In the course of the meeting held in September 2016 between President Putin and the Russian government, Mr Sergey Donskoy, the Minister for Natural Resources and the Environment, announced that it had been decided to impose a temporary moratorium on the issue of new appraisal, exploration and development licences in the area of the Arctic continental shelf. No timing has been attributed to the length of this moratorium but it would usually be expected that a significant revision of the regulatory regime and the licensing process to follow could take at least a year.
This development is significant because it suggests that the Russian government would like to prepare the way for a new assessment of the potentially significant oil and gas resources to be found on Russia's Arctic continental shelf. An immediate effect of the moratorium is that it will prevent the accumulation of more licences that their holders intend to bank rather than to develop in the short term.
The Russian government has not issued any new Arctic shelf licence that have been publicly disclosed since August 2016 as evidenced in an official register of Russian Geological Fund1, however there has been some reported competition for the same licence areas by Rosneft and Gazprom in the past year. Russian law currently permits the Russian Government to only grant new Arctic shelf licenses to two companies, Rosneft and Gazprom2 , which between them hold over 90% of such licenses3. One purpose of the new regulatory regime would therefore appear to create greater competition, including as between Russian companies, in order to secure a better return for the Russian government, not just in terms of investment but also in terms of the supplemental licence conditions that it will be able to secure, being the additional obligations that a licence in Russia will typically contain4.
Exploration and development of the Arctic shelf requires significant investment and technologies that Russian companies cannot currently provide. Although the Russian government has granted a substantial number of exploration licences to date, there is only one successful Russian hydrocarbon production project on the Arctic shelf - the Prirazlomnoye oil field operated by Gazprom. This situation is exacerbated because of the dual squeeze on revenues exerted by the low oil price and the economic sanctions imposed by the US and EU. Those sanctions currently prohibit US or EU entities from participating in the exploration for and exploitation of deepwater offshore, shale or Arctic upstream projects in Russia.
There is therefore a possibility that Russia will seek to attract capital and technology from Chinese or Indian oil companies that are not directly affected by those sanctions but, realistically, it will be American and European investment and technology that is required to substantively advance development. Yamal LNG will have begun to deliver cargoes during 2017 and there will be increased focus on the energy potential of, and shipping distances from, the Russian north. A new, more open, regime for must therefore ultimately be seen as being directed in part at inducing commercial pressure to loosen sanctions.
Even with no other discernible political movement on sanctions in the US or EU at present, there have been signs of increased activity in the Russian onshore conventional oil and gas sphere over the last year where Total completed a major transaction to sell down a majority stake in the Kharyaga field and, significantly, to transfer the operatorship to a Russian producer, Zarubezhneft. Total remains fully committed to Russia through its stake in the massive Yamal LNG export project and it is significant that no western major has exited Russia during the sanctions period. The lower oil price has also created opportunities for Russian companies overseas, with United Capital Partners and its partner Trafigura signing an agreement in October 2016 to buy a 49 percent stake in Essar Oil, an Indian refiner and downstream operator. In the capital markets, Russia hopes to raise around 700 billion roubles ($11.2 billion) from the sale later this year of a 19.5 per cent stake in Rosneft by state holding company Rosneftegas, which holds 69.5 percent of its shares.
The challenges to the development of the hydrocarbons resources of the Russian north oil and gas sector are significant but the potential is enormous. Unlocking this potential will depend both upon the attractiveness of the new regulatory regime for the Arctic continental shelf to foreign investors and external political developments on the sanctions situation.
Footnotes
1 A licence was issued to Gazprom on August 1, 2016 (see https://www.rfgf.ru/license/itemview.php?iid=2717763); Rosneft received its last licence on June 6, 2016 (see https://www.rfgf.ru/license/itemview.php?iid=2717576)
2 Article 9(3) of the Russian Subsoil Law is drafted in such a way that only these companies meet the requirements of the law to obtain licences to explore and develop continental shelf.
3 These two companies hold 81 out of 87 licences publicly disclosed on the RGF official register.
4 Article 12 of the Russian Subsoil Law.
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