Russia's Gazeta
Russia’s Gazeta announces America’s “rush to the Arctic.” May 12, 2015.

The reaction to the U.S. government’s decision to conditionally allow Shell to drill in the Chukchi Sea this summer has been harsh in many media outlets. The non-profit organization Greenpeace is carrying out an aggressive campaign against Shell, which The Guardian – the newspaper behind the “Keep it in the Ground” campaign – is covering non-stop. The New York Times ran an op-ed by environmentalist Bill McKibben lambasting President Barack Obama’s “catastrophic climate change denial.” The media in Russia, however – a country where the petroleum industry accounts for 26.5% of GDP – has a different take on Arctic oil exploration. Gazeta, a privately-owned online Russian newspaper, published a story by journalist Alex Topalov on May 12 entitled “Americans rush to the Arctic” (“Американцы рвутся в Арктику”). The article depicts Shell’s plans as logical and future-oriented, while the subtext seems to be that Russia could have a new competitor in the Arctic offshore industry hot on its heels.

A map of Shell's plans for Summer 2015. From a BOEM document.
A map of Shell’s plans for Summer 2015. From a BOEM document describing Shell’s exploration plans.

The Bureau of Ocean and Energy Management’s conditional approval of Shell’s exploration plans is relevant to Russians for both environmental and industrial reasons. On the one hand, the Chukchi Sea is right in between Alaska and Chukotka, Russia’s most northeastern region. While Shell will be drilling much closer to Alaska than Chukotka (see above map), any oil spills or accidents could still affect Russia’s coastline, where some indigenous Chukchi people still live. Most Chukchi were forcibly assimilated into sedentary lifestyles under the Soviet Union, but some still hunt whales and fish for subsistence purposes. The Chukchi Sea is also teeming with wildlife on the Russian side, from the walruses that haul out every year onto places like Herald Island to the polar bears that sometimes eat the tusked marine mammals.

More importantly for the Russian government and industry, however, is the sense of industrial competition brewing across the Bering Strait. Russia already has one active Arctic offshore field, Prirazlomnoye, in the Pechora Sea. As Topalov pointed out in his article for Gazeta, the U.S. has none. He wrote (translated from the Russian),

“At the moment, offshore work in the U.S. Arctic is almost not conducted except for in Prudhoe Bay in Alaska. But it cannot be considered offshore, for it goes onto the shelf only partially.”

Yet if Shell manages to be successful this summer, then the company might leap ahead of Russia in developing Arctic-ready offshore technology. Already, access to American technology and finance has proven crucial for Russian firms operating in the region. Due to the sanctions, however, Shell might not be able to export any technological advances it makes in the Chukchi Sea to Russia. Rosneft, for instance, has postponed any drilling plans in the Russian Arctic this summer since the sanctions forced ExxonMobil to pull out of its joint venture with the Russian oil major in the Kara Sea despite striking oil last September.

The Gazeta article quoted an expert from Russia’s Institute for Energy and Finance, located in Moscow. Nikolai Ivanov, chief of the energy markets sector, remarked that although weak oil prices would likely dissuade Shell from investing in large-scale production on the Arctic shelf in the near future, instead, their efforts in the Chukchi Sea represent “an attempt to take a foothold for the future.” So while the U.S. moves forward into the next frontier of oil and gas extraction, Russia is forced to sit this summer out on the sidelines.

From the space race to the Arctic shelf

As the Barents Observer reported, Russian Minister of Natural Resources and Environment Sergey Donskoy noticed the story, posting it to his Facebook page. His comments stating that he sees “no alternative” to exploiting deposits on the Arctic shelf made the headline. Yet his comparison of Russia’s development of the Arctic shelf to the Cold War space race is equally interesting. He suggested,

“Russia should intensify work on the Russian Arctic shelf to guarantee the resource base of our economy and the development of high technology. For Russia, development of the Arctic shelf can become a scientific and technological breakthrough on par with the conquests of the Soviet space industry in 60-70 years of the last century.

In outer space, Russia was the first to launch a satellite, Sputnik 1, in 1957. The U.S. trailed behind but ultimately pulled ahead as epitomized by the Apollo moon landing in 1969. On the Arctic shelf, Russia, too, was first. The country began producing offshore oil at the Prirazlomnaya field in 2014, which will ultimately have been years before any other Arctic country. While the U.S. has been trailing behind in the Arctic offshore just as it did in space, it may now be inching forward thanks to Shell’s plans to drill into the Arctic shelf this summer. Whereas Sputnik scared the U.S. into action in outer space, with the “Americans rushing to the Arctic”, to paraphrase the Gazeta headline, could Shell’s Chukchi Sea exploration have the same catalyzing effect on Russia’s activities on the Arctic shelf?

It’s hard to say, but Russia, cut off from U.S. technology and financing for its energy sector, is considering other options. On May 8, in remarks to the press after inking deals with Chinese President Xi Jinping on  integration of the Eurasian Union and the development of the Silk Road, Putin welcomed the participation of Chinese firms in the Arctic and Sakhalin shelf. He announced,

“We welcome Chinese companies to connect to the gas production in the Russian Arctic and Sakhalin shelf. In the development stage is the participation of our partners from China to develop the large Vankor oil and gas field in the north of Krasnoyarsk Territory.”

China National Petroleum Corporation (CNPC) holds a 10% stake in Vankor, one of Russia’s biggest new oil developments. Vankor may not be offshore, but it is in the Arctic, and oil from there may be transported via the Northern Sea Route. CNPC, which already has a 12-year history of activity in Russia, is the same company that signed a $400 billion, 30-year agreement with Gazprom last year to secure Russian gas supplies for China. Now, Vankor may symbolize CNPC’s establishment of a foothold in the Russian Arctic oil industry. It’s feasible that another Chinese oil company, China National Offshore Oil Corporation (CNOOC), could one day help jointly develop a field on the Russian Arctic shelf. The Ministry of Natural Resources, headed by the aforementioned Minister Donskoy, recently submitted a letter to the government in which it encouraged liberalizing activities on the shelf and allowing the participation of foreign companies. CNOOC Iceland, a subsidiary of CNOOC, is already a majority stakeholder in Dreki, an Icelandic offshore field. If Russia opens up its treasured Arctic shelf, the Chinese company might have its sights set there, too.

In other words, the competition between the U.S. and Russia in the Arctic offshore is not going to be as easy to confine into national boxes as the space race was.

Categories: Oil & Gas Russia

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