Central now to Russia’s hydrocarbons-related power is its Arctic sector oil and gas reserves. These comprise over 35,700 billion cubic metres of natural gas and over 2,300 million metric tons of oil and condensate, principally located in the Yamal and Gydan peninsulas. According to recent comments from Russia’s President, Vladimir Putin, the next 10-15 years will witness a dramatic expansion in the extraction of these Arctic resources, and a build-out of the Northern Sea Route (NSR) as the main transport route to monetise these resources in the global hydrocarbons markets. To these ends, last week saw the announcement of a joint venture (JV) between Russia’s third biggest oil company by output and the oil arm of state gas giant Gazprom, Gazprom Neft, and Anglo-Dutch super-major, Royal Dutch Shell (Shell). In broad terms, the JV will focus on the exploration and development of oil and gas resources along the Gydan peninsula area, with an immediate focus on the Leskinsky and Pukhutsyayakhsky licence blocks. To date, according to Gazprom Neft, little exploration work has been carried out on these two licence blocks, which are a considerable distance from any existing transport and oil and gas infrastructure. This said, both appear to be good prospects, with the Leskinsky block (located in the Taimyr district of Krasnoyarsk) estimated to contain at least 100 million metric tons (733 million barrels) of oil equivalent across its 3,000+ square km area, according to Gazprom Neft. The Pukhutsyayakhsky block is estimated to hold at least 35 million metric tons (256.5 million barrels) of oil equivalent, albeit over a much smaller exploration and development area (800 square km).
According to Gazprom Neft, two-dimensional seismic studies have been completed on both blocks, giving positive results, and drilling of the first well at the Leskinsky block is scheduled for 2020. Gazprom Neft-GEO will act as the operator on the exploration work at both blocks, and after the usual corporate and regulatory approvals, the deal should be completed by the end of the year, with each partner holding exactly 50 per cent in the JV.
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The development of the two blocks will neatly augment Gazprom Neft’s increasingly Arctic-leaning business, with the area accounting for around 30 percent of the company’s oil production in 2019. The company started exporting oil produced in the Arctic sector from as early as 2013 and since then it has delivered at least 40 million tons of oil – including both the ARCO (Prirazlomnoye field) and Novy Port (Novoportovskoye field) blends – to various European countries. Last month saw Gazprom Neft’s highly-significant first Arctic oil delivery to China via the NSR and last week saw a similar first, albeit for Russia’s Novatek, with its inaugural delivery of a cargo of liquefied natural gas (LNG) from its flagship Yamal LNG project to Japan via the NSR.
Both deliveries highlight the potential to exponentially ramp-up oil and gas product exports to key Asian markets via the NSR’s Eastern delivery route. To this specific end, Novatek is right now working on developing a trans-shipment terminal in Kamchatka to enable LNG to be unloaded from the specialised ice-class tanker fleet onto traditional LNG vessels. Last week, Novatek’s first deputy chairman, Lev Feodosyev, stated that these efforts to enhancing its LNG export logistics: “will significantly expand our opportunities to cost competitively deliver and supply LNG to the entire Asia-Pacific region.”
All of these developments have come despite the still in-place U.S. sanctions on Russia, primarily as a result of Russia’s annexation of Crimea in 2014 and negative rhetoric from the U.S. on Russian hydrocarbons expansion is increasing. Most notably, the U.S. State Department on 15 July updated part of its ‘Countering America’s Adversaries Through Sanctions Act’ (CAATSA) legislation to allow for the targeting of companies involved in building the Nord Stream 2 gas link to Germany and the second line of the TurkStream gas pipeline to southern Europe.
The U.S. Congress is also considering an additional element to the Nord Stream 2 sanctions – the ‘Protecting Europe’s Energy Security Clarification Act’ – which would target even more companies involved in building the project’s final segment. If implemented, these new sanctions could hit at least another 120 companies across a multitude of business sectors from more than 12 European countries, according to a comment last week from a Nord Stream 2 spokesperson.
It may be that Shell’s involvement in the JV with Gazprom Neft in the Arctic is a reaction at least in part to the increasing U.S. threats in Europe. As recently as April reports were that Shell had withdrawn from a wider deal with Gazprom Neft to develop five fields and licence areas in the Yamal-Nenets region. That JV had tentatively been named ‘Meretoyakhaneftegaz’ and had also involved Spain’s Repsol, until it too withdrew a month after Shell. The ‘Meretoyakhaneftegaz’ project looked to be a natural addition to Shell’s existing operational footprint in Russia, which includes a stake in oil JV Salym Petroleum with Gazprom Neft and a partnership in the major Sakhalin 2 oil, gas and LNG project.
At the time that it withdrew, Shell stated that it had exited the project due to “the challenging external environment”, although whether that meant the operational landscape, the U.S.’ increasingly hostile attitude to doing business with Russia, or a combination thereof remained unclear. It is clear, though, that Shell is also one of Nord Stream 2’s five core investors, along with France’s Engie, Austria’s OMV, and Germany’s Uniper and Wintershall Dea (with each committing to pay EUR950 million).
“It’s becoming increasingly clear that there is a growing feeling of resentment in Europe to what it regards as U.S. interference in European affairs,” a senior oil and gas industry figure with close knowledge of the European Commission’s energy security policies told OilPrice.com last week. “This really began back with the revelations by Edward Snowden in 2013 that the U.S.’s NSA [National Security Agency] had spied on European Union members and had tapped [German Chancellor] Angela Merkel’s mobile phone, which, for Merkel – who had grown up in the Stasi [secret police]-run East Germany – was intolerable, and she has never forgiven them,” he said.
“You could see this distaste for the U.S. ‘meddling’ in European-only affairs, when the E.U. refused to go along with the U.S. in its withdrawal from the ‘Joint Comprehensive Plan of Action’ nuclear deal with Iran or the subsequent sanctions, and the Nord Stream argument is part of exactly the same thing and dates right back to Merkel’s phone being bugged,” he underlined. Indeed, very recently, German Foreign Minister, Heiko Maas, said that by announcing measures that threaten European companies with sanctions: “The U.S. Administration is disrespecting Europe’s right and sovereignty to decide itself where and how we source our energy…European energy policy is decided in Europe and not in Washington.”
By Simon Watkins for Oilprice.com
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Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…