Cold calculation
Russia is going to facilitate Arctic developments with tax incentives, construction of Arctic fleet including 110-MWt nuclear powered icebreaker and creation of the Far North transport infrastructure. There is no slack from Russia’s rivals in warmer countries – by the time Russian projects are launched, LNG from Qatar and Australia may occupy the lion’s share of the market leaving Russia to solve the pipeline transit problems.
In search of investments
When developing the Arctic, Russia has faced a range of economic, technical and political problems. Economic challenges are associated with the location of Russia’s offshore Arctic fields in climatic zones with extreme conditions. Their development requires huge investments, creation of infrastructure in marginal weather conditions, construction of powerful icebreaking fleet with the most advanced technological innovations.
The brightest example of a project shelved due to the problems mentioned above is the Shtokman. As Valery Golubev, deputy Chairman of Gazprom BoD, said at the 11th International Conference and Exhibition for Oil and Gas Resources Development
of the Russian Arctic and CIS Continental Shelf (RAO/CIS Offshore), “we are ready to make a decision on this project today but the world market does not need this. The existing fields are enough to ensure implementation of our contracts”.
Nevertheless, we think Gazprom representative has not told the whole truth. In fact, Shtokman was intended, in particular, for gas liquefaction (according to the project, annual production of 7.5 mln t at Teriberka plant) while amid the growing global LNG market Russia should facilitate the development of corresponding projects – otherwise we can miss the distribution of the most attractive “Asian pie”. Pipeline gas is good, of course, but its sales depend too much on transit and political risks while importers strive to diversify its supplies with LNG sales. If Russia fails to take a worthy share in the global export of LNG her position of an energy power will inevitably decline and in the context of a resource-based development model chosen by the state leaders that would mean a wreck.
In the mid-run, major LNG importers will be the EU countries (excluding Norway, which is a gas exports) and the Asia-Pacific region (primarily China, India and Japan). However, Russia has strong competitors at both western and eastern directions. First of all, the largest LNG producer is Qatar capable of fast redirection of gas supplies from Europe to Asia and backwards. Its capabilities will even improve if situation around Syria as a transit country is solved according to the “western” scenario. Iran is to compete with Qatar here. In the European market, Russia’s rivals will be Norway and African states (Algeria, Libya, Egypt, and Nigeria). The political influence in this region is being contested by the West, Russia and China.
In the Far East markets (the most promising area) a powerful competitor is Australia boosting its capacities in gas liquefaction and Middle East exporters (first of all, the above mentioned Qatar). As ARD representative Aleksei Goncharov said at RAO/CIS Offshore, Australia’s export of LNG will more than double by 2017 to hit 63 mln t. According to Goncharov, Australia has by now obtained 209 exploration licenses, 88 production licenses, 45 retention licenses, 69 pl licenses and 2 licenses for gas infrastructure.
For comparison: by 2017 Russia will annually export only 15-16 mln t of LNG produced by the existing Sakhalin-2 plant and the first phase of Yamal-LNG if it is put into operation in 2017 according to the schedule). Russia’s major LNG facilities will start functioning only from 2018. So, Russia is behind the rivals already. In this respect, Gennady Timchenko, co-owner of NOVATEK (major shareholder of Yamal-LNG) earlier said: “It does not matter whose gas it is to be, ours or Gazprom’s – the main thing, it should be Russian”. Read more about LNG projects >>>> .
Goncharov thinks that Australian companies could share interest in Russian oil projects in exchange for Russia’s participation in Australian projects on liquefied gas, coal seam gas and shale gas. It would be reasonable as Australia is interested in Russian oil while Russia is behind Australia in LNG sector.
So, freezing of offshore project is probably in line with the immediate situation but does not meet the long-term challenges at all. Experts say that shelving of the Shtokman project was actually caused by extreme conditions of its implementation requiring huge investments and latest technological solutions.
Therefore, to encourage investors to participate in such costly and challenging projects the Ministry of Natural Resources and Environment of Russia has elaborated amendments into the legislation to provide a range of tax privileges for companies investing into the development of Arctic fields. As Deputy Minister Denis Khramov said at RAO/CIS Offshore, these amendments are expected to be adopted by the State Duma in the nearest time to facilitate the investments into hard-to-develop northern fields. It will ensure 10-15-pct profitability of the investments. According to the official, optimal proportion of private and state investments into offshore projects is 1 state ruble against 7-8 rubles from investors.
