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Petroleum Developmentin Russian Barents Sea:

Driving Forces and Constraints

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By Arild Moe and Anne-Kristin Jm-gensen

FNI Report 7/2000

DISCLAIMER

Portions of this document may be illegiblein electronic image products. Images areproduced from the best available originaldocument.

FRIDTJOF NANSENS INSTITUTTTHE FRIDTJOF NANSEN INSTITUTE

Tittel/Title Sider/Pages

Petroleum Development in Russian Barents Sea: Driving Forces 62

and Constraints

Publikasjonstype/Publication Type Nummer/Number

FNI Report (also published in Post-Soviet Geography and 7/2000

Economics, 2, 2000)

Forfatter(e)/Author(s) ISBN

Moe, Arild and Anne-Kristin Jmgensen 82-7613 -394-0

Program/Programme ISSN

0801-2431

Prosjekt/Project

0047

Sammendrag/AbstractThe potential of the Barents Sea for petroleum production has attracted interest for many years.In the Russian sector of this ocean, enormous gas finds and substantial oil resources have nowbeen proven, and the first real licensing for field development in the area has just begun. Despitethe area’s potential, there are strong conflicts of interest. The report examines the forces alterna-tively driving and hindering offshore hydrocarbon development in the Russian sector of theBarents Sea. It describes exploration activities beginning during the Soviet period and extendingto the present. The status of the major development projects financed in part with foreign capital,and conflicting regional and central government interests involved in such development, isdescribed and evaluated. Coverage includes a discussion of the various regional interests in

petroleum activities, with a particular focus on the conversion of naval yards in the area and theemergence of Rosshelf, an oil/gas conglomerate formed to facilitate such conversion. It alsoreviews the planned licensing rounds and the results of the first round. Finally, it discusses

supplies from the Barents Sea in the context of overall Russian energy supply and energydevelopment strategies.

Stikkord/Key WordsRussi~ offshore, oil, gas, Barents Sea

Bestilling til/Orders to:Fridtjof Mmsen Institute, Postboks 326, N-1326 Lysaker, Norway.

Tel: (47) 67111900 Fax: (47) 67111910 Email: [email protected]

Table of contents

INTRODUCTION .................................................................................................................................. 3Ewly Development ..............................................................................................................................3

THE RESOURCE POTENTIAL OF THE RUSSIAN BARENTS SEA ............................................ 5Surveying and Exploration after 1991................................................................................................. 5Present Drilling Activi~ .................................................................................................................... 10

STATUS OF DEVELOPMENT PROJECTS ................................................................................. 12Prirazlomnoye Field .......................................................................................................................... 13Shtokmanovskoye Field .................................................................................................................... 14

REGIONAL INTERESTS ................................................................................................................... 16General Situation in Murmansk and Arkhangel’sk Oblasts and the Nenets Okrug ........................... 17Regional Complexes Supporting Offshore Development ................................................................. 20Industrial Spin-off Effects from Shelf Development ......................................................................... 23Energy Supplies to the Regions .........................................................................................................25“Regional” Oil and Gas Resomces ....................................................................................................26

NAVAL SHIPYARDS — ASSET OR CONSTRAINT? . ................................................................... 27General ..............................................................................................................................................28Conversion ......................................................................................................................................... 30“The Shelf Will Feed Eve~body...'' ................................................................................................. 32The Establishment of Rosshelf .......................................................................................................... 33

Legal framework ............................................................................................................................... 38Licensing in the Barents Sea .............................................................................................................4OResults of the First Tender .................................................................................................................43Outlook ..............................................................................................................................................44

OVERALL DEWD PICTURE ..................................................................................................... 44

OTHER CONSIDERATIONS ............................................................................................................ 50

CONCLUSIONS ................................................................................................................................... 52

REFERENCES ..................................................................................................................................... 57

Frid~of Nansen Znstitute

INTRODUCTION

The potential of the Barents Sea for petroleum production has attracted interest for many

years. In the Russian sector of this ocean, enormous gas finds and substantial oil

resources have now been proven, and the first real licensing for field development in the

area has just begun. Despite the area’s potential, there are strong conflicts of interest. The

main “contestants” are the authorities of the adjacent coastal regions, large Russian

energy companies, and the military. At the same time, prospects for development also

are affected by the unsettled balance of power between the federal center and the regions.

In this paper, we describe the resource potential and current status of petroleum

exploration and development activities on the Russian continental shelf in the Barents

and Pechora seas and then proceed to analyze regional interests and the role of shipyards

in the area. The licensing round carried out in 1999 is described alongside plans for

further rounds. In conclusion, we examine the role of the region in the overall Russian

energy supply picture.

