Russia Warming Up to Arctic Drilling Licences for Western Companies

on Oct 5, 2012
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On 4 October 2012, the Financial Times reported that Russia was considering a change in its policy for awarding offshore exploration licences, a move which would make the world’s second largest crude oil producer much more attractive to foreign investors.

The FT quotes Russia’s energy minister Alexander Novak as saying that the proposal would allow major foreign companies not only to operate offshore projects but also to “have access to production”, and become “co-owners of the licences.” Only companies which are technologically advanced, financially robust and environmentally safe would qualify for the Arctic drilling licences.

Although Mr Novak pointed out that no final decision had so far been taken as regards the motion, the proposal would be a radical break from the current practice of awarding licences for offshore exploration only to state-owned companies such as Rosneft (MCX:ROSN, LON:ROSN) and Gazprom (MCX:GAZP). Although western energy groups have been involved in Arctic exploration deals, such as the partnerships between Rosneft and the Texas-based oil and gas company Exxon Mobil Corporation (NYSE:XOM) and the Italian multinational oil and gas company Eni SpA (NYSE:E, BIT:ENI), the foreign companies have only been awarded with minority stakes, with Rosneft retaining sole ownership of the licences.

!m[](/uploads/story/529/thumbs/pic1_inline.png)The proposal which has been prompted by interest from western energy groups was welcomed by Norway’s Statoil (NYSE:STO), whose head of exploration Tim Dodson told the FT that the move would simplify the structure of the companies’ investments in Russia and be “more akin to the model we’re used to.” The Norwegian energy giant is one of the western companies involved in a joint venture with Rosneft.

In addition to reforming the licence awarding policy, the Russian oil ministry is also considering changes to the fiscal system to encourage investment, namely introducing a profit-based tax system for oil-producing companies which are currently taxed on the basis of production rather than profits.
Mr Novak’s comments come ahead of a visit to London, where he is scheduled to meet more than 50 institutional investors, with Russia currently seeking funds to develop its increasingly challenging deposits. Bloomberg reports that Mr Novak will explain to investors about tax incentives to help develop new projects in eastern Siberia, offshore deposits, and hard-to-recover reserves. The London presentation will be followed by a New York visit in November.

As noted in the FT article, developing oil deposits in places such as the South Kara Sea and the South Barents basin is essential for achieving Russia’s production goal of 10m barrels of oil a day. Mr Novak has noted that by 2030, 25-30 percent of Russia’s crude oil production will come from offshore projects. Yet, there has been growing awareness in Moscow that the technology and finances of western companies will be crucial for tapping these resources.
It is no wonder therefore that Russia is indeed warming up to foreign oil companies, with the Russian President Vladimir Putin recently awarding Orders of Friendship to Exxon’s CEO Rex Tillerson and the chief executive of Eni Paolo Scaroni, as reported by Bloomberg.

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