Risks in assessing the prospects for international cooperation of Russia related to oil and gas resources of the Arctic shelf: economic, technological, geo-economic, political,

factor analysis is used (for example, fundamental factors of oil supply and demand) and regression models are used ⁶⁷.

For the purposes of scenario planning, a concept such as “price corridor”⁶⁸, which is an interval of price fluctuations, is used. The spread in oil price forecasts between the scenarios shows the degree of uncertainty in price risk in the future. Figure 3.1 shows the average forecast oil price based on the above 11 scenarios, the maximum and minimum prices and the 95%

probability interval.

The development of Arctic projects requires a longer forecast horizon with more predictable oil prices (i.e. low volatility). In the short term in the face of a sharp drop in prices in 2014-2015. oil and gas companies have frozen Arctic projects, but have not made a final decision to terminate them. In 2016, many projects were postponed to a later date. The strongest effect of price risk can occur in the medium term: if the price of oil decreases or remains at a stable low level, then investors can decide to stop the development of offshore oil and gas resources in the Arctic or their long-term conservation.

Technological risks

The need to develop more inaccessible and remote oil and gas resources is associated with continuous improvement of technologies, which increases the risk of accidents and technological disasters. Technological risks are multifaceted and include aspects such as severe weather conditions (low temperatures, ice conditions, icing of structures), a changing climate, as well as safety risks (rescue operations)⁶⁹. Technological risks also exist on the entire chain of oil and gas resources on the Arctic shelf - from exploration to transportation. They are associated with the problem of gas hydrate formation, remoteness of deposits from the coast, and underdeveloped infrastructure. More specific design and technological risks that arise during the planning and development of Arctic shelf deposits are platform design features (for example, the need to create drilling platforms with a double barrier), features of flushing fluids (water-based, which impairs their flushing properties), low seabed temperature , perennial frozen rocks and the risk of erosion. Potential hazards for the project may include fire or explosion, uncontrolled release, leakage from the pipeline, collision of the vessel with the platform and others⁷⁰.

67 M. Kozenyasheva, Features of forecasting oil prices in modern conditions (Issues of Economics and Law, 2011), 331-339

68 O. Braginskii, Oil prices: history, forecast, impact on the economy. (J. Ros. Chem. Society named after D.I.

Mendeleev, 2008)

69 DNV GL. Arctic – the next risk frontier, 2017 https://www.dnvgl.com/technology-innovation/broader- view/arctic/the-arctic-risk-picture.html

70 A. Zolotukhin, O. Gudmestad. Oil and Gas Resources: Offshore Development (WIT Press, Southampton, Boston, 2012), 338

The subject of particular technological risk is the dependence of Russian oil and gas companies on technology transfer. This technological risk acquires a pronounced external market situation and geopolitical implication, although it is the reason for the technological lag of domestic high-tech products and equipment in the oil and gas industry. The risk of dependence on Western technologies in the development of Arctic offshore projects escalated with the advent of the sanctions regime between Russia and Western countries, which affected the transfer of technology.

EU and US sanctions were introduced in 2014 and continue to apply at the time of writing. The US and the EU have limited access to Russian oil and gas companies (Gazprom, Rosneft, Transneft, Gazprom Neft, Lukoil, Surgutneftegas) and the state for long-term financing, as well as European technologies and equipment (drilling, well testing, geophysical research of wells - only 30 types of products for oil 74 industry⁷¹). The EU and the United States have clarified Arctic projects (above the Arctic Circle)⁷², the shelf and the exclusive economic zone, which are also subject to sanctions. The only class of equipment that can be supplied to Russian companies is equipment for the elimination of spills and the consequences of accidents. Norway, one of the most important technology partners of Russia, has joined the sanctions⁷³. It is important to note that sanctions are not applicable to existing projects, however, they affected the fields, which were planned to be put into development within the short and medium term (5-10 years).

The consequences of the sanctions seriously disrupted the work of Russian oil and gas companies and affected the timing and plans for the development of Arctic offshore fields. The issue of technological import substitution has become more acute. Due to the current lack of appropriate technologies and methods for developing difficult inaccessible shelf deposits in the Arctic or their limitations, the risk of dependence on Western technologies is most pronounced in the short term. At the time of the imposition of sanctions against Russian companies, the question of modernizing the oil and gas industry in Russia became extremely acute⁷⁴ [197]. To develop the oil and gas resources of the Arctic shelf, technologies are one of the most important components.

