Larusson: Commercial or Political Interests – Oil and Gas in the Russian Arctic

Summary:

The Russian efforts of developing the natural resources in the Arctic region have intensified during the last years, and the leadership of the country is underlining the importance of speeding up the process of doing do. Putin has states that the current resources on land are depleting, and that a substitute needs to be found. But the Russian state companies Gazprom and Rosneft, the two companies who have been granted licenses to develop the Arctic shelf, are struggling against heavy bureaucracy and tight restrictions. Not the least because the Russian energy sector is considered an issue of national security, foreign involvement is heavily restricted. Furthermore, profitability of such offshore Arctic projects is uncertain, due to large demands for investments and high technology and the need for a high world oil price.

The dubious nature of developing the Arctic thus spurs the question of why the Russian government is so keen on landing these oil and gas reserves. By highlighting the economic viability of developing the northern oil and gas resources and putting them in contrast to other potential reasons for developing the regions resources, this study attempts to present possible drivers for the Russian development of the Arctic oil and gas riches. Furthermore, the question of what the state oil and gas companies do to try to affect the regulations for their Arctic endeavors is studied.

Even though the Arctic is expected to hold large amounts of resources, the economic viability of developing the Arctic region is questionable. The crucial oil price, which recently has experienced a sharp decline, could pose difficulties for the profitability of the oil and gas development projects. Furthermore there are potential development sites on land that do not require the same costs and risks. Russian governmental officials however, have pointed to the development of the Arctic as a way of giving a boost to the Russian economy, not just by sales of oil and gas, but also by using domestic technology and expertise to support the Arctic activities. As a result of the Ukraine sanctions against Russia, Rosneft has stated that it could replace the foreign equipment used in a matter of three to four years.

Having this dubious economic outlook for developing the Arctic, other drivers are suggested. One driver connects to the image-making of Putin. Being one of the first to land resources in the unhospitable conditions of the Arctic is a feather in the hat for Putin, and leads to a positive international reputation.

Another highly topical potential driver is geopolitics. The planned increased military presence is portrayed as a guarantor for the safety and security of the commercial activities in the Arctic, but it should also be able to discourage other powers from engaging in any of the contested sea areas. Furthermore, the increased US interest in the Arctic, as well as the deteriorating relations between Russia and the West as a result of the events in Ukraine, could be seen as factors instigating this driver.

For Rosneft and Gazprom the Arctic is a difficult place to operate and the profits are uncertain. However, their Arctic ventures attract capital investments, something which both companies are in need of. In order to facilitate their work on the shelf, they do try to influence the leadership. Letters leaked to the media, sent to the president and the government from the state companies, give an indication of how they try to lobby the state and what issues they focus on. One of the major issues the state companies lobbied against was to allow any other actors onto the shelf. To date, it appears as if this has been successful – only Rosneft and Gazprom are allowed access. Another result of the lobbying efforts could be seen in the Interdepartmental Commission for removing administrative barriers for subsoil development. Rosneft had prior to this sent letters to state representatives about the tight regulations and excessive red tape for the oil and gas business. As these letters were surely preceded and succeeded by informal and non-public lobbying efforts, the result is still clear. Both state companies were to be included in the Interdepartmental Commission, which gives them a better position to influence and present their views. Similar lobbying efforts had earlier been attempted by e.g. Lukoil, but without any success. Igor Sechin’s arrival as the President of Rosneft has made the state companies’ voice stronger and seemingly more influential. His close ties with Putin and his understanding of the political drivers and the commercial realities of oil and gas development in such difficult areas as the High North, has given him a unique position in the development of the Russian Arctic.

 

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