The competitive advantage of other states against Russia is favorable climate conditions. They do not have to build icebreaking fleet, look for specific solutions when building ports and plants on permanently frozen soil or in ice conditions of the Far North etc. Russia has to do it. Designers and builders of port Sabetta (Yamal LNG project) are actually pioneers in this sphere. They have to invent and test different tricks to withstand the extreme climate. For example, according to Vladimir Merzlikin, representative of LENMORNIIPROEKT, the temperature of the port’s water area is supposed to be raised with water heated by the gas boiler plant. Besides, stronger berths are to be built in Sabetta as compared with other ports. There are also other challenges related to the necessity to create social and transport infrastructure.
However, Russia has some advantages in gas sphere, but they are not in use so far. According to Aleksei Kontorovich, Chairman of RAS academic board on oil-gas geology, Russian Arctic gas is rich with additional substances which could be used in petrochemical industry for additional value. It is a normal practice in Qatar, while Russia looses profit when exporting gas instead.
Fleet is the core
Powerful fleet of icebreakers is required to ensure regular navigation on the Northern Sea Route. According to the calculations made the Krylov State Research Center, maintenance of throughput Northern Sea Route is commercially efficient for Russia if it is used to transport 12 mln t of cargo per year. To support this cargo flow powerful nuclear icebreakers are required. As of today, the construction of the most powerful icebreaker (60 MWt) has commenced already. Besides, in 2014, a competition will be announced for the construction of a more powerful icebreaker (110 MWt), which is to become the flagship of the world’s fleet of icebreakers.
Meanwhile, the experts have not come to a consensus on the capacity of gas carriers to deployed for the Arctic. Krylov State Research Center considers the decision of Yamal LNG to use 170,000-tonne gas carriers for transportation of Yamal gas to be inefficient. At the same time, Gazprom is going to build tankers capable of sailing along the Northern Sea Route without icebreaking assistance.
It also should be noted that the Arctic zone of Russia is not sufficiently explored and additional research is required therefore. Special fleet is needed for this purpose. According to Denis Khramov, Hydrometeorology and Environmental Monitoring Agency of Russia 107 additional vessels including 15 vessels of unrestricted navigation, 8 vessels with a specified operating area and 84 vessels for operation within inland waters. As of today, the Agency’s fleet numbers 80 vessels. By 2030 Russia will have to spend RUB 6.5 trillion on vessels needed for offshore projects.
As of today, Khramov says, 129 licenses have been granted for water area development, 34 licenses are in operation (including 13 applications of Gazprom and Rosneft, 8 - auction). Under the license commitment, investors are to drill 290 wells. In 2015 – 2020, Gazprom and Rosneft are to drill 16 wells per season, Khramov says.
Icy policy
As for political problems, it should be noted that Russia is not the only Arctic state. It is the area claimed by a number of powers including Canada, USA, Norway etc. Anton Vasiliev, Ambassador-at-large of the Russian Ministry of Foreign Affairs, the Russian envoy to the Arctic Council said that the information disseminated in the media about rivalry of world powers in the Arctic is a "horror story”, which is groundless.
However, it carried not much conviction – he acknowledged the growing military presence in the region. Besides, there is a discontent with certain results of the above mentioned “distribution” – for example, not everybody in Russia is satisfied with the delimitation of the Barents Sea between Russia and Norway which obtained rich fields there. And the respect of sovereignty in contemporary world can be estimated by the recent events in Iraq, Georgia, Afghanistan, Libya, Syria ... So, economic, shipbuilding and technological challenges of Arctic development are supplemented with the aspects related to the national interests. This also requires expenses for equipment of northern military bases, purchase of adequate facilities etc.
Thus, against the background of the 30-ies of the past century, when the USSR was challenged by the need to force industrialization to come up with the leading powers, the agenda of today’s Russia with the resource-based economy includes as fast development of northern lands and water areas which also requires all-out efforts and resources of the country.
Vitaly Chernov