Early Development

The Soviet Union initiated seismic surveys in the Barents Sea in the early 1970s, spurred

by theories of Soviet geologists who maintained that the area contained significant

petroleum resources. After 1978 extensive surveys, concentrated mainly in the area

between Novaya Zemlya and the Kola Peninsula, were performed. In total, the seismic

surveys covered a huge area, and several structures were identified. However, at the time

Western specialists raised doubts concerning the Soviet capacity to analyze the collected

data. Prior to the mid-1980s, no co-operation existed with foreign companies with

respect to data gathering or analysis; however, considerable amounts of equipment were

imported for use in the Barents Sea.

Exploration drilling began in 1981 in the southeastern portion of the Barents Se%which

also is referred to as the Pechora Sea. The drilling took place on the Dresvyanskaya

structure at the mouth of the Pechora River, fi-omthe platform Sevastopol’, based on a

converted Liberty ship anchored in the shallow waters. This represented a quite primitive

Fridtjof Nansen Institute

3

technological solution that could not be applied in deeper waters. In order to carry out

operations in deeper waters, imported technology was needed. Special attention was

devoted to the purchase of three drillships fi-omFinland in 1979. Two of them, l’alentin

Shashinand ViktorMuravlenko, delivered in 1981 and 1982, came to play a key role in

subsequent exploration. These ships were designed for arctic drilling down to 6000 m in

water depths of 300 m. They were equipped with dynamic positioning systems from

Norway’s Kongsberg Vi?ipenfabrikkand were considered the most advanced ships for

arctic offshore drilling at the time.2 In addition to the two drillships, three semi-

submersible rigs— Shelf5,6, and 7, built in Vyborg— and two jack-ups— KoMaya and

Murnzanskaya,built by Rauma-Reppola in Finland — were employed. Thus by the

beginning of the 1990s altogether seven drilling rigs were operating in the Russian sector

of the Barents Sea (Moe, 1994).

These rigs had carried out drilling on a total of 21 structures by 1991; 41 wells were

drilled, of which 26 were completed. This is a small number compared to the number of

drilling units, even if one takes into account the short work season and the inexperience

of the crews. The discovery rate was quite good, however, and nine interesting fields

were discovered, including the giant Shtokmanovskoye gas and condensate field (1988)

in the northwestern part of the Russian Barents Sea and one significant (l%irazlonmoye,

1989) and several small oil fields in the Pechora Sea.

Thus, by the end of the Soviet period it appeared as if the stage was set for major

petroleum activities in the Russian Barents Sea. A significant resource potential had been

identified, the competence and equipment of Soviet organizations working in the field

had reached a reasonable level, and an emerging openness toward international co-

operation seemed to guarantee that any remaining obstacles could be overcome by the

parties involved. In the next section, this paper returns to the Russian Barents Sea during

this critical period for the purpose of explaining why developments took another path and

at the same time evaluating the

and economic fi-amework.

prospects for increased activity within the new political

2For more details on the period before 1987, see Bergesen et al. (1987).

4Fndtjof Nansen Institute

THE RESOURCE POTENTIAL

Surveyingand Explor&”onafter 1991

Seismic surveying as well as exploration

OF THE RUSSIAN BARENTS SEA

drilling was curtailed from the early 1990s

because of fimding problems as well as reorganization of the oil and gas sector (see

below). Thus the amount of drilling dropped fi-oma top level of roughly 19,000 m in

1988 to 2,000 m in 1996. Seismic surveying dropped concomitantly. This decline in

activity is reflected in annual additions to resources since 1990, which have been less

than in the years of peak activity, but nevertheless substantial.

As of 1997, roughly 322,000 km of two-dimensional seismic profiles had been shot in

the Barents and Pechora seas. Three-dimensional seismic profiles were shot for the first

time on the Russian shelf in 1996–1997, altogether some 500 kmz. The density of the

seismic profiles that have been shot is very low, 0.3 km per krn3 for the entire area

(Malovitskiy et al., 1998, p. 8). Altogether 93 interesting geological structures have been

discovered.’ Of these 39 are in the Barents Sea and 54 in the Pechora Sea. Detailed work

has been carried out on 27 structures (9 in the Barents Sea and 18 in the Pechora Sea)

(ibid., p. 10).

In the structures where detailed seismic exploration has been conducted, estimated

resources (C3) are set at 4,500 million tons of oil equivalent (ibid.). Russian

expectations are that the reserve numbers can be increased considerably with more

exploration. The geological organizations active in the area expect thereto be a total 24

billion tons oil equivalent of exploitable hydrocarbons in the Russian sector of the

Barents and Pechora seas. Of this 3.4 billion tons are forecast in the Pechora Sea and

20.6 billion tons in the rest of the Barents Sea. In the Pechora Sea, the expected share of

oil and condensate of total hydrocarbon resources is 45 per cent, and in the rest of the

3As of 1991, the corresponding number was 60 to 70.

