Russia's Arctic Opening

As Moscow prepares to open the icy waters of the Arctic to offshore drilling, dangers abound. But it's also a moment of opportunity to get things right.

BY CHARLES EMMERSON | MARCH 30, 2011

When it comes to Russian oil and gas, major deals with foreign companies are a good deal like London buses: Just when you're about to give up waiting for one to come along, three or four turn up at once.

Already, 2011 has been a bumper year.

In January, BP sought to ensure its future as a major international player by announcing a landmark $16 billion alliance -- now on the rocks -- with Russia's state-run Rosneft. The company's chairman, Igor Sechin, is also Russia's deputy prime minister. Facing a multi-billion dollar tab from last year's Gulf of Mexico spill -- and the prospect of being frozen out of operating roles in the United States for years -- BP agreed to swap a chunk of its own equity for a share of Rosneft and cooperate in a new Arctic venture in the Kara Sea, with the blessing of the Kremlin but, perhaps fatally, without the benediction of BP's Russian business partners in TNK-BP.

Later the same month, on the margins of the World Economic Forum annual meeting in Davos, Switzerland, executives at ExxonMobil struck a deal with Rosneft to develop offshore fields in the Black Sea.

In early March, France's Total bought a $4 billion stake in Russia's leading independent gas company, Novatek. Less noticed -- but of considerable long-term significance -- the same week saw Russia's state-run gas giant, Gazprom, secure ownership of Kovykta, a Siberian gas field that will ultimately be used to pump gas to the hungriest energy consumer on the block: China.

Together, these deals reflect Moscow's growing appetite for partnerships with international companies in areas that require hefty investments of technology and money, coupled with a strategic desire to assert control over relatively easy-to-produce assets.

In one sense, this is nothing new. International companies have a long and tortured history of involvement in Russia's hydrocarbon development, stretching back to the Rothschilds and the Nobels more than 100 years ago.

Much of this history has depended on the ebb and flow of power between resource-rich Russia and companies with the means to develop those resources. In the 1990s, with oil prices low and a weak Russian government, companies' bargaining position was strong. After 2000, with rising prices and a more assertive Kremlin, power shifted back to the state.

Now, Russia seems attractive -- and receptive -- once again. With large parts of the world off-limits to outsiders and the Middle East in turmoil, international oil companies increasingly see Russian assets as an indispensable part of their portfolio. Russia, meanwhile, needs international expertise, and money, to keep production high.

But these latest deals involve two new elements that point to the longer-term future of Russian hydrocarbons.

First, two of the deals have an Arctic focus, moving beyond the more southern fields that have fed Russia's energy superpower status for years. It is an ironic twist of business logic that one of the indirect consequences of the Gulf oil-spill disaster has been that BP has attempted to enter an agreement to develop hydrocarbons in the environmentally sensitive offshore Russian Arctic. (As Russia's ever-colorful prime minister Vladimir Putin put it: "One beaten man is worth two unbeaten men.")

The Total-Novatek deal, meanwhile, opens the way for Total's involvement in the huge onshore Arctic Yamal gas deposit, with a development price tag of $20 billion. (Development of the giant Arctic offshore Shtokman gas field, in which Gazprom is partnering with Total and Norway's Statoil, is slated to come into production in 2016 -- but many expect that timeline to slip).

Second, Russia is attempting to recalibrate its hydrocarbon focus from Western countries to those in Asia. American shale gas has exploded the commercial logic of large-scale liquefied natural gas (LNG) exports to the United States: America may be able to get all the gas it needs out of its own ground. U.S. oil imports have already been declining for several years.

The European energy market is huge, but mature. The prospects for growth in European gas consumption are limited. China, meanwhile, is hungry. It is already more dependent on imported oil and gas than the United States, and its needs are projected to increase dramatically in the coming years.

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Charles Emmerson, author of The Future History of the Arctic, is a senior research fellow at Chatham House.