The oil-price war Russia helped create complicates their Arctic plans

By Olga Tanas and Dina Khrennikova on 3/17/2020

MOSCOW (Bloomberg) --Oil’s freefall amid a deepening price war and a global pandemic threatens to complicate Russian efforts to turn the Arctic into a major new energy zone.

Just last month Igor Sechin, the boss of top Russian producer Rosneft PJSC, told President Vladimir Putin the company would invest more than 10 trillion rubles ($134 billion) in its Vostok Oil project on the Taymyr peninsula. Yet reimbursement of infrastructure costs is dependent on crude prices, and they have crashed to a four-year low.

A drop in funds from the state could be a setback for Rosneft, which estimates potential resources in the new region at more than 37 billion barrels of oil equivalent, with a production plateau equal to “the largest projects in the Middle East.”

In return for investing in the Arctic province, the government has offered tax breaks to one of Rosneft’s flagship fields in East Siberia, Vankor, located about 250 miles south of Vostok Oil. That would allow the company to reduce annual extraction-tax payments by as much as 60 billion rubles in the next 10 years.

Under the current bill, awaiting final approval from Putin, Rosneft would get tax breaks for Vankor as long as oil trades above $42.45 a barrel this year, $43.30 in 2021 and $44.16 a barrel in 2022. Such prices set down in the budget would allow the government to cover all spending without seeking extra funds.

Yet benchmark Brent crude is currently trading near $30, having been battered by the simultaneous shocks of the coronavirus and a price war unleashed by Saudi Arabia after OPEC+ talks broke down earlier this month.

“Amid low oil prices, Rosneft may minimize investment in its Arctic project,” said Vasily Tanurkov, director of Russia’s ACRA Ratings. The extent of any pullback will depend on the duration of crude’s recovery, he said.

Arctic Bet. Rosneft has been among the staunchest opponents of cooperation with OPEC, and the recent collapse of the deal to cut supply may help frame its view of future production. Russia expects its Arctic reserves to drive long-term output growth as most of its crude currently comes from declining Soviet-era fields.

The Finance Ministry hasn’t received any request from Rosneft or from government authorities to review the oil-price base level in the draft tax legislation, its press office said.

Rosneft is ready to finance the construction of infrastructure at Vostok Oil with its own funds and offset those costs once it receives tax breaks for Vankor, the company said.

Vostok Oil includes several fields on the Taymyr peninsula in the Krasnoyarsk region, including the Lodochnoye, Suzunskoye, Tagulskoye and Payakha deposits. The license for Payakha is held by operator Neftegazholding, a company owned by former Rosneft president Eduard Khudainatov. Rosneft also created a joint venture with BP Plc to explore fields in the area.

“In the long term, Vostok Oil is likely to remain the company’s priority,” ACRA’s Tanurkov said. Crude’s plunge may lead to underinvestment across the global industry, resulting in lower output and subsequent price growth in the future, he said.

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