Politics, geology and money collide for Russia's Arctic bids: At the Wellhead

In this week's Oilgram News(opens in a new tab) column, At the Wellhead, Nastassia Astrasheuskaya looks at Russia's moves to lay claim to oil resources in the Arctic.

Calling the oil resources of the Arctic vast is a bit like calling the weather there chilly. It is understandable why a nation would want to claim as much of it as possible. Yet the challenges to harvesting its wealth are also vast, which makes Russia’s move to owning a larger swath of the region about more than just resources.

What is Russia after? Most likely a strategic symbol, but hardly a hydrocarbons source.

Russia first claimed a large chunk of the Arctic, including the North Pole, in 2000 but the UN Commission on the Limits of the Continental Shelf (CLCS) did not find the country’s evidence for that claim sufficient.

Moscow did not give up and refiled the claim in August with new evidence collected through 15 years of geological work and is preparing to present its case at the CLCS’s next session in February.

Russia’s move also set off a landrush from other countries looking to get a piece of Arctic action.

While Russia conducted bathymetric and seismic work to prove its land geology continues beyond the 200-mile exclusive economic zone, Denmark and Norway filed similar claims for their Arctic shelf extension, and Canada is preparing its request.

The US can only compete vocally so far, as it is not part of the 1982 UN Convention on the Law of the Sea.

According to the convention, any country has the right to pick the most distant point from its border and try to include it in the claim if it can prove it a natural continuation of its continental shelf.

Russia’s petition involves 1.2 million sq km and includes the Lomonosov Ridge that cuts the Arctic Ocean in two, the Mendeleev Rise, and the southern tip of the Gakkel Ridge.

Estimated potential hydrocarbons resources in the claimed area range from 4.9 to 5.5 billion mt of oil equivalent (36-40 billion boe), according to Russia’s natural resources ministry.

Russia also included the North Pole, which lies just off the Lomonosov Ridge.

Moscow unofficially claimed the North Pole in 2007, when it decorated the pole sea floor with a titanium Russian flag.

The pole is one of the issues Russia will have to settle with Denmark, which claims the entire Lomonosov Ridge, from Greenland to the Russian shelf. Russia only applied for the stretch of the Ridge from its coast to the pole.

Dividing the Arctic does not have to be contentious, as Russia and Norway, for instance, recently settled the issue of the so-called “grey zone” in the Barents Sea.

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The North Pole division, too, can have a simple solution if it is proclaimed neutral territory, some Russian experts say. But this will be up to the countries in the region, and not the UN commission, which only determines whether the claimed area of the sea floor can be considered part of the shelf or of the ocean.

As Russia has re-applied for the shelf extension, it has a priority right to present its case ahead of other candidates, which only filed their first requests recently. Even if Russia’s request is approved, it will not be able to make use of the overlapping areas until the UN commission considers the other claims.

The time frame makes little difference for Russia, in this case, in terms of the access to hydrocarbons underneath the ocean, as there are doubts of how reachable, plentiful, and necessary they are in the coming decades.

To justify the expensive and complex work required to turn those resources into reserves, oil prices need to at least double from their current $50/b level.

In current macroeconomic conditions, even work under existing licenses in more accessible areas is barely profitable. Add on ecological risks, and this puts off mass Arctic exploration and production indefinitely, as Shell recently showed when it put its Arctic venture on ice.

Russia has one producing project in offshore Arctic so far, Gazprom Neft’s Prirazlomnoye, which is in the country’s exclusive economic zone. It is expected to produce 600,000 mt (about 12,000 b/d) of crude by the end of this year, but its geology is fundamentally different from what Russia is seeking in its latest claims and makes duplicating Gazprom’s efforts in those areas unlikely for the foreseeable future.

The Arctic Ocean is the worst to drill for crude in terms of climate, and the best in terms of geology, as it is the youngest ocean on the planet and the richest in formed sedimentary basins with economically viable crude resources, Gazprom said.

Most resource-rich basins, however, are located at the ocean’s outskirts, and are already part of the Arctic countries’ continental shelves. The deeper into the ocean, the more irregular and the less reachable the hydrocarbons blocks become, making the territorial claims further into the Arctic shelf more of a political than business ordeal. — Nastassia Astrasheuskaya