further development of the region remains controversial, given its environmental sensitivity, and is therefore likely to move forward at a slow pace. The issue will continue to be a source of significant debate in the governing Red-Green coalition of Prime Minister Jens Stoltenberg.11 Development of the Barents Sea as a petroleum-producing region is likely to be an increasing focus for operators on the Norwegian Continental Shelf as Norwegian Sea and North Sea fields mature. Statoil already operates the world's most northerly liquefied natural-gas production facility near Hammerfest, which draws gas equivalent to about 48,000 barrels of oil a day from the Snшhvit field in the Arctic waters off Norway. (Snшhvit is the world's only LNG facility north of the Arctic Circle.) By 2020, the company hopes to extract one million barrels of oil equivalent a day from new Arctic wells. It plans further exploratory drilling this year in the Skrugard and Havis gas fields, which were discovered in the Barents Sea in 2011.12 Should further drilling confirm Statoil's reserve estimate, it would mean that Skrugard could be Norway's single largest offshore discovery. Skrugard's gas potential suggests that it could provide feedstock for a second liquefaction train at the Snшhvit liquefied natural gas (LNG) project. Statoil said in June 2010 (and reaffirmed in January 2011) that it was examining a second train, with a decision expected in 2013. Skrugard has significant implications for broader Barents Sea exploration, given the spate of disappointments in recent years, with all six wells drilled in 2011 (prior to Skrugard) failing to yield hydrocarbons. Faced with rapidly falling reserves, in the North Sea and Norwegian Sea, Norway believes that its hydrocarbon future lies in Barents Sea prospects.In September 2010, then-Russian President Dmitry Medvedev and Norwegian Prime Minister Jens Stoltenberg signed a treaty delimiting their maritime border in the Barents Sea, ending a decades-long dispute between the two countries. The treaty signing in Murmansk, a Russian city near the Norwegian border north of the Arctic Circle, came following a preliminary agreement reached in April. The disputed territory covered approximately 175,000 square km in the Barents Sea. The treaty represents a compromise, with the two countries agreeing to a border that splits this area roughly in half.Relations between Norway and Russia have warmed in recent years, and with both sides eyeing the potential oil and gas reserves in the disputed zone, the countries agreed to set aside their differences and establish a maritime border so that they can get on with the business of exploration in the region. Norway is keen to replace declining North Sea oil production via exploration and development of Arctic deposits in the Barents Sea, while Russia has an interest in cooperating with Norway to secure Norwegian support for Russia's own territorial claims in the Arctic. Resolution of the bilateral Barents Sea dispute could see Russia and Norway support each other in the wider international race over the Arctic -- which also has Canada, the United States, and Denmark staking their claims.

USA

As noted above, the North American side of the Arctic is estimated to hold about 65% of the undiscovered Arctic oil and 26% of the undiscovered Arctic natural gas. Specifically, it is projected that the Alaskan Arctic region holds the largest undiscovered Arctic oil deposits (approximately 30 billion barrels).

The Alaskan Arctic is made up of five areas: the Arctic National Wildlife Refuge (ANWR), the Central Arctic, the National Petroleum Reserve -- Alaska (NPRA), the Beaufort Outer Continental Shelf (OCS) and the Chukchi Sea OCS. Currently, exploration and production in these areas are focused on oil production; however, in the long term, the focus may be shifted to natural gas.

The Beaufort Sea has the advantage of having relatively shallower water, and it is closer to the Trans-Alaska Pipeline System (TAPS) infrastructure, while the Chukchi Sea is deeper water and farther from existing infrastructure. The first oil from the Beaufort Sea could come as early as 2020, while the first oil from the Chukchi Sea is unlikely before 2022. Notably, the operator and owners of TAPS are eager to identify the new supplies that will be needed to keep the line economic. TAPS currently operates at less than half its total capacity, as North Slope production has declined. Much of the Arctic's oil and gas resources remain unexplored due to various concerns such as climate change and the impact of development on the Arctic environment. However, some companies are planning to proceed with oil and gas drilling. For example, after a long, arduous process, Royal Dutch Shell has recently received approval from the Environmental Protection Agency (EPA) to drill oil and gas exploration wells in the Beaufort and Chukchi seas, and in mid-February 2012, Shell received approval of its spill contingency plan from the Department of the Interior's Bureau of Safety and Environmental Enforcement. Shell planned to begin drilling in the summer of 2012, but drilling has been postponed to summer 2013. These will be the first offshore wells in the US Arctic region.

Summary comparative assessments

Rather than get into detailed examinations of the individual legal, fiscal and regulatory regimes of the five countries, we offer a high-level summary assessment, essentially drawn from the work produced by Deutsche Bank's Russian analyst team. In Deutsche Bank's view, from an overall fiscal perspective, with its proposed new tax regime for the Arctic, Russia will arguably move slightly ahead of the US and Canada. Costs will be a challenge in every country, but perhaps slightly less so in Russia. A lack of infrastructure similarly is a challenge everywhere, although access to existing infrastructure is most favorable in the US, given the TAPS. Production from the Norwegian Arctic would likely

have the easiest access to markets. The potential for large-scale discoveries is probably greatest in the Russian and US Arctic regions, but Deutsche Bank believes that the prospects for turning discoveries into material value may be more favorable in Norway and Greenland. Broadly speaking from an overall perspective, Arctic opportunities in Russia are probably the most attractive, slightly more so than in Norway and the US.

Summary attractiveness of Arctic opportunities by country

hydrocarbon resource shelve gas

As shown below, the fiscal and tax perspective is extremely important. In the accompanying table, we have summarized the key characteristics of the tax regimes of the five countries. Notably, we have included two “views” of the Russian regime: the current state and a summary of the proposed new regime for the Arctic offshore.

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