5Fridtjof Nansen Institute

Barents Sea only 6.1 percent. Thus the Pechora Sea is considered to be promising for

both oil and gas, whereas the Barents Sea is considered to be mainly gas bearing.

Figure 1. Interesting fields and structures in Russian Barents and Kara Seas

... ............ ......... : .,,.:.:.::::::........>.....:.::.fi.: ...1 Ludlovskove 7 Prirazlomnove 13 Mezhdushmskaya 19 Varandev-More 2S Ferarnanovskaya2Shtokmanovskove 8 Ruaanovskove 14 Pa aninakaya 20 Yuzh.-Dolginakaya 26 Kurchatovskaya3Severo-Kildinskove 9 Lenimzradskove 15 Ko ‘ska a

‘k21 Ledovoye 27 Luninakaya

4 Murmanskove 10 AdmiraIteiskaya 16 Koloko orakaya 22 Alekseevskaya 28 R bachinskaya5 Pomorakove 11 Tulomskaya 17 Sev.-Dol inakaya 23 Russkaya6 %v.-G f

+’29 sentralnayatdv~evskove 12 Akh.-Andreyevskaya 18 Medyns we 24 Arkticheskaya 30 Varyazhskaya

FridfjofNansetlInstitute 2000 31 Zap. -Sharap0vskaya

Underlined names represent jekis with exploitable reserves (according to Russian deftition), others arepromising structures

6FridQof Nansen Institute

Altogether over the 15-year period 1981-1996, 127.2 thousand m were drilled, 90.6

thousand in the Barents Sea and 36.6 thousand in the Pechora Sea, fi-om43 holes. Of

these 33 were completed, although only 7 of these since 1991.4

At present 16 oil- and gas-bearing or potential oil- and gas-bearing areas have been

identified in the Russian Barents and Pechora seas (Malovitskiy et al., 1998, p. 10) (Fig.

1). The dividing line between the concepts “interesting structure” and “field” is not

totally clear, and thus the numbers may vary, but it is reported that 10 fields had been

discovered as of 1998, 5 in the Barents and 5 in the Pechora Sea. The Pechora Sea

contains three oil fields (l%irazlomnoye, Varandey-More [Severo-Varandeyskoye], and

Medynskoye-More) ;one oil and condensate field (Severo-Gulyayevskoye); and one gas

and condensate field (l?omorskoye). The Barents Sea contains three gas fields

(Murrnanskoye, Severo-Kildinskoye, and Ludlovskoye) and two gas and condensate

fields (Shtokmanovskoye and Ledovoye) (Fig. 1). Three of the discoveries were made

after 1991— Ledovoye, Varandey-More, and Medynskoye-More. A listing of fields as

well as structures of potential interest in the Barents/Pechora Sea region is presented in

Table 1.

The Pechora Sea shelf is an extension of the onshore Timan-Pechora petroleum province.

The latter is fairly well mapped. Extrapolating results from onshore exploration to the

shelf, it is believed that the Pechora shelf may contain a vast number of oil fields.

However, the average size will be very small, with less than 30 fields expected to contain

more than 10 mt.5 The most recent Russian estimate of total exploitable oil reserves in

the Pechora Sea suggests reserves of 400 ret,’. This resource base could support an annual

production level of 15 to 20 million tons (ret), representing a quite significant oil-

4In comparison, by January 1, 1999,939 exploration wells had been drilled on the continental shelf ofNorway (Ministry, 1999).

5 This assessment is based on Belonin and Podolski (1995), as quoted in Bjmkvoll and Sandvik (1997, p. 42).

b This figure was stated by B. Nikitin, a Gazprom official, during a discussion in the Presidium of theRussian Academy of Sciences in 1997 (quotedin VestnikRossiyskoy Akirdemii Nauk, Vol. 67, No. 10, 1997,p. 906). This is more than earlier assessments. Gqrom expects that 1.1 billion tons of exploitable oilreserves already exist for the Barents Sea as a whole (including the Pechora Sea), and that the potential ismuch larger (see Russian Petroleum Investor, May 1998 and Zorin, 1997).


7

producing region compared to, for example, the Komi republic. Almost all the

hydrocarbons in the Pechora Sea are found in structures in shallow waters, at depths of

less than 50 m, and most at depths of less than 20 m. (Nikitin, 1999).

The largest field identified in the Pechora Sea is Prirazlomnoye, located 57 km offshore.

Drilling on the structure started in 1989 (Nikitin et al., 1999a, p. 8); it is now believed to

contain as much as 100 mt of recoverable oil, sufficient to support an output of 7.5 mt

annually (ibid.). The two other oil fields discovered in the Pechora Sea — Varandey-

More and Medynskoye More — are close to shore, 20 and 23 km, respectively.

