Abstract. Northwest of Russia is a fast growing region attractive for investors substantially due to expectation of intense oil and gas production on the Arctic shelf and coast, and development of an export-oriented transportation infrastructure for delivery of hydrocarbons to the world market. Yet, any project may hardly be implemented until a number of problems, primarily those concerning improvement of the applicable law, have been solved. With its significant oil and gas production volumes, Russia completely meets the internal demand on hydrocarbons, thus securing its energy stability. Hydrocarbon production not only provides considerable proceeds directly to the budgets at various levels due to natural resources tax (oil and gas production being 96% of the total mineral resources tax), but also has a great multiplicative effect on associated and supporting industries (machine engineering, transportation, civil engineering, etc.) both in terms of economic and social development. Export of hydrocarbons is the principal source of currency in Russia virtually constituting the base for solution of main social and economic challenges in the country. This brings high benefits to the state from export duties, and also, owing to the lower domestic market energy prices, enhances the corporate profit margin resulting in higher profit tax and other business returns. Oil and gas production and export, especially with the current favorable market trends, are the main cause for growth of gross national product. Europe is a conventional market for the Russian energy, as nearly all gas and over 92% of oil are exported there both through trunk pipelines and marine terminals and railways. Basic consumers of the Russian natural gas are Germany, France, Italy and Turkey. Basic importers (also for re-export purposes) of the Russian oil are the Netherlands, Germany, Italy and Poland. With its natural wealth Russia takes advantage of the opportunity using energy as an instrument in its foreign policy. Pursuant to the Energy Strategy of Russia adopted in 2003 by the Government for the period till 2020, production and export of hydrocarbons will be increased. This would require a package of measures to be taken seeking to enhance oil and gas production, also in new regions, and approach new markets. Asian-Pacific Region (Eastern export trend) and North America, including the USA and Cananda (Western trend) are regarded as the basic new markets for the Russian energy. Obviously, access to North American and enhanced presence on the European market will be only possible upon development of necessary facilities for liquefied natural gas production and shipping and creation of independent oil export routes, primarily in Northwestern Russia. Stronger Russian influence on the energy market in the Asian-Pacific Region depends on the successful development of oil and gas fields in Eastern Siberia and offshore Sakhalin, and creation of the necessary transportation infrastructure, primarily trunk oil and gas pipelines and marine terminals. At the initial stage of the production process in Eastern Siberia, the newly developed export capacities will be loaded with the raw materials recovered from the principal resource-prone region of Russia, Western Siberia, with partial use of the existing transportation (pipeline and railway) infrastructure. This point makes it less possible to start in the foreseeable future the construction of the Western Siberia-Barents Sea pipeline. Northwest of Russia is one of the most promising areas in terms of oil and gas production, extension of the existing and establishment of new export-oriented transportation lines (Figure).Figure: The designed (green) and developed (red) investment projects for production and transportation of oil and gas in Northwestern Russia (territory shown in yellow).
Different sea ice thickness is shown in lilac hues. Red circles indicate different limited possibilities for transportation (chokepoints). The geography of the region covering not only northern territories of Russia ranging from the Urals to the Baltic Sea, but also the shelves of the Barents and Pechora seas, provides a number of important transportation advantages, particularly, the possibility to export the Russian oil without entering into the territory of the adjacent nations, and create alternative transportation lines without involving the trunk pipeline systems. The alternative transportation design is so much attractive not because sufficient export capacities are not available in the Transneft Plc trunk oil pipeline system, but rather because oil companies are keen to increase the corporate margin through 100% export of the recovered oil (export through trunk oil pipelines is quoted and the companies are not able to export more than 30% of the recovered oil being forced to sell the remaining 70% on the domestic market at prices lower than elsewhere in the world).
At present, export from Northwest is mainly supported by the trunk oil pipeline system, primarily through the marine terminal of the Baltic pipeline system in the town of Primorsk. The capacity of the latter is now 50 million tons per year and by the end of 2005 it is planned to be increased up to 60 million tons. Therefore, Primorsk is becoming a major Russian export terminal. However, there are two alternative export transportation centers based on railways. The Kaliningrad transportation center supports not only export of high quality oil recovered from onshore and offshore areas, but also the transit of oil from other regions of Russia, such as Volga Region and Western Siberia. In 2004, according to preliminary data, over 4 million tons of oil were reloaded through the center, primarily to marine tankers. Oil volumes are expected to grow. A shortcoming of this center is that capacity of the tankers passing through the Danish straights is limited to 110 thousand tons, which makes oil transportation more expensive.
