YEAR IN REVIEW: Cold war – state and private companies lock horns over Arctic shelf
MOSCOW. Dec 31 (Interfax) – The standoff between state and private oil companies over access to Russia’s continental shelf over the past year recalled the cold war of the early 1980s. It was also a combination of clashing ideologies and ambitions, coalitions of allies, war on the periphery, scare tactics, a search for compromises and absurdity. As in the cold war of the 20th century, no one took a decisive step. Throughout the year, companies and officials, market players and watchers waited for some sort of clarifying government meeting at which the prime minister would answer a decisive yes or a firm no on the question of private companies’ access to the continental shelf, but it never camea(euro)
Shelf for the state alone
The idea of blocking access to the continental shelf to private Russian and foreign companies was officially tabled by the Natural Resources Ministry back in 2005. It was legally formalized by amendments to the law On Sub-surface Resources in 2008, which allowed only two companies – state oil major Rosneft and gas giant Gazprom – to operate on the shelf. Over these seven years, the ideological justification for imposing the restrictions gradually evolved from “saving national resources from being seized by foreign capitalists” to “attracting foreign capitalists to national resources and seizing the world.”
The chief proponent of a state monopoly on the shelf was former Deputy Prime Minister Igor Sechin, who is now president of Rosneft. He believes that the best, or rather only, possible model for the development of Russia’s offshore resources is when the license is held by a state company while junior foreign partners conduct exploration and contribute the latest production technologies. And from there on it’s like the song about the Red Army, which “from the taiga to the British seas is strongest of all” – Rosneft’s market capitalization grows to $100 billion and it becomes a global giant, defending Russia’s interests.
Pursuing this model, Sechin reached agreements with U.S. major ExxonMobil to develop offshore blocks in the Kara and Black seas, with Norway’s Statoil on projects in the Barents and Okhotsk seas and with Italy’s Eni on projects in the Barents and Black seas. Sechin was so
elated by the success in attracting foreign partners that he aggressively lobbied the Federal Subsurface Resources Agency (Rosnedra) and Natural Resources Ministry to give Rosneft another 14 offshore licenses in 2012 and promised to expand the international mix of partners. In order to facilitate Rosneft’s ambitious plans to transform itself from a modest Cinderella into a princess with a global name, the Finance Ministry and Energy Ministry developed a special tax regime for offshore development that is far more liberal than those of other countries, such as Norway and Brazil.
Gazprom (RTS: GAZP), discouraged by difficult relations with foreign partners in the Shtokman offshore gas project, showed far less interest in offshore resources in 2012. The company sent the Natural Resources Ministry a letter asking for 17 blocks on the Arctic shelf, but did not go any further than this. However, it is in no hurry to give up the monopoly that state companies have on the Arctic shelf.
Private companies join forces
Private oil companies, suffering from stagnating production in their traditional regions and difficulties securing new fields onshore, were pushed to take a desperate step in April 2012. They joined forces and wrote a letter to then Prime Minister Vladimir Putin asking for the chance to work on offshore Russian projects. The list of grievances was signed by Lukoil president Vagit Alekperov, Surgutneftegas (RTS: SNGS) chief executive Vladimir Bogdanov, Bashneft (RTS: BANE) president Alexander Korsik and TNK-BP (RTS: TNBP) executive director German Khan.
The authorities responded to the oil companies’ aspirations by holding a meeting, stressing the need for companies to observe the purity of Russian roots, proposed they work with Rosneft and then turned to post-election concerns. But not one of the signatories managed to work with Rosneft (RTS: ROSN) on the shelf.
Private companies and govt officials – an unusual misalliance
However, private companies unexpectedly gained an ally in the Natural Resources Ministry. The ministry drafted a program for Russian offshore development that targets oil production of about 60 million tonnes on the shelf by 2030. And it immediately acknowledged that in order to meet this target it is necessary to explore all of Russia’s Arctic seas, build infrastructure in undeveloped regions with a small population and extremely harsh climate, create a whole industry for production of drilling and production platforms, icebreaking tankers and gas carriers in the next 10-15 years, and ultimately invest nearly 10 trillion rubles in the sector. The Natural Resources Ministry came to the conclusion that state companies, left alone and irreplaceable offshore, would simply skim the cream at the most attractive blocks. And it would be virtually impossible to control the offshore operations of Rosneft and Gazprom – the possible cancellation of a license to a given block under a monopoly by state companies does not scare these same monopolies.
The Natural Resources Ministry in October proposed a new plan for developing Russia’s offshore oil and gas wealth: service companies would conduct seismic surveys of offshore blocks and submit the data to Rosnedra, the agency would allocate the blocks to state companies, which would select the blocks they are most interested in and the remaining 75% of blocks would go into the undistributed fund. These blocks would then be put up for sale at auctions that would be open to private companies.
At the same time, the ministry, under the plausible excuse of insufficient exploration work, blocked the issue of 12 new offshore licenses to Rosneft. The ministry argued that if these blocks were granted to the state company it would have more than 75% of Russia’s offshore area, and who would then control who on the shelf – the ministry Rosneft or Rosneft the ministry – would be unclear. Then even state-controlled Gazprom and Zarubezhneft would have nothing left to pick over.
Not always one truth
The confrontation between the private and state sectors peaked in the fall. The heads of Rosneft and Gazprom fired off indignant letters to the government and Kremlin administration complaining about the Natural Resources Ministry. The ministry meanwhile sent its offshore development program to other government agencies for endorsement, noting in regard to Rosneft that “multibillion financial obligations will have a significant negative impact on the state company’s capitalization.” It also got in a dig at Gazprom. The program stated directly that the gas giant has too many gas reserves onshore to be seeking offshore resources. The Energy Ministry tried to quietly support the state companies by reminding the Natural Resources Ministry of the fragility of the Arctic environment and the need to protect it through state companies.
Lukoil (RTS: LKOH) took advantage of the dispute, announcing that it could conduct exploration of the Arctic more cheaply and better than Rosneft. Later the chorus of appeals was joined by Zarubezhneft, which although a state company does not hold rights to the Arctic shelf. In the rush, Lukoil and Zarubezhneft did not even notice that they are seeking the rights to the same North Vrangel block in the godforsaken Chukotka Sea.
A government meeting chaired by Prime Minister Dmitry Medvedev and scheduled for December was supposed to put an end to the dispute. But a few days before it was to be held it was postponed, allegedly due to a visit by Ukrainian President Viktor Yanukovych, who actually never made to Moscow. The decision on the eternal question about the Arctic shelf was kicked down the road to 2013.
An ironclad argument
However, state companies may have been given a serious argument in the dispute over offshore resources. Rosnedra held two unique auctions in December to sell the rights to the Imilor and North Rogozhnikovsky (Shpilman) blocks, two of Russia’s last major undistributed oil properties, with oil reserves of 855 million tonnes and 395 million tonnes. The auctions were won by Lukoil and Surgutneftegas, respectively, although Rosneft also bid. Now it appears that woeful eyes and requests for offshore resources because there is nothing with which to replacing declining production in Western Siberia are unlikely to help private companies.
The scenario for the January government meeting could be painfully simple: the government could decide to expand the list of companies that have the right of access to the Arctic shelf, but simultaneously give Rosneft and Gazprom all of the blocks they are asking for. Then there simply won’t be anything left to share on the shelf.