Russia has embarked on actual offshore activities in the Arctic but apart from the extreme weather the projects face logistic and transport challenges.
Ice broke up
The current year has been marked by the beginning of the large-scale development of the Arctic shelf. The most promising northern participate of the Dolginskoye field (Pechora Sea) is to sea the drilling of 3 wells in 2014-15This was announced by Aleksandr Korobkov, Director General of Gazprom Neft Sakhalin LLC, at the Adam Smith Conference “Russian Arctic Oil and Gas” in Moscow. According to him, the first well is to be drilled in September 2014, with the drilling of the other two scheduled for 2015.
To commence the development, the company has to prove at least 50 mln t of reserves which is a minimal level of commercial viability considering the tax burden. Aleksandr Korobkov does not rule out the address to RF Government for a tax reduction.
The volume estimated reserves - 235 mln t, proven reserves – 800,000 t. All the reserves are recoverable. A branch of the Baltic Basin Emergency and Rescue Department will be on oil spill response alert.
Besides, shipment of first oil from Prirazlomnaya platform (Pechora Sea), Russia’s first offshore project on production of hydrocarbons in the Arctic (operated by Gazprom Neft Shelf), commenced on April 18, 2014.
Moreover, oil shipments from the Novoportovskoye field via Arctic sea terminal at Kamenny Cape (Yamal) are to be commenced in 2016, says Sergey Devyatyarov, Deputy Director General, Chief Engineer of Gazprom Neft New Port LLC.
According to him, the terminal will transship 5.5-6 mln t per year with six ice class tankers. The project of Institute Shelf (Simferopol, Crimea) implies the construction of a sea terminal with the capacity of 8.5 mln t of oil per year. Crude oil will be delivered to the terminal from the Novoportovskoye field by a 106-km long pressure line.
Rosneft plans to commence drilling of a well at the Universitetskaya field in the Kara Sea in August 2014, Vice-President of Rosneft Andrey Shishkin said at the Conference. According to him, the first result is to be achieved by the Company in November 2014.
Offshore fields in the Arctic are quite far from the infrastructure centers, hence the problem with their regular supply with necessary materials, equipment and resources.
Both Gazprom and Rosneft have chosen the Murmansk Region as the ground for onshore supply bases. According to Aleksey Fadeyev, Head of Production Support Directorate at Gazprom Neft Sakhalin, the Company plans to develop the supply base for the Pechora Sea project at two berths of Murmansk Sea Fishing Port. Ice-free port of Murmansk, which is located 1,000 km from the field but liked with the other regions of Russia, was chosen because no transportation hubs are located close to the field.
Rosneft is creating a supply base in Lavna district (Murmansk Region), at the territory of 82nd ship repair plant.
At the same time, Aleksey Fadeyev notes insufficient capacity of the railway towards Murmansk which can become a ‘bottleneck’ of the supply logistics as the remote approached to Murmansk are busy with delivering fuel to the region.
According to the forecasts of Russian Railways, cargo traffic to port Murmansk will hit 24 mln t in 2015 and 37 mln t in 2020. The ‘bottlenecks’ will be felt as early as in 2015. Investment programme of Russian Railways implies the construction of the second track at certain sections, as well as rail bridge crossings and new railway lines. But the sufficiency of resources is questionable considering the sequestered budget expenses and the necessity to develop Crimea.
Grand offshore armada
Apart from the above problems with infrastructure, the offshore projects in the Arctic need a powerful icebreaking fleet with the adequate ice class. As Andrey Shishkin said at the Conference, at least 3 icebreakers are required for icebreaking services at the Kara Sea (two icebreakers are to escort vessels with one icebreaker staying in reserve). One drilling rig is to be supported by 13 vessels. All in all, Rosneft needs about 300 support vessels for the development of the license areas in the Kara Sea, Shishkin said.
It is clear that such a fleet cannot be completely built in Russia. The competitiveness of the domestic shipbuilding is unfortunately inferior to that of the foreign shipyards but Shishkin says the Company will promote maximum localization of production in Russia. It is not quite clear what mechanism is to be used considering Russia’s membership in WTO.
Great hopes in shipbuilding are placed on the shipyard in Bolshoy Kamen which has been handed over to the consortium of investors including largest customers ordering Arctic vessels and facilities, first of all Rosneft and Gazprom.
Large capacity vessels dedicated for servicing of offshore projects will be built by Zvezda shipyard in the Primorsk Territory from 2016, Aleksey Rakhmanov, Deputy Minister of Industry and Trade said at the last meeting of the Marine Board in Komsomolsk-on-Amur.
He added that offshore projects require vessels of different classes which can be built by Khabarovsk shipyards as well.
Under the long-term plan of Russia’s Ministry of Industry and Trade, three shipyards of the Far Eastern Shipbuilding and Ship Repair Center (United Shipbuilding Corporation) will secure orders for RUB 780 bln by 2025. This was announced by Dmitry Rogozin, Deputy Prime Minister of the Russian Federation at the meeting of the Marine Board under RF Government.
Key to the Arctic
Evidently, such challenges of offshore projects and extreme weather make the cost price of Russian oil quite high. As Gazprom Neft head Aleksandr Dyukov said, oil production at Prirazlomnoye will be profitable with oil prices not falling below $80 per barrel. Taking into consideration the lifting of sanctions from Iran, prospects of settling the crisis in Syria and Libya as well as slowdown in Chinese economic growth, oil prices can drop to this level or even below.
As for gas, the situation is not easy either. There is no a unified global LNG market and LNG prices vary in different regions of the world today. The prices in the N. America and Asia can differ up to 6 times. However, this difference can significantly decrease sooner or later.
Besides, Russian gas can compete with the American LNG in Europe. According to Professor Vassily Bogoyavlensky, Director of the Shelf Laboratory of the Russian State Oil and Gas University (Russian Academy of Science), LNG shipment from USA to Europe is estimated at $10 mbtu. He says it can influence the European gas market by 2020 and Russia will find it difficult to compete with the American LNC. In Asia, Russian LNG will be rivaled by gas from Australia, Qatar, Africa etc. as we wrote earlier >>>>
In view of huge investments required for the development of Shtokman gas condensate field, the project has been ‘frozen’. However, Gazprom representative Aleksey Novikov said at the Conference that the project had not been finally rejected. A possibility of creating a subsea platform is under consideration today – it is to make the project much cheaper. Read more about the prospects of subsea platforms in the interview with Oleg Timofeev, Deputy Director General of Krylov State Research Center >>>>
Amid high cost of oil and gas production in the Arctic, energy companies lobby tax preferences. A lot has been done already and further improvement of the legislation in this sphere is expected with the adoption of the law on shelf development which is to be elaborated in 2014, as Pavel Zavalny, Deputy Chairman of the State Duma Committee on Energy and President of Russian Gas Society, said at the Conference.