The other transportation center is the port of Murmansk which plays a significant part in oil export via the ice-free offshore area of the Barents Sea and provides an opportunity to let in tankers of a bigger displacement. Oil for reloading in Murmansk is delivered in different ways, that is directly by railways, by small tankers from the ports of Vitino and Arkhangelsk, (where delivered by railways), by tankers from Kolguev Island and Varandey Terminal. It also comes by sea from the fields at the Bay of Ob in Western Siberia. Partially, oil is reloaded in the roads, partially via the storage tanker. Turnover of oil supplied from Western Siberia, Timan-Pechora Province and Volga Region via Murmansk in 2004 was about 7 million tons. As soon as the development of the shelf and onshore fields of the Pechora Sea are launched, the reloading will exceed 40 million tons, and with allowance for oil transit from Western and Eastern Siberia, primarily from the Vankor Group of fields, this amount will be over 65 million tons.
Two major gas transportation projects are planned to be implemented in Northwest. The North European gas pipeline will enable delivery of gas from the South Russian field of Western Siberia along the Baltic Sea floor directly to consumers in Germany, Sweden, Denmark and Great Britain without entering into the territory of these countries. Development of the Shtokman field would allow great export capacities to be developed for transportation of liquefied natural gas to the European and North American markets. Larger amounts of oil and gas exported via the Northwestern territories are not only beneficial for the state in terms of higher proceeds gained from export, but also result in significant investments into the gas liquefaction production facilities, extension of pipelines, development of port infrastructure, and modernization of supporting railways; as wells as in placing orders with shipbuilding companies (primarily for construction of ice-breaking fleet), etc. Thus, it largely affects the prosperity not only of the Northwestern Region, but the country in general.
Subject to the concept outlined in the Energy Strategy of Russia, intense oil production in the Northwestern Region will be mainly linked with the development of existing and creation of new oil production centers on the shelf and coast of the Pechora Sea. Presumably, by 2015, the total oil production in the Timan-Pechora Province will gain (according to different assessments) 50 to 60 million tons per year, which will constitute a large part of the entire oil production in Russia, 20-30 million tons per year being recovered from the shelf and coast completely for further export . Gas production growth in the Northwestern Region is primarily related to the development of the Shtokman gas condensate field which is scheduled for 2010-2012. The annual production will amount to 65 billion cubic metes. The recovered gas is planned to be liquefied at the plant near Murmansk, and then mainly exported. Participation in the field development of Norsk Hydro that is now implementing a similar Snow-white project in the Barents Sea will enable application of efficient advanced technologies, and in the event of counter-participation of Gasprom in the Snow-white project, to coordinate implementation of both projects. Despite the fact that the first licenses for development of offshore oil and gas fields were granted 11 years ago, no actual results have been obtained, no single ton of oil nor cubic meter of gas has been recovered from the shelf. This is attributed mainly to the following: hard physical and geographic conditions, such as great depth and necessity to employ higher and costly technologies; harsh ice environment requiring ice-resistant rigs, expensive ice-reinforced tankers and ice-breaking support. Environmental control is more expensive for offshore operations. An aggravating factor is low quality of the Pechora Sea oils, which causes decrease of their selling price in comparison with the basis sort. All these reasons makes the project less profitable. According to the calculations, development of the offshore fields is of low profit under the current taxation conditions suggesting no differentiation subject to quality of the natural resources and project feasibility.
At present, the principles for differentiation of oil and gas production taxation supported by the Russian President are being elaborated. Amendments to the Act on the Natural Resources are discussed seeking, in particular, to enhance the attractiveness of the Arctic shelf in terms of investment into development of oil and gas fields. Probably, Product Sharing Agreement will be again selected as one of the solutions. The final end of these efforts for the state is obviously to ensure economic security and export independence of the nation.
The large investment potential for production and transportation of the Northwestern hydrocarbons may be adequately assessed due to enormous interest expressed with respect to the investment projects suggested for implementation in the region. Undoubtedly, implementation of such big projects as development of oil and gas fields on the shelf, construction of natural gas liquefaction plants, transnational gas pipelines and similar facilities is only possible with involvement of international investors and participants both for the purpose of raising necessary financial support and obtaining machines and technologies. The intention to take part in the projects has been expressed not only by all major oil and gas producers in Russia, such as Gasprom, Rosneft, Lukoil, Surgutneftegas, TNK-BP, but also by a number of foreign companies including Statoil, Norsk Hydro, ConocoPhillis, etc.
It is also noteworthy that implementation of the strategy for natural resources management in Northwest is regarded as one of the elements in systems approach to elaboration of the public policy for development of Russian northern territories and is largely supported by the Government.
Author: MIKHAIL N. GRIGORIEV GECON Geological Consulting Center, Moscow – St. Petersburg, Russia