71 Yu. Lukin, Arctic shelf: sanctions and opportunities (analytical media review) (Arctic and North, 2014)

72 EU. Council Decision 2014/872/CFSP of 4 December 2014 (Official Journal of the European Union, 2014), 58–

60.

73 J. Jokela, Arctic Governance, in Arctic Security Matters, ( Paris: European Union Institute for Security Studies, 2015), 39

74 M. Morgunova, K. Wesphal, Offshore Hydrocarbon Resources in the Arctic: From Cooperation to Confrontation in an Era of Geopolitical and Economic Turbulence? (German Institute for International and Security Affairs, Berlin, 2016), 30

In the medium and long term, this type of technological risk can be partially mitigated by import substitution or the search for other international partners. Thus, the development of the Norwegian oil and gas sector is a vivid historical example of reducing risks of this type, when the state took the risk by creating a special regulatory framework for the interaction of international and national oil and gas companies (production localization, investment in science).

Another example of the imposition of international sanctions is Iran, where measures to localize production were also taken to reduce risks.

Geoeconomic Risks

Sanctions against the Russian banking and oil and gas sectors stand out as a geo- economic risk. The sanctions regime is aimed at restricting investments and technology transfer, which has a negative impact both in the short term (freezing of contracts or forced refusal to cooperate) and in the medium term (impossibility of planning). As a result, oil and gas companies are forced to “leave” the Russian Arctic and abandon joint projects. This applies in particular to companies such as ExxonMobil, Royal Dutch Shell, Total, BP and the oilfield services companies Schlumberger, Halliburton and Baker Hughes. The following events, for example, result from this geopolitical risk: ExxonMobil was forced to withdraw from a joint project with Rosneft in the Kara Sea (joint projects are estimated at more than $ 22 billion, and joint drilling of the Universitetskaya well is estimated at $ 600 million,⁷⁵); Rosneft’s acquisition of a 30% stake in the North Atlantic Drill service company was suspended (involving the development of six North Atlantic Drilling offshore rigs until 2022); lack of access to long-term financing, which affected a number of projects, such as South Stream (at a certain stage, 70% of investments were planned to be attracted in the project financing mode); HSBC Holdings and Lloyds Bank refused to finance a deal to buy petroleum products between BP and Rosneft;

Export-Import Bank refused to finance the Novatek Yamal-LNG project. At the same time, some transactions are the result of sanctions: Morgan Stanley oil trading transaction⁷⁶; acquisition of a stake in Weatherford oilfield services company ($ 398.3 million). Sanctions and counter- sanctions create critical uncertainty in geopolitics and economics, as they affect the volatility of oil prices, which in turn increases the risk of long-term investments in Arctic fields⁷⁷. In general, Russian oil and gas companies, along with foreign partners, suffer significant losses due to geopolitical conflicts. The state of uncertainty is also expressed in high risks for business, where

75 Forbes. The ban on investment: what threatens Russia with new sanctions, 2015 http://m.forbes.ru/article.php?id=26300

76 Rbc. "Rosneft" came up with a way to get around sanctions, 2015.

http://top.rbc.ru/economics/01/08/2014/940509.shtml#xtor=AL- [internal_traffic]--[rbc.ru]-[main_body]-[item_11]

77 M. Holter, Norway Oil Services See Russia Sanctions Risking Arctic Push (Bloomberg Business, 2014) http://www.bloomberg.com/news/articles/2014-08-12/norway-oil-services-risking-arcticchances-on-russian- sanctions

with a sufficiently high probability of extending the sanctions regime, the likelihood of negative consequences of the risk also increases.

At present, it is believed that the global energy market is ready for events of a geo- economic type, which means that the degree of risk is reduced. Long-term sanction risk also seems less dangerous, as companies can adapt to the external environment or insure risks.

Geopolitical risks

Geopolitical risks arise in connection with a change in the political situation in the world, for example, reforms, imposition of restrictions, moratorium. Geopolitical risks are objective and cannot be regulated. It is difficult to quantify them, as they, as a rule, lend themselves only to a qualitative expert assessment. Growing geopolitical tensions add additional uncertainty to the development of energy markets, which increases geopolitical risks. These risks are objective and not amenable to regulation, however, they can be predicted. It is possible to assess their impact at the expert level, as well as through historical analysis. Subject to adaptation to the new external environment, geopolitical risks will have a weaker impact in the long run or will be offset by other factors, such as diversification of energy supplies and the development of unconventional types of hydrocarbons, such as offshore Arctic oil and natural gas resources. For the development of Arctic offshore hydrocarbons, this risk is more of a risk of uncertainty.

