Participation of Russian oil and gas transnational corporations in modern international Arctic projects

The continental shelf of Russia is under federal jurisdiction; its subsoil is owned by the state and is provided for use by the Federal Subsoil Use Agency. According to the Decree of the Russian Federation dated 8.01.2009 No. 4 (as amended on 05.06.2016), licenses for the use of subsoil resources located on the continental shelf of Russia, including in the Arctic region, are issued without a tender or auction on the basis of a decision of the Government RF dated 08/22/2013 N 726.⁸⁸

In accordance with the adopted amendments to the Law of the Russian Federation “On Subsoil”, only companies with state participation of more than 50% (a share in the authorized capital of more than 50% and (or) an order of more than 50% of the votes attributable to voting shares).

Another important condition for companies to access is the requirement of having five years of experience on the continental shelf of the Russian Federation.

According to the law, only two companies can be admitted to the continental shelf of Russia - PJSC Gazprom and OJSC NK Rosneft. In the summer of 2013, as an exception, another company received the right to access the development of the Russian Arctic - Zarubezhneft OJSC, which did not have it before, despite being 100% state owned and more than 25 years of experience working on the Vietnamese shelf (joint venture "Vietsovpetro"). The reason for the permission to work on the shelf was the possession of Zarubezhneft's subsidiary (100% of the shares minus one) - Arktikmorneftegazrazvedka, which is state owned and has been operating on the shelf for more than 5 years and, thus, meets all legislative requirements.

Arktikmorneftegazrazvedka was certified by the Ministry of Natural Resources and Environment of the Russian Federation for the development of the Arctic shelf. The areas claimed by Zarubezhneft in the Arctic are Pechora and Kolokolmorsky in the Pechora Sea.

Recently, the issue of gaining access to the Arctic resources of private companies has been very actively discussed. So far, the only opportunity to participate in production on the continental shelf of the Arctic is to create a joint venture with state-owned companies that remain license holders. However, this option of total state control is not attractive to private companies.

In 2012, the Ministry of Natural Resources came up with a proposal to make exploration a separate type of use of the subsoil of the continental shelf, to issue private exploration licenses without competition, provided that in the event of the discovery of a large field, Gazprom and Rosneft OJSC will have option to enter the project with 50% plus one share. It was also

88 Decree of the Government of the Russian Federation of 08.01.2009 No. 4 (as amended on 05/06/2016) http://www.consultant.ru/document/Cons_doc_LAW_83826/92d969e26a4326c5d02fa79b8f9cf4994ee5633b

proposed to guarantee private companies participation in the development of offshore fields, which they themselves would discover.

The main argument of supporters of the admission of private capital to the continental shelf of the Arctic is to advance the development of oil and gas resources in the region, accelerating the protracted process. The participation of a larger number of companies will contribute to the diversification of risks that PJSC Gazprom and Rosneft OJSC are now assuming. In addition, liberalization of access to the bowels of the Arctic shelf will have not only economic, but also social effects (jobs, increasing the general standard of living of residents of the northern regions, developing local infrastructure).

At the moment, this issue remains only a matter of discussion, no legislative acts allowing private companies to acquire licenses for the development of the Arctic shelf have yet been adopted.

Today, most of the proven oil and gas reserves of the Arctic shelf of Russia are already distributed between the two companies. As practice shows, PJSC Gazprom and OJSC NK Rosneft are inactive. In addition, due to the lack of their capabilities, they attract foreign partners.

Recently, commercial operation was started only by PJSC Gazprom at the Prirazlomnoye field. Initially, its development was assumed by the joint efforts of Rosneft and PJSC Gazprom, but in 2005 the first block of shares was sold.

Perhaps the provision of favorable conditions for private companies will accelerate the development of the Russian continental shelf. Private companies can complement the activities of state-owned companies by applying their technological potential and experience, which will lead to an increase in exploration and production indicators on the Arctic shelf.

One of the first applicants for access to the Arctic shelf among private companies is PJSC LUKOIL. In 2011, the Norwegian Ministry of Energy and Oil confirmed the company's readiness to work on the continental shelf of the country. In 2013, PJSC LUKOIL became a partner in two Norwegian projects with shares of 20% (Finnmark district) and 30% (Fingerdjupet district).⁸⁹

To implement the first phase of the Shtokman field development project, a special- purpose company Shtokman Development AG was created, the parties to the agreement were Gazprom, Total and Statoil with 51%, 25% and 24%, respectively.

89 PJSC “Lukoil” Annual Report 2015 https://fs.moex.com/content/annualreports/1967/2/lukoyl-angl.pdf

In the summer of 2012, PJSC Gazprom bought out a stake in the Norwegian company, which means Statoil will exit the project. At present, PJSC Gazprom owns 75%, and Total owns 25% in the capital of Shtokman Development AG.⁹⁰

In 2005, PJSC Gazprom received a license to develop the Dolginsky field located in the Pechora Sea, which was then transferred to the company PJSC Gazprom Neft. The start of industrial development of this field was planned for 2020, but at the moment the discounts have not yet begun.⁹¹

As of 2016, offshore oil production in Russia amounted to 22.3 million tons⁹². Almost half of the production is carried out on the shelf of the Sakhalin Oblast, in the future, the main increase is expected to be due to the Arctic shelf and the Caspian Sea. At the same time, a significant part of the new offshore projects was planned either in cooperation with international oil companies, or with the active use of foreign technologies.

