Russia can wait for $70 oil before re-entering Arctic waters

Elena Mazneva and Dina Khrennikova 3/29/2017

MOSCOW (Bloomberg) -- Russia can wait for a sustained recovery in oil prices before drilling again in Arctic waters, relying for now on less costly regions even as rival producer Norway accelerates development of its northerly fields.

“We estimate production costs for the Russian Arctic offshore in the range of $70 to $100/bbl,” Energy Minister Alexander Novak said by email. These reserves “are our backup stock,” he said before the International Arctic Forum in Russia’s Arkhangelsk that began Wednesday.

While crude is languishing at around $51/bbl -- less than half the price of mid-2014 -- analysts at Morgan Stanley forecast a rebound to $70 by the end of 2019 as bloated global stockpiles decline. As Russia waits, Norway’s Arctic waters may host a record number of wells this year following recent discoveries, new government license awards and efficiency gains.

Russia plans to boost exploration in the Arctic Barents and Kara seas from 2019, according to Novak. In the meantime, the cost of offshore development may fall as Russian companies adopt new technologies, he said.

“Offshore Arctic is interesting but it needs to be commercially competitive,” David Campbell, president of BP’s Russia business, said in an interview during the Arkhangelsk forum on Wednesday. “Its reserves, I am confident, will be there for future generations,” he said, commenting on the general prospects for development rather than BP’s own plans.

Onshore Focus

Russia has almost 60% of its known hydrocarbon reserves in the Arctic and has spent about $100 billion on energy projects in the region over the past decade, according to Bloomberg calculations based on data from operating companies. The vast majority of that investment has been in the less-costly onshore developments.

“If we talk about the cost of producing onshore Arctic, it’s barely different from that in other Russian provinces,” Novak said. “Given our geographical location, operating in the Arctic isn’t something unusual for us.”

Russia’s Arctic in Numbers

Arctic projects accounted for 81% of Russia’s natural-gas output and 17% of crude production last year, according to Novak.  The country’s Arctic zone is home to 346 hydrocarbon fields, including 19 deposits offshore. More than 90% of potential hydrocarbon resources on the Arctic shelf are still unexplored, according to the Natural Resources Ministry.

Russia has retreated from Arctic waters since crude’s collapse began in 2014, yet still sees “strategic potential” there, Novak said in an interview with Russia Today this week. Development of its most recent northern offshore discovery -- a billion-barrel oil find in the Kara Sea by state-run Rosneft and the U.S.’s Exxon Mobil in 2014 -- has languished amid international sanctions.

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