Who Will Fund Russia’s Answer To U.S. Shale?

 

Russia regards its Arctic oil and gas development in the same way that the U.S. saw its shale oil and gas sector around 20 years ago, which is a truly game-changing opportunity to alter the balance of power in the world’s hydrocarbons markets.

In broad terms, the Vostok Oil project will unite the largest deposits in the north of Krasnoyarsk Territory, including the..

supergiant oil and gas fields of the Vankor cluster (Vankorskoye, Suzunskoye, Lodochnoye, Tagulskoye, Ichemminskoye), and the Payakhskoye oil field, and West-Irkinsky site. Overall, according to several senior oil and gas industry sources in Moscow and London spoken to by OilPrice.com last week, Rosneft’s estimates that the Vostok Oil project has 6.2 billion tonnes (53 billion barrels) of oil reserves are realistic.

At full capacity, the project is set to produce up to 100 million tonnes (845 million barrels) of oil per year, which equates to just over another 2 million barrels per day. Given Russia’s ability to currently produce at least 11 million bpd with relative ease, this additional output from the Vostok Oil project would bring its average daily crude oil production to between 13 and 14 million bpd. This would be on a level with the current upper limit projections for the U.S. in the next five years and way above Saudi Arabia’s true crude oil production, which has averaged 8.162 million bpd from 1973 to yesterday. 

All of these developments – and other elements of Russia’s Arctic sector exploration and development in the Yamal and Gydan peninsulas, lying on the south side of the Kara Sea - are within close proximity of the Northern Sea Route (NSR). The NSR, the coastal route of which crosses the Kara Sea, is already in operation but is being built out further to be the primary transport route to monetise these resources in the global oil and gas markets, especially to China.

Recently, Rosneft chief executive officer, Igor Sechin, told Russia’s President Vladimir Putin of the formal commencement of operations on the Vostok Oil project, stating: ‘The prospecting and exploration work are now underway, in accordance with our timetable,’ and adding that the design work for a 770-kilometre oil pipeline and a port had been completed. In this context, Sechin also promised Putin that the scheme would create a ‘new oil and gas province’ on Siberia’s Taymyr peninsula, with the complete project representing a total investment of RUB10,000 billion (US$135 billion), including two airports and 15 ‘industry towns.’ 

Russia’s efforts in the Arctic and through the NSR are being bolstered by Gazprom Neft, the country’s third biggest oil company by output and the oil arm of state gas giant Gazprom. July 2020 saw Gazprom Neft ship its first cargo of oil produced in the Arctic to China via the NSR, adding to its existing Western exports via the NSR to Europe.

According to Gazprom Neft, it took 47 days to deliver a full cargo of 144,000 tonnes of sweet, light Novy Port oil – that comes from the Yamal peninsula developments – to the Chinese port of Yantai on the Bohai Sea from Russia’s north-western city of Murmansk. ‘Successful experience in the sale of Arctic oil in the European market and in-depth insight of Asia-Pacific markets allow Gazprom Neft to offer Novy Port oil with a unique year-round logistics scheme to Asian partners,’ said Gazprom Neft’s deputy director general for logistics, processing and sales, Anatoly Cherner. A month later, Gazprom Neft announced a new joint venture (JV) with Anglo-Dutch super-major Royal Dutch Shell, focused on the exploration and development of oil and gas resources along the Gydan peninsula area, particularly at the Leskinsky and Pukhutsyayakhsky licence blocks. 

The China side of these Arctic projects is fully in line with the US$400 billion or so 30-year deal signed in 2014 for Russia to export vast quantities of gas – through the ‘Power of Siberia’ pipeline project – to China over that period (managed on the Russian side by Gazprom and on the China side by China National Petroleum Corp). The agreement delivers some 38 billion cubic metres of natural gas a year to China’s burgeoning economy (having formally started in 2018), totalling over 1 trillion cubic metres of gas being supplied during a whole contractual period.

Although a relatively reasonable deal for Russia economically, the political benefit is huge, giving it a major second market for its gas in the event of further sanctions from the U.S. over its already significant gas dealings with Europe. It also opened the way for massive Chinese investment in Russia’s power and transportation infrastructure and for a much broader and deeper co-operation between the two countries (including militarily) over the 30-year period.

It is highly likely, therefore, that China’s investment into Russia’s Arctic exploration and development efforts will not just be focused on its gas (and resultant LNG) projects but also on its oil ones. It is also interesting to see that despite the remnants of the U.S.-led sanctions against Russia (as a result of its annexation of Crimea in 2014 and later its poisoning in the U.K. of former GRU colonel, Sergei Skripal, and his daughter Yulia) – many international oil companies are still active in Russian oil and gas projects, including in the Arctic. Aside from Royal Dutch Shell’s stake in the Gazprom Neft Gydan projects, Japan’s Mitsui and Japan Oil Gas and Metals National Corporation stake in Novatek’s Arctic LNG 2 project, perhaps the most overt signal that the oil business goes its own way when possible, regardless of all other considerations, is the fact that U.K. supermajor BP sold its TNK-BP Russian joint venture for cash and a 19.75 per cent stake in Rosneft.

According to initial – but vague reports out of Rosneft – potential investors in the Vostok Oil project (aside from the obvious Chinese candidates) include oil traders, international integrated oil and gas companies, and national or neo-national oil companies, including firms from India. A 10 per cent stake in the Vostok Oil project was already acquired by international trader Trafigura in 2020, and Rosneft and a consortium headed by Vitol signed a letter of agreement for the sale of a 5 per cent stake in the Vostok Oil project, according to a statement from Rosneft in June. 

By Simon Watkins 

Από το oilprice.com