With the majority of Russia’s energy resources buried deep beneath the icy waters or permafrost of its Arctic regions, exploration and extraction of this bounty is the key to development, concluded participants in the international Arctic forum “Arctic: Territory of Dialog”, which took place in Arkhangelsk on March 29-30.

“Russia is different from many other countries because a large part of its energy resources is located in the country's northern regions,” said Russian Energy Minister Alexander Novak. “Currently, 60% of all Russian energy resources are concentrated in the Arctic regions.”

According to Novak, the country’s Arctic regions are responsible for about 80% of natural gas extracted in the country and 17% of oil, with the latter proportion on the rise for the last few years.

In 2012, it stood at 13% and is expected to increase to 22% by 2035 under a strategy currently mulled by the Russian government.

Overall, the government seeks to attract investors to the region's promising energy resources sector with privileges to those extracting oil on the Arctic shelf.

Foreign allure growing

Predictably, not just Russian, but also international companies are interested in energy projects in the country’s Arctic territories.

Yamal SPG, one of Russia’s highest profile oil and gas exploration and production projects, is currently being implemented by the country's largest independent natural gas company Novatek in collaboration with China National Petroleum Corp (CNPC).

“The first unit of the project is expected to be launched this year,” said Novatek head Leonid Mikhelson, adding that the total cost of the project is estimated at RUB27bn (€450mn) and its annual capacity is expected to be 16.5mn tonnes.

Meanwhile, natural gas giant Gazprom has been looking more closely at gas fields in Yamal region as its traditional fields in Western Siberia are approaching exhaustion.

The Bovanenko gas field on Yamal is expected to begin operating at full capacity in 2022, said Vitaly Markelov, deputy chairman of Gazprom’s board.

“The Arctic regions are our future, and we know how to work there,” he added.

According to Markelov, the company’s main focus has been on the use of exclusively locally-manufactured equipment and application of cutting-edge technology, such as satellite exploration and underwater extraction on shelf in the Sea of Okhotsk.

Localisation of equipment manufacturing has helped the gas giant to avoid problems with Western sanctions. “We are collaborating with foreign partners which agreed to localise their production,” Markelov said.

Several regions, including Murmansk, are also launching programmes for manufacture of oil and gas extraction equipment.

 

Meanwhile, BP recently entered a joint venture with Rosneft. “[The Arctic region] is clearly underdeveloped, but it could contain huge resources,” said David Campbell, BP president in Russia, adding that the Arctic region is definitely attractive for investors.

Local coal-fired economies

While coal reserves in the Arctic region appear to be small compared with its oil and gas reserves, accounting for only 2.7% of total reserves in Russia, they make a big difference for companies located in the region or next to it.

“Despite recent interest in developing renewable energy sources, traditional energy, such as coal, is still in demand,” said Dmitry Bosov, chairman of the board of Vostok Coal, a company focused on the Taimyr region.

“We have two major advantages,” he added. “The quality of the coal is very good, and logistics are very convenient.”

According to Bosov, Taimyr has coal reserves of up to 10bn tonnes, and his company expects to step up extraction to 30mn a year by 2022.

Sanctions challenge

There are all kinds of challenges for exploration and extraction of energy resources in the Arctic, ranging from harsh climate to availability of necessary equipment.

One of the challenges is related to Western sanctions slapped on Russia three years ago over the annexation of Crimea and support for pro-Russian rebels in East Ukraine.

“The legal situation has affected our business and that of any international investors,” BP's Campbell said. “We take those sanctions very seriously, and our partners here and the government are also aware of the situation.”

“We have taken a step back from some projects and some businesses,” he said, adding that the sanctions haven’t affected such areas as the gas business and onshore.

“There are many things that need to be improved in the Arctic,” said Yevgeny Ambrosov, vice president of the Arctic Economic Council. “That primarily applies to meteorological data, liquidation of emergency oil spills and development of the infrastructure.”

Among other issues is insufficient exploration work, experts pointed out.

“Geological exploration is currently receiving much less attention than in the Soviet era,” said Vasily Bogoyavlensky, deputy director for research at the Russian Academy of Sciences’ Institute for Oil and Gas Issues. “And about one half of deposits that get confirmed are unprofitable.”

“In the Soviet era, the government funded geological exploration as part of the planned economy,” Energy Minister Novak said. “These days, companies themselves fund that kind of work based on the resources they can spend.”

“Extraction of energy resources in the Arctic region requires substantial investment,” said Novatek’s Mikhelson. “These have to be global projects implemented in collaboration with international partners. In Yamal SPG, a total of 15 countries are involved.”

“Environmental safety is a key issue, and in that respect, unfortunately, relevant technology has not yet been created,” said Novak. “This has to be a major direction of international cooperation.”