To the Arctic!
Translated by
Nils van der Vegte
September 29, 2011

Original appeared in Ekspert
Author: Vadim Ponomarov

Russia returns to the Arctic and this time it is not for research. The motives are economic. Development of the rich resource potential in the Arctic will provide the Russian economy with a strong boost and, at the same time, develop the Northern (Arctic) regions of the Russian Federation.

Most Russians associate the word “Arctic” with a boundless expanse of ice, Arctic expeditions, myths and the world’s strongest nuclear-driven icebreakers. Indeed, these are common associations with this area and they are true. But it is not the whole story. The Arctic is also a land of immense natural wealth, an area of strategic, military and political interests, an area of large herds of deer, countless indigenous people and tens of thousands tons of scrap metal left by the military, scientists and geologists on the coast of the Arctic Ocean.

In Soviet Times, the Arctic was seen as an area of great military importance. But when the Soviet Union collapsed and state funds dried up, Russia’s presence in the region was sharply reduced. Neighboring states immediately took advantage of this by claiming their rights to develop the mineral resources in the traditional territories of the Russian Arctic. During a meeting on the Arctic area, held in Naryan-Mar, Nikolai Patrushev, Secretary of the Security Council, said that “underdeveloped transport infrastructure hinders the development of the Arctic regions. The infrastructure is also inadequate to protect Russia’s national interests.”

Dmitry Baranov, an expert in the region, told Ekspert, during an interview that “it’s not just a question of mining and mineral processing, but also our national security. Twenty years ago, nobody was interested in the Arctic and its resources. In the last decade, several countries have intensified their presence in the Arctic. Many more are preparing to claim part of its territory. Therefore, if we do not want to lose our influence in the area we first of all need to strengthen our military presence in the Arctic, and secondly, try to resolve international disputes and prove our ownership of the Arctic. Finally, we must start economic activity there.”

Besides the extraction of oil and gas, other reasons for Russia’s return to the Arctic are control over the shortest transport route from Europe to Asia along the Russian Arctic coast and the further integration of Russia’s remote and rugged Arctic territories into the economy of the Russian Federation.

So much, but so difficult to extract

The era of cheap hydrocarbons is over. So, world powers and leading oil and gas companies are turning to the north, to the Arctic. According to the U.S. Geological Survey, published in 2008, the territory north of the Arctic Circle contains about 22% of the worlds undiscovered reserves of oil and gas. This is confirmed by data from the Russian gas giant “Gazprom”, which believes that the quantity of hydrocarbon resources on Russia’s contintental shelf approaches 100 billion tons (80% of which is gas). There is also plenty on dry land. Proven gas reserves on the Yamal Peninsula are around 16 trillion cubic meters (Russia produces about 650 billion cubic meters of gas annually.) and Gazprom expects to discover another 22 trillion cubic meters of gas on the Yamal Peninsula. Natural gas condensate reserves of are estimated at 230 million cubic meters, oil reserves at 292 million tonnes.

The Arctic Circle contains large qualities of minerals and hydrocarbons. According to Oleg Dushina, senior analyst at Zerich Capital Management, the Arctic Zone holds about 95% of Russia’s natural gas, 60% of its oil reserves, 40% of its gold deposits, 90% of its silver, chrome and manganese deposits, 100% of its diamond deposits, 47% of its platinum deposits and 95% of Russia’s rare metals. In recent years, Russian geologists (working in the Nenets Autonomous Okrug) have found deposits of manganese, vanadium, titanium, iron, copper, lead, zinc, nickel, cobalt, germanium, molybdenum, tungsten, zirconium, gold, platinum, fluorite, quartz, phosphate and diamonds. The development of these deposits, however, is hampered by the fact that the state does not allocate money to further explore these deposits.

