Response to Stratfor’s article “Russia’s Arctic Dreams Remain on Ice” dated 6th November 2019

After reading this Stratfor article “Russia’s Arctic Dreams Remain on Ice”, I was struck not just by the title of the article but also by some of the statements made within it, such as “Russia’s progress in making use of the Arctic’s mineral and hydrocarbon resources …………..is stalling” and,  in the context of Russian Arctic hydrocarbon development “…..progress has become bogged down as the sides [Government and industry] haggle over tax breaks or financial support. Ultimately, cost, feasibility and the like could well put paid to Russia’s hopes of scoring an Arctic windfall”. All this creates a false impression of what is actually happening in the Russian Arctic. It may be true that the giant and massively expensive Vostok (East) Oil Project has not yet got off the ground and its proponents, led by Rosneft, are yet to receive all the tax breaks they are looking for, but elsewhere in the Russian Arctic oil and gas projects are generally moving forward, some at an aggressive pace – look no further than Novatek’s Arctic LNG projects or Gazprom Neft’s Arctic oil projects.

I will come back to the Vostok Project, which its proponents hope will take shape in the East Siberian Arctic, but first consider what is going on in the neighbouring West Siberian Arctic, specifically the Yamal-Nenets Autonomous District. This is the traditional heartland of Russia’s gas industry and, as such, a great deal of associated infrastructure has been built up over the past four or five decades here. This has helped the likes of Gazprom push further north in the past decade or so onto the Yamal Peninsula, during which time they’ve commissioned the giant Bovanenovskoye gas field (and are currently engaged in pre-development at nearby Kharasaveyskoye), and then moved onto the Kara Sea shelf where exploration and appraisal drilling has recently taken place, plus seismic. I’ll also say more on the Arctic shelf (offshore) below, as it is lagging somewhat behind the Arctic onshore, but for good reasons. Gazprom Arctic strategy, over decades, has been to establish a hub, which they’ve used as a stepping stone on to the next location, established it as a hub and moved on even further, and so on. This is a common theme in the Russian Arctic, as I’ll continue to explain here. Gazprom Neft, focused on oil, has also benefitted from the legacy Gazprom infrastructure in the area, helping them open up the Novoportovskoye field (with its the Arctic Gates oil export facility) on the Yamal Peninsula. Gazprom Neft will use Novoportovskoye as a hub for development of satellite oil fields in the area, while the large volumes of associated gas (beyond those needed for local power gen or reinjection into the reservoir) will, most likely, be moved over to Yamburg on the Taz Peninsula, where the gas will enter the trunk pipelines heading to European Russia and beyond. Gazprom Neft, with Rosneft, is also developing a hub around the East Messoyakha field in Yamal-Nenets, benefitting from proximity to Transneft’s Zapolyarye – Purpe – Samotlor pipeline (with connection to the ESPO pipeline system).

And then there is Novatek. True, the Stratfor article does allude to Novatek’s recent Russian Arctic success, but they’ve achieved that success over a very short period of time and I see no reason why Novatek’s successes in the West Siberian Arctic will cease any time soon. They are blazing the trail in the region and are, in my view, ahead of the game, which is all the more impressive when one considers that they joined the Arctic game very late on, relative to Gazprom, for example. Admittedly with a considerable degree of state and regional ‘support’, Novatek nonetheless established a new hub at Sabetta in the northern part of the Yamal Peninsula, some distance from Gazprom infrastructure, for their first Arctic LNG project, Yamal LNG. Without the need for pipeline connections to the South, proximity to Gazprom wasn’t required. One of Novatek’s next LNG projects, Ob LNG, will soon follow, making use of the existing infrastructure at Sabetta. Just 70km across Ob Bay, on the Gydan Peninsula, Novatek’s Arctic LNG 2 is into its execution phase. Its port, Utrenniy, will serve not just ALNG2 but also ALNG1. Again, a beach head is established and then other projects follow and ‘piggy-back’ off that infrastructure. Notable also is that Novatek is focusing on a relatively ‘compact’ region for its Arctic LNG projects. This becomes apparent when you look at a map of Novatek’s license block holdings in Yamal-Nenets. Yamal LNG, Ob LNG, ALNG2, ALNG1 and ALNG3 resource bases are all relatively close to each other, resulting in considerable efficiencies. All of this will help Novatek as it moves forward aggressively with its Arctic LNG plans. With its deep-pocketed (foreign) partners on Yamal LNG and ALNG2, financing of their ALNG2 Arc 7 LNG carrier fleet courtesy of state development corporation VEB.RF, plans to develop LNG transshipment terminals at each end of the Northern Sea Route, success so far in navigating its way around western sanctions and its ambitions to increasingly use cheaper domestically fabricated components for its LNG plants, amongst other factors, the future looks pretty bright for Novatek in the Russian Arctic. The one thing that may stand in their way (and not referred to in the Stratfor article) is their ability to export LNG year-round eastbound along the Northern Sea Route. They’ve been able to export year-round westbound from Sabetta into Europe but currently they can’t go eastbound during the mid-winter months, given the tougher sea ice conditions encountered around the Taymyr Peninsula and into the Laptev and East Siberian seas. In order to be able to move the majority of their Arctic LNG to key Asian customers, they will be relying on new next-generation nuclear-powered icebreakers, e.g. the Lider class icebreakers. The timing of their availability is currently unknown and is dependent again on state/government support. Securing year-round eastbound access along the Northern Sea Route will be a major focus of Novatek in the next few years.

