Development of the Russian Shelf: The State and Oil Companies, Unite Your Efforts!

May 28, 2011

   Obviously, the state and oil companies require mutual assistance in shelf development issues. After all, oil companies need money for development of offshore fields – much larger amounts than those for similar projects on the shore. The state, in turn, needs to replenish the budget at the expense of oil companies, which remain the main taxpayers and sources of income for the Russian budget.  

   The higher cost of developing Arctic fields compared to similar fields on land, or even on the “warm” shelf, is due to the difficult ice conditions in the Russian Arctic seas. Generally, if you look at the map of Russian seas where hydrocarbons are produced, it becomes obvious that the major Russian oil reserves are concentrated in the Barents-Pechora region, as well as in the Kara and Chukotskoye seas (not counting the already developed fields in the Sea of Okhotsk, and small deposits in Black and Caspian Seas). These Arctic seas are precisely the seas with the most severe ice conditions. Scientific studies of the Russian Institute of Arctic and Antarctic Research (AARI) indicate that ice conditions in these seas are as follows:
– the ice is usually from one-half to three meters thick;
– in the summer there is drifting ice, varying in thickness from 7 to 25 meters which breaks away from perennial Canada and Greenland glaciers;
– drifting icebergs are present.

   As the map shows, the effect of Gulf Stream waters ends exactly at the state border between Russia and Norway. This explains why operation conditions of offshore oil rigs on Russian and Norwegian shelf are different – namely, ice conditions on the Norwegian shelf are much softer than on the Russian Arctic shelf.

   Obviously, oil producers need to invest a lot of money and effort, with a long period of ROI before Russia’s Arctic shelf begins to provide at least some monetary returns.

   Let’s consider now where oil companies can find money for lengthy E&P projects and research work, as well as for building costly offshore production facilities.

   Currently the Russian government and oil companies operating in Russia are engaged in a kind of “tug of war”. It is no secret that Russia’s energy exports, as mentioned earlier, are one of the major revenue items for state budget. For this reason the Russian government is constantly trying to establish ever-higher taxes and duties in the oil sector to maximize the government’s “take” of oil company revenue. In turn, oil producers are trying to minimize payments to the state, lobbying for their interests in government corridors and motivating their actions by the need to reinvest profits back into the industry in order to discover and develop new fields, as without these there will be ultimately no income for either state or the oil companies. The compromise between the government and oil companies is achieved by continuous and complex negotiations, and as they say, the “truth” is somewhere “in the middle”.

   Let’s study the experience of