But even deposits that have been well explored are extremely difficult to extract. First of all, exploitation is hampered by the harsh climate and difficult geological conditions.  Of Gazprom’s current deposits 70-85% holds the accessible Cenomanian gas, located around a depth of 700 meters. On the Yamal peninsula only 27.5% of the reserves is located at these depths. The rest is located at great depths in the Neocomian and Jurassic deposits. Also, the further to the north, the bigger the problems with infrastructure. There are plenty of coal and steel companies that can’t wait to start production at the coal deposits in the region of Ust-Kara (estimated at 98 billion tons), but there is neither a railroad nor a road. Third, the development of the Arctic deposits requires the use of more efficient (and thus more expensive) technologies in order to preserve the fragile ecosystem.

Despite all difficulties, the Arctic is the only way to strengthen the political and economic power of Russia. The governor of the Yamal-Nenets autonomous region, Dmitry Kobylkin, told Ekspert: “Today the Arctic attracts the interest of many nations. The reason is obvious – it’s a big source of natural resources. President Dmitry Medvedev envisions that the Arctic will be turned into the resource center of the twenty first century and he is right about this. According to preliminary estimates, within the next fifty years the Arctic will be become a source of energy and a key transportation hub of the world.”

A hydrocarbon feast

The development of the Arctic is currently conducted by individual companies and regions. Gazprom, for example, is the ‘chief executive’ (the main entity responsible) for the projects for gas exploration on the Yamal Peninsula and Russia’s expansion into the continental shelf of the northern seas. The Yamal area plays a key role in government plans, according to which by 2030 the volume of Russian gas production will increase with fifty percent, from 650 billion to 1 trillion cubic meters. This increase relies on the successful exploration of the Yamal territory (10.4 trillion cubic meters in proven reserves) and potential deposits in adjacent deposits, which may together ensure a stable annual production of 300 billion cubic meters of gas in the next 50-70 years.

The development of hydrocarbon reserves on the Yamal peninsula will be implemented by establishing three industrial zones around the three main gas fields Bovanenkovo, Tambeyskoye and Yuzhnii. The largest deposit is Bovanenkovo, which reserves are estimated at 4.9 trillion cubic meters. The first gas is expected in the third quarter of 2012. By 2016 a new pipeline will transport up to 115 billion cubic meters of Yamal gas per year.

Consecutively, production will start at other gas fields (most notably the Kharasaveyskoye and Kruzenshternskoye deposits), which are part of the same Bovanenkovo group.  After this the Tambeyskoye (65 bcm) and Yuzhnii (20 bcm) gas fields will be developed. Finally, Gazprom prepares to develop the gas in the Kara Sea.

For the development of transport infrastructure (to connect the Bovanenkovo field with the port of Kharasvey), Gazprom plans to build 525 kilometers of railway. Also, the company plans to build a new pipeline network which will either transport gas to Europe through the Russian city of Ukhta or if Gazprom can agree on the price to China. To deliver this gas to China Gazprom will need to build an additional pipeline of 2666 kilometers to connect Yamal with the Russo-Chinese border in the Altai region. The total amount of investments until 2035 needed to develop the gas deposits on the Yamal Peninsula is estimated at 214 to 252 billion dollars.

The gas from the main offshore project, the Shtokman field (located at about 600 kilometers north-east of Murmansk) should start flowing at the end of 2016. When this field reaches full production capacity (71.1 bcm per year) it will be the largest in the world. Its reserves are 3.9 trillion cubic meters of gas and 56 million tons of shale gas. Investment in this project amounts to 49.6 billion dollars including the construction of a pipeline with a length of 1.4 thousand kilometres (from Murmansk to Volkhov, in the Leningrad Oblast). Because it does not have the necessary experience in offshore projects, Gazprom will work together with Total (which owns a 25% stake) and Norway’s Statoil (which owns a stake of 24%).

Total is also a strategic partner in another ambitious project: the construction of a plant for liquefied natural gas (LNG) that is being build by Novatek on the east side of the Yamal Peninsula. Most of the gas for this plant will come from 7 deposits totaling 4.5 trillion cubic meters of gas. For transportation of the LNG Novatek and Total will build a new specialized arctic port that can service LNG carriers with a weight of 160 thousand tons. Furthermore, Novatek will buy a tanker fleet of 20 vessels. The total investment in this project amounts to 31.5 billion dollars.