Geological risks

Geological risk is understood as systematically organized information about the dependence of risks on the volume of investments and the expected increase in reserves. The accuracy of assessing the characteristics and volumes of potential oil and gas resources depends on geological exploration, modeling the structure of reservoirs and calculating reserves. The more complex geology and less knowledge, the more uncertainty and higher geological risks that have a direct impact on the project economy. During the project justification, the probability of the discovery of oil and gas deposits is analyzed and their estimated reserves are estimated.

Geological risk assessment is the final phase⁷⁸. For example, the likelihood of discovering oil and gas deposits of 0.3 and lower is unfavorable (high risk), while the probability of 0.7 and higher refers to low risk⁷⁹. The knowledge of the Arctic shelf is low. To reduce geological risk, detailed and other more detailed work is required.

An important element of geological risk assessment is the availability of technologies for accurate data collection and analysis. Seismic exploration in Russia is critically dependent on foreign technology. To date, Russian companies own only one vessel capable of performing 3D geophysical surveys. The rest of the vessels can perform 2D studies, where not all of them,

78 A. Fokin, Risks and uncertainties in the exploration process (ROGTEC, 2011)

79 Z. Chen, K. Osadetz, Geological risk mapping and prospect evaluation using multivariate and Bayesian statistical methods, western Sverdrup Basin of Canada (AAPG BULLETIN, 2006), 859–872

according to technical parameters, can operate in arctic ice conditions. At the same time, access to foreign technologies is limited due to sanctions against the Russian oil and gas sector.

Thus, the risk of errors in assessing the characteristics of reserves and production costs is significant enough for Russia, due to the lack of access to the best world (including technological) practices for assessing hard-to-reach hydrocarbons and insufficient transparency of the audit and assessment of oil and gas resources, as well as insufficient geological exploration of the shelf. The geological risks associated with the development of the Arctic shelf of Russia should be taken by the state, which as a whole will lead to their reduction.

Environmental risks

The environmental risks of developing Arctic offshore oil and gas fields are multifaceted.

First of all, this is the possibility of oil spills and environmental pollution, as well as the risks of anthropogenic nature. The risk of a spill has a fundamental danger to the Arctic ecosystem due to a number of climatic and technological features of its elimination.

Environmental damage is the negative impact of oil pollution on biological organisms, which can be fatal⁸⁰. This is an incident that violates the sustainability of the ecological system.

According to statistics, the damage from accidents in each case amounts to: up to 100–200 million US dollars on offshore pipelines, up to 100–1200 million US dollars on offshore pipelines, and up to 100– 79 10,000 million US dollars on tankers⁸¹. For example, an accident in the Gulf of Mexico cost BP $ 41.3 billion.

In project planning, special attention is paid to the likelihood of environmental risks and damage that a responsible company may suffer. So, according to Russian scientists, the likelihood of emergencies on offshore drilling platforms in a 30-year period is 0.7% for the probability of an outburst, 1.2% for a fire and 2.6% for deaths⁸². According to experts, the possibility of an accident with gushing of wells at the Shtokman field could be about 0.4%

(exploration, production drilling, completion, operation and repair — weighted average value⁸³).

Despite the low likelihood of environmental risks, the consequences of accidents, that is, environmental damage, can be catastrophic for the Arctic.

80 A. Zolotukhin, O. Gudmestad. Oil and Gas Resources: Offshore Development (WIT Press, Southampton, Boston, 2012), 243

81 S. Alekseev, A. Dobrotvorsky, On the integrated system for ensuring the safety of marine development oil and gas fields of Sakhalin (Marine research and study technology, Nature of the oceans - issue 1, 2005)

82 V. Kryukov, Theory and practice of oil and gas insurance on the shelf of Russia, Oil and gas geology (Theory and practice, 2007)

83 I. Sosunov, N. Posokhov, S. Gorbunov, Assessment of technological safety in development of gas condensate fields in the Arctic (Strategy civil protection: problems and research - No. 1 / volume 3, 2013), 81-91

In assessing environmental risks and environmental damage, criteria are needed.