Currently, production on the Russian Arctic shelf is conducted at the Prirazlomnoye field, operated by Gazprom Neft Shelf LLC. Despite the fact that Gazprom Neft Shelf LLC did not attract foreign partners to develop this field, many foreign contractors and suppliers participated in the project. Foreign service companies: Baker Hughes, Halliburton and Schlumberger were involved in drilling wells at the Prirazlomnoye field. Aker Solutions, National Oilwell Varco, Cameron, FMC Technologies also participated in the development project. ⁹³Foreign participation was provided for at the stages of drafting serial projects and engineering. A drill rig on the Prirazlomnaya platform was supplied and installed by the American company Indrill International. The role of foreign contractors in the maintenance of systems that are operated on the Prirazlomnaya platform, as well as in the provision of maintenance services accompanying drilling, makes up about 50% of the total workload⁹⁴.

The imposition of sanctions seriously undermined the development of offshore projects, mainly Arctic ones, most of which focused on the participation of foreign partners, and was frozen under the pressure of sanctions. The list of the projects and the companies that were involved ib the projects are presented in Table 3.2. The reason is simple - the lack of Russian technology and equipment. However, this has practically not affected the current production volumes, since in any case, the launch of these fields was scheduled for the period after 2020.

90 Daria Kovalevskaya, Olga Mikhaylova, Case Study: The Shtokman Project, (Swedish University of Agriculture, 2011) https://stud.epsilon.slu.se/3239/1/kovalevskaya_d_mikhaylova_o_110913.pdf

91 Dolginskoye Oil Field https://www.offshore-technology.com/projects/dolginskoye-oil-field/

92 Presentation of the Ministry of Energy of Russia (The official website of the Ministry of Energy, 2017) https://minenergo.gov.ru/node/7687

93 The Prirazlomnoye project (The official website of Gazprom, 2018) https://www.gazprom- neft.com/company/major-projects/prirazlomnoe/

94 Presentation of the Ministry of Energy of Russia (The official website of the Ministry of Energy, 2017) https://minenergo.gov.ru/node/7687

The biggest blow came from sanctions on future offshore projects of Rosneft. A joint project with ExxonMobil in the Kara Sea was stopped - this happened after the Universitetskaya- 1 exploratory well was drilled. As part of this project, Rosneft PJSC also entered into an agreement with the Norwegian North Atlantic Drilling Ltd. offshore drilling, which provided for the long-term operation of six offshore drilling rigs until 2022. A key agreement is the long-term lease of the West Alpha platform. But in November 2014, North Atlantic Drilling Limited announced that it had postponed the transaction due to sanctions.⁹⁵

In general, it is worth noting that the imposition of sanctions in many cases led to serious losses for Western companies and created obstacles to their plans to expand cooperation with Russia. For example, Exxon suffered a loss of more than $ 1 billion in 2015⁹⁶. Moreover, the positions of European and American companies in Russia can be seriously squeezed by other partners. Negotiations with Asian, Middle Eastern and Latin American companies, which, although they do not have such unique technologies as majors in this field, may replace them.

In February 2015, Rosneft PJSC sent a list of offshore license areas to Rosnedra with a request to postpone their development for 1.5-2 years. This list, in particular, includes 12 projects in the Okhotsk, Barents, Pechora, and East Siberian seas. Rosneft PJSC requested a postponement due to the freezing of the participation of foreign companies in joint projects.⁹⁷

In the period until 2017, a number of Russian oil companies announced their intentions for international expansion and globalization of their business. However, the introduction of sanctions creates too many obstacles for these plans, and now oil companies are more focused on improving the efficiency and development of their key assets in Russia than on attempts to international expansion. Global development has always been an important part of PJSC LUKOIL's strategy. Today, the company is a leader in the number of assets abroad among Russian oil companies. Group enterprises operate in 35 countries on 4 continents. However, production abroad accounts for only 13% ⁹⁸ of the total production of the company and it is not clear whether the prospects for Russian oil production will succeed: life under the sanctions of 22 companies in the future will realize their plans to expand foreign activities. x In accordance with its development strategy in 2017, Zarubezhneft JSC should enter the stage called “new growth”, which implies a significant expansion of the company's activities in joining new projects abroad. However, these projects are still either at the stage of geological exploration, or

95 Veli-Pekka Tynkkynen, Shinichiro Tabata, Daria Gritsenko, Masanori Goto Russia's Far North, (The Contested

Energy Frontier, 2018)

96 Exxon Has Lost Over $1 Billion From Russian Sanctions (Oilprice.com, 2016)

https://oilprice.com/Energy/EnergyGeneral/Exxon-Has-Lost-Over-1-Billion-From-Russian-Sanctions.html)

97 Offshore projects (Rosneft, 2020) https://www.rosneft.com/business/Upstream/Offshoreprojects/

98 D. Kryanev, S. Zhdanov. Oil Recovery Methods: Experience and application prospects. (Oil and Gas Vertical, # 5, 2011)

are only planned. Sanctions on existing projects of Russian companies abroad should not seriously affect their current performance, since their presence in this segment is not so great.

Moreover, the prospects for further long-term development and globalization can be seriously limited.

3.3. Global scenarios of cooperation in the Arctic against the backdrop of the