In the next twenty years, global demand for liquefied gas could increase by so much as 200% and exceed 400 million tonnes a year. When Shell, Mitsui and Mitsubishi launched their LNG plant in Sakhalin (total capacity of 9.5 million tons per year) last year, they instantly took a 5% share of the world market. Russia can produce more than 100 million tons of LNG per year and control a quarter of the market.

Not everyone is happy with the attention for Yamal. Igor Fyodorov, the governor of the Nenets Autonomous Republic (NAR – located west of Yamal), told Ekspert that the Russian government should not only focus on the Yamal Peninsula alone, but strive to assist all the arctic regions with the conditions ot build such plants. Of the NAR’s total gas deposits, for example, only 2% is being developed. Companies operating in the region west of Yamal are prepared to build a new LNG plant and loading terminal in the port of Indiga, but they need government guarantees to insure return on investment.

In this year there have been three interesting developments in the arctic oil industry. First of all, Russian oil companies Bashneft and Lukoil have begun preparations to develop the largest federal oil deposits of the NAR: the Trebs and Titov deposits. Secondly, Gazprom Oil has build the first ice-resistant oil-production platform in the Pechora Sea. Thirdly, Rosneft and ExxonMobil will together start producing oil in the Kara Sea. Also, the two companies decided to create the Arctic Scientific Project Center for Offshore Development in St. Petersburg. Obviously, the agreement between Exxon and Rosneft is not limited to the development of the three sites in the Kara Sea. The volume of joint investments in offshore projects (including infrastructure and settlement) could reach 500 billion dollars.

‘The agreement is the basis for a constructive dialogue with the Russian government on the establishment of a tax regime for offshore production, based on the best global practices’, Rex Tillerson, chairman of the board of directors and president of Exxon said. Most analysts however expect difficulties to arise when the Russian government will want Exxon to share its technological know-how (on offshore development) with Rosneft.

Also, this fall, Russian oil companies will start the construction of a new pipeline: the Zapolyarnoye-Prupe line (investment of 3.8 billion dollars). This pipeline will connect the oil fields of the Yamal-Nenets area with the oil fields in the Krasnoyarsk territory, which oil reserves are estimated at 18 billion tons. Some of these oil deposits were discovered already 35 years ago. According to experts from TNK-BP oil the Russkoe field in may produce 20 million tons of oil per year, but to become profitable to the project needs a big pipeline.

The shortest path

Full-scale development of the Arctic zone is impossible without a reliable transport infrastructure. The most important component of which is to restore and develop all year round traffic from Europe to Asia, via the so called Northern Sea Route (NSR) – along the Arctic coast.

During the Soviet era, the NSR was used to transport 7 million tons of cargo per year. After 1991, the NSR was abandoned for almost two decades, but it was ‘reborn’ last year. As it turned out, its year of rebirth quickly became a ‘year of navigational achievements’. First of all, the largest tanker ever to travel the NSR (the Vladimir Tikhonov, 160 thousand tons) traversed the route from Murmansk to Thailand with liquid gas on board. Also, for the first time in twenty years, a ship traversed the NSR from Vladivostok to St. Petersburg, delivering 40 thousand tons of redfish. And not so long ago, a cargo ship from Murmansk managed to reach Japan with 70 tons of iron ore on board. It was the largest bulk cargo vessel that ever crossed the Northern Sea Route and perhaps more importantly, it was the first time that the Japanese used this route.

The director of Atomflot, Vladimit Arutyunyan told Ekspert: “It was not easy to persuade the Japanese. But even they could not resist the temptation after they understood the advantages of the route and the guarantees we could give them. I will be easier the next time and soon they will stand in line.”

There is a lot of enthusiasm for the Northern Sea Route, because it is one-third shorter than the traditional southern sea route to Asia via the Suez Canal. Norilsk Nickel for example, managed to decrease the costs of every ton of cargo by 50%. Therefore, over the next years, the company plans to spend 370 million dollars to double the volume of cargo along the Northern Sea Route as demand from Asia will rise. Eurochem (a mining company) will increase traffic by 3 million tons as well.