According to the NORSOK-013 standard used in Norway⁸⁴, the environmental impact is determined on the basis of industry standards, and the damage is classified as impact, the restoration of the consequences of which takes more than one month. In this case, a threshold of 5% is considered a framework of acceptable risk. Environmental risks can be insured, but this system is not very developed in Russia. The low cost of national insurance companies, the underdeveloped methodology for calculating insurance premiums and the amount of coverage does not guarantee the environmental safety of the development of oil and gas resources of the Russian Arctic.

The Prirazlomnoye project was insured against an oil spill in the most negative scenario of no more than 2,000 tons. The amount of environmental insurance is 7 million rubles.⁸⁵. According to the All-Russian Union of Insurers, the cost of damages from the spill of one ton of oil in the Pechora Sea is 450 rubles. per ton (depending on the sea in which the source of a possible spill is located⁸⁶).

The degree of environmental risks for Russia increased significantly with the introduction of the EU and US restrictions on technology transfer. Minimization of environmental risks can be achieved subject to international cooperation, the application of world best practices, both in the development of deposits and in the prevention of accidents and the adoption of safety and environmental standards. For example, in 2012, Rosneft, ExxonMobil, Statoil, and Eni developed the “Declaration on the Environmental Protection and Biodiversity Conservation and Exploration of the Mineral Resources of the Arctic Continental Shelf of the Russian Federation”, in accordance with which optimal solutions are developed to ensure environmental safety in joint projects⁸⁷. Such practice is necessary to reduce environmental risks in the Arctic, as is the use of modern environmental management systems and tools using appropriate standards and tools.

One of the important elements in assessing the prospects for developing oil and gas resources of the Arctic shelf of Russia is risk analysis. The development of Arctic shelf deposits is characterized by a high degree of both external and internal risks.

Economic (price) risks are high and have a negative impact on the development of oil and gas resources of the Arctic shelf due to the long-term nature of investments in their development, the need for large investments in infrastructure development, as well as due to the volatility of oil

84 A. Zolotukhin, O. Gudmestad. Oil and Gas Resources: Offshore Development (WIT Press, Southampton, Boston, 2012), 243

85 Rosneft discovered large oil and gas resources in the Kara Sea, (Vedomosti, 2014) http://www.vedomosti.ru/business/articles/2014/09/29/arkticheskaya-pobeda

86 Insurers advocate for holistic environmental risk insurance systems in the Russian Federation (All-Russian Union of Insurers, 2014) http://www.ins-union.ru/eng/news/18/2454

87 Ecology, labor protection and industrial safety, access is implemented, (Rosneft, 2015) http://www.rosneft.ru/Development/HealthSafetyandEnvironment/

prices and changes in the supply and demand for hydrocarbons. The strongest influence of price risk may occur in the medium term, subject to a declining or stably low oil price, as investment decisions may be delayed.

Technological risk is expressed in the dependence of Russian oil and gas companies on technological cooperation with foreign companies. The reason for this is the technological lag of the oil and gas industry in Russia. Due to the lack of appropriate technologies for the development of offshore fields in the Arctic, technological risk is most pronounced in the short term. This risk escalated with the advent of the sanctions regime, since the consequences of the sanctions disrupted the work of Russian oil and gas companies and affected the timing and plans for the development of Arctic offshore fields. In the medium and long term, technological risk can be overcome through import substitution.

Geo-economic risks, sanctions against the Russian banking and oil and gas sectors are exacerbating. The sanctions regime is aimed at restricting investments and technological cooperation, and also introduces additional uncertainty in the development of energy markets.

This has a negative impact both in the short-term (forced refusal to cooperate) and in the medium term (impossibility of planning). In the long run, this risk is less dangerous, as companies can adapt to the external environment.

As geopolitical risks increase, so does the cost of developing traditional oil and gas reserves. This affects global oil prices and the security of energy supplies. Subject to adaptation to the new external environment, geopolitical risks will have a weaker effect in the long run.

Geological risk is not critical, since the Russian Arctic shelf is the most promising in terms of discovering new large deposits (for example, the Universitetskoye well in the Kara Sea).

Environmental risks include, in particular, the possibility of oil spills and environmental pollution. Minimization of environmental risks can be achieved with international cooperation in the field of field development, accident prevention, joint development of safety standards and environmental standards.