By Vladimir Kovalev
Earlier this year, Russian Prime Minister Dmitry Medvedev noted that Russian oil and gas operators’ attempts to explore the northern sea shelf were proceeding rather slowly. Exploration work in the Russian section of the Arctic has been 10 times less extensive than in the US section of the Chukchi Sea and 20 times less than in the Norwegian Arctic shelf, he was quoted as saying by RBC Daily.
Moscow may now be trying to remedy the matter. The Russian government has reportedly decided to accede to the requests of major state-controlled oil and gas operators to amend the federal tax code in order to generate additional funding for exploration of crude oil and natural gas deposits on the northern sea shelf.
Rosneft’s new project
Following reports of the Kremlin’s decision to reduce tax rates for new Arctic sites, state-owned Rosneft, Russia’s largest oil producer, announced that it had begun seismological research work in the Barents Sea, in co-operation with its Italian partner Eni.
The partners are slated to explore several sections of the Tsentralno-Barentsevsky Block, which may hold 7 billion barrels of oil equivalent, as well as the nearby Fedynsky deposit, which could contain more than 18 billion boe.
The sites may be home to nearly 15 billion barrels of oil and 1.9 trillion cubic metres of gas.
Using previously collected 2-D seismic data, Russian experts have identified 10 promising structures. However, it may take about 10 years to explore these structures thoroughly.
Rosneft has indicated that it intends to drill the first exploration well at the Fedynsky deposit in 2017, with additional seismological research to continue in 2018. Another well is slated to be drilled by 2020, and if the results are positive, a third well will be drilled at the block by 2025.
At Tsentralno-Barentsevsky, meanwhile, the first well is scheduled to be completed by 2021 and a second well by 2026, according to InvestCafe, a Moscow-based investment company.
In the exploration phase of this project, Eni will fund up to US$1.4 billion in new exploration expenses; it will also cover Rosneft’s previous expenditures in the area. But in the development phase, the Russian firm will be responsible for covering 66.7% of costs, while its Italian partner will carry 33.3%.
Since the total cost of exploring and developing the two blocks is anticipated to reach US$50-70 billion, Rosneft’s outlays will be quite high. Under these conditions, the company’s request for tax breaks seems reasonable.
Grigory Birg, an analyst at InvestCafe, noted that the Arctic projects were likely to be very expensive. “Production costs for crude oil on the Arctic shelf could reach US$40-50 per barrel, which is one and a half to two times higher than in Russia, on average,” he told NewsBase.
The amendments to the tax code take such difficulties into account, Birg said, and the extent of the concessions will hinge on the complexity of the sites in question. The legislation defines several categories of eligible sites and states which licence areas qualify for tax breaks, “including rates of 5-30% for production taxes [and] zero export duty, as well as zero [import] duty and VAT for imported equipment,” he said.
He added: “The government will also guarantee the shelf operators that the tax code will not be changed within a period of five to 15 years. This would enable the companies to make shelf projects profitable.”
However, Rosneft and its partner will still face serious obstacles.
One of the main challenges will be the extreme weather conditions that prevail in the area. Eni and Rosneft will only be able to work for two months each year, when the northern seas are free of ice, according to Vladimir Vovk, a scientist at the Gubkin Oil and Gas Institute in Moscow.
“The most serious problem on the Arctic shelf is the lack of drilling technology and equipment, as well as the very short length – only two months – of the ice-free season,” he was quoted as saying by Oilru.com. This means that investors must have access to the technologies and equipment needed to carry out geological research, to conduct exploration and development drilling and to extract oil and gas from sites that are not only underwater but surrounded by ice, he explained.
Nevertheless, work is moving forward on several projects. In June of this year, for example, Rosneft announced that it was starting seismological research work at the Lisyansky, Kashevarovsky and Magadan-1 sites in co-operation with Norway’s Statoil. The partners set up a joint venture for the project in 2013 on roughly the same terms as the Rosneft-Eni deal. The sites may hold as much as 1.74 trillion tonnes of oil equivalent.
Then in the first half of July, Gazprom, the state-controlled gas monopoly, was awarded exploration licences for sites in the Barents and Kara Seas. The company is likely to team up with a foreign partner, owing to the extremely complex nature of these sites.