With respect to the Russian Arctic offshore, the Stratfor article suggests that oil and gas activity here may grind to a halt. It is true that offshore development has not occurred at the same pace as onshore, but in addition to the sanctions and low oil prices referred to, there are other factors that explain this. For example, only state-controlled Gazprom and Rosneft hold the right to operate on the Arctic shelf at the moment and their focus has been very much onshore, given the vast resources available to both companies in regions like Yamal-Nenets. The Russian Government is in fact considering opening up the Arctic shelf to private and even foreign players, though it has to be said that interest may be limited given the sanctions, low oil prices and most of the offshore acreage has already been taken by Rosneft and Gazprom. Tax breaks may be forthcoming for Arctic offshore projects, which could help. We could see Gazprom-Neft tying their Dolginskoye field back to their Prirazlomnaya platform in the Pechora Sea and Gazprom is slowly but surely drilling exploration and appraisal wells off the west coast of the Yamal Pensinula on the Kara Sea shelf (again close to their onshore hubs) and carrying out offshore seismic. However, before we see big Arctic offshore developments from Gazprom, I expect to see them focus in the coming decade on tying-in relatively small ‘offshore’ fields in Ob and Taz bays to nearby onshore fields like Yamburg.

Turning our attention to the East Siberian Arctic, where the Vostok Oil Project (the focus of the Stratfor article) would be launched. The situation in this part of Russia’s Arctic is very different. Most importantly, existing oil and gas infrastructure is extremely limited here. It partly explains why the price tag for Vostok, which boasts oil resources > 10 billion bbls, is so vast, well over USD 100 billion. Vostok would draw on oil resources from two distinct hydrocarbon-bearing provinces. The Vankor Cluster, consisting of four fields (Vankor, Tagulskoye, Ladochnoye and Suzunskoye) owned by Rosneft, actually does benefit from an existing pipeline from the Vankor field over to the Transneft system in neighbouring Yamal-Nenets (Vankor has already been producing for 10 years). Then there is the more northerly group of Vostok fields centered around Payakha (owned by Neftegazholding, whose CEO is a former Rosneft executive). These fields are totally undeveloped and very remote, located on the Taymyr Peninsula. Together with Payakha, there’s the West Irkinskiy Block (recently picked up by Rosneft) and blocks that are part of the Yermak Neftegaz JV (Rosneft and BP), such as Baikolovskiy. Vostok would involve tying both the Vankor Cluster fields and Payakha (or Taymyr Cluster) fields into a 600-km pipeline that would move the oil to the Arctic coast (near Dikson), from where the oil would be exported both east and westbound along the Northern Sea Route. Given the massive price tag for Vostok Oil, Rosneft has been spearheading efforts, via its influential CEO Igor Sechin, to secure massive tax breaks (~ USD 40 billion) from the Government. In the past few days the Government has agreed to provide some tax breaks, but they come with a number of conditions that I’m still trying to get my head around (!) and they seem to fall short of expectations. So, expect to see further efforts by Sechin to secure more tax relief for Vostok. It wouldn’t surprise me in the least if he gets more concessions, in spite of opposition from parts of the Government, such as the Ministry of Finance. Bear in mind also that potential foreign investors in Vostok Oil (from India and possibly China) have made their participation conditional upon the project receiving these enormous tax breaks. But even if the Vostok Project, as it is currently conceived, doesn’t move forward, I could see development of the Vankor cluster still taking place, taking advantage of the existing pipeline connection between Vankor and Yamal-Nenets, i.e. the oil would head west, as opposed to the north as would be the case under the Vostok Project. I, for one, will be keeping a close eye on Vostok in the coming weeks and months to see where those tax break negotiations end up.

Finally, I do tend to agree with the Stratfor article that 80 million tons of cargo moving along the Northern Sea Route by 2024 seems out of reach. Novatek’s line up of Arctic LNG projects and a successful Vostok Oil Project could help Russia achieve that volume some years later. While Novatek will very likely bring its five Arctic LNG projects on line in the coming 10 – 15 years, the prospects for Vostok Oil are currently much less certain.

In spite of the uncertainty over Vostok Oil, and for the reasons discussed above, I believe the future continues to look bright for Russian Arctic oil and gas, certainly brighter than the Stratfor article would have us believe.