Interest for the NSR does not only come from Russian companies. Also foreign companies are interested in cutting their costs. According to Scott Borgerson, an American expert of the Council on Foreign Relations: “If we take into account the fees for passage of the Suez Canal, fuel costs and other factors that determine the rates of transport, companies can reduce the costs of a large container ship by as much as 20 percent: from about 17.5 to 14 million dollars a year. It will save companies billions of dollars a year.”

In order to support all year round transport on the Northern Sea Route, the Russian government, according to Deputy Prime Minister Sergei Ivanov, has already approved funding for the construction of three new nuclear-powered icebreakers. Prior to 2015, the Russian government will commission almost 50 new ships for various functions. Russia has also announced the creation of nine rescue stations with helicopters (with fire and rescue equipment), 15 new stations (eventually numbering 70) and 30 automatic observation posts (total of 33).

On the other hand the Russian government still has to approve modernization of the Arctic ports of Khatanga, Tiksi, Pevek, Dudinka and Dixon and constructing a new multipurpose port in Indiga. What’s more, the status of the Northern Route itself is still unclear: it is managed from St. Petersburg, based on the “Rules of navigation on the Northern Sea Route” codex from 1990.

The situation reflects a systematic problem of Russia’s strategic planning in which individual sectors are more important the entire territory. The Ministry of Energy, for example, is now developing a national program to develop the shelf of the Kara Sea. This program will require an estimated investment of 305 billion dollars. Fourteen billion dollars has been committed to geological exploration alone. (which is significantly more than the 5 billion dollars in previous years). There is however still no state-approved integrated plan for the development of the Arctic, even though this area is of strategic importance to Russia. For example, Russia will now allocate money to recycle the tons of scrap metal left in the Arctic, but has not yet build a railroad to move the metal to the recycle factories.

Cleaning up before we start

In the process of ‘industrializing’ the Arctic several important issues need to be addressed. The first one is the environment. It goes without saying that Russia needs to demand the unconditional implementation of the strictest environmental standards from oil companies. As Prime Minister Vladimir Putin put it: “This spring we are going to clean the Arctic. We will dispose of trash barrels and other waste that have been accumulating around installations and settlements for the past decades. The Arctic is an extremely vulnerable ecological environment and if we are not careful enough, the consequences of mismanagement are irreversible.”

One of the most important installations is the abandoned base of Amderma (NAR). This base must become a transport hub, supporting the Northern Sea Route. The main emergency rescue service will also be located here. The military however left behind tens of thousands of tons of scrap metal, which needs to be cleaned up in the near future with money from the federal budget.

The second objective is to create a clear system to monitor the activities of oil companies. By their own standards, oil companies are of course always complying with the law. However, starting this year, the NAR administration intends to conduct an independent environmental audit of oil by remote satellite sensing, which will function as a full time security system.

The third objective is to introduce energy saving technologies that for example will use associated gas, excess gas released in the process of oil production, to power households in Russia’s north.

The fourth objective is to develop agricultural industries in the North. This not only concerns the Nenets and Selkup reindeer herders and the preservation their traditional lifestyles, but the whole of the Northern population. In the Soviet times, for example, the city of Teriberka (Murmansk region) had two fishing farms, two dairy and poultry farms, two fish factories, a workshop and a warehouse. Now there is nothing anymore. When the Shtokman project comes online, Gazprom may again provide these people with the means to survive.

It is striking that the chances of survival in a Russian village are so heavily associated with the gas industry. Neighboring Norway however demonstrates that if agriculture is developed, it could become a large success. The production of artificially bred salmon (on state-owned farms) for example is such a success that Norway exports about 1 million tons annually, some of which goes to Russia. We could do the same in Murmansk and in Arkhangelsk. That is why, by using new technologies coupled with state support, this too, could help strengthening and developing the potential of the Russian Arctic.

  • MHN Paree

    soviet style planning combined with Russian style free enterprise could hold the key!

  • vanadium

    Large amounts of vanadium ions are found in a few organisms, possibly as a toxin. The oxide and some other salts of vanadium have moderate toxicity