Preliminary estimates put recoverable reserves (category Cl-3) at 20.5 and 85.9 million

tons in the respective fields (Resolution, 1999, p. 5-6.).

Gas also is expected in many small offshore fields in the Pechora Sea, but again the

average quantities will be small, some 1.5 BCM. Less than 25 fields are expected to

contain more than 10 BCM (Bjarkvoll and Sandvik, 1997), meaning that from a

commercial point of view exploitation of natural gas from this area of the shelf is unlikely

to be commercially viable.

Proven reserves of gas in the Barents and Kara Seas are approximately 6.6 trillion cubic

meters (TCM). Annual production fi-omthe Shtokmanovskoye field alone could amount

to 50-100 billion cubic meters (BCM). Afier the discovery of Shtokmanovskoye, two

other giants, Ledovoye and Ludlovskoye, were identified in the same part of the Barents

Sea. With regard to natural gas, it is not the total volume that is most interesting about

the Barents Sea deposits, but rather the fact that substantial volumes are concentrated in

very large fields. In addition to the Barents Sea giants, two super giants, Leningradskoye

and Rusanovskoye, have been discovered in the Kara Sea.


Table 1. Offshore Fields and Important Offshore Structures, Russian Barents Sea

Field or structure (Expected) contentAdmiralteyskaya

I

Akhmatovskaya

Akhrnatovsko- Gas and condensateAndreyevskayaAlekseyevskayaPloschadAndreyevskaya

ArkticheskayaFersmanovskaya

Kolokolmorskaya Gas

KolskayaKurchatovskayaLedovoye Gas and condensate (9)Leningradskoye Gas and condensate (1)

Ludlovskoye Gas (9)

Luninskaya

Medynskoye-More Oil (9)

Mezhuzharskaya Oil

Polyamaya I1

Pomorskoye Gas and condensate (9)

Prirazlomnoye oil (9)

Rusanovskoye Gas and condensate (1)

Russkaya Oil and condensateRybachinskayaSevero-Dolginskaya

Severo-Gulyayevskoye Oil and condensate (9)Severo-Kildinskoye Gas (9)

Reserves

134 BCM probable

Smaller thanPomorskoye

4–500 BCM (2)4,100-7,300 BCMexpected (8)1,400 BCMex~ected (7)

85.9 (Cl-3) (10)

50-60 mtpreliminary120 BCM probable(9)50-60 BCMprobable

22 BCM of gas(C1+C2)100 mt (3)

3,300 BCMexpected (8)31 mt probable

135 BCM expected(7)

Status IExploration license 1993–1997 held by I

~

Exploration license 1993–97 held by

Tender expected 2000-2001 (2)

Exploration license 1995–2000 held byGazprom (6)Exploration license 1993–1997 held byAMNGR (6)

Exploration license 1993–1997 held byAMNGR (6)Exploration license held by Pechormomeft;open tender announced Feb. 1999 (1O)

Tender expected year 2000 (2)Exploration license 1993-1997 held byAMNGR (6)Exploration license 1993–1997 held byAMNGR (6)Exploration license 1993–1997 held byAMNGR (6)Exploration license 1993-1997 held byAMNGR Co-operation Gazprom-Statoil(11) Closed tender (only Russiancompanies) announced Feb. ’99 (10)Tender expected 2003–2004 (2)

~

Exploration license 1993–1997 held by

Tender expected 2001–2002 (2)

Exploration license 1993–1997 held by IA~GR (6)Exploration license held by Pechonnomeft;op& tender announced Feb. 1999 (10)Development by Gazprom and Rosshelf, incooperation with Wintershall (5);development and production license 1993-2018 held by Rosshelf (6)Exploration license 1993–97 held by {AtiGR (6)Tender expected at the end of 2000 (2)

Co-operation between Gazprom-NorskHydro-Statoil(11)


9

Shtokmanovskoye Gas and condensate (9) 3,200BCM gas Exploration and development license 1993–(4); 22 mt. 2018 held by Rosshelf (6)condensate

Tsentral’nayaTulomskaya Gas and condensate 390 BCM probable Tender expected 2001–2002 (2)Varandey-More Oil (9) 20.5 (Cl-3) (10) Exploration license 1995–2000 held by(Severo-Varandeyskoye) Gazprom (6); cooperation with Gazprom-

Statoil (11); closed tender (only Russiancompanies) announced Feb. 1999 (10)

VaryazhskayaYuzhno-Dolginskaya Exploration license 1995–2005 held by

Gazprom (6)Zapadno-Sharapovskaya Exploration license 1993–1998 held by

AMNGR (6)

Sources (numbers in parentheses): 1 = Ostistiy et al., 1999; 2 = Garipov, 1998; 3 = Upward, 1998;4 = statement by B. Nikitin, Gazprom, during a discussion in the Presidium of the Russian Academy ofSciences, 1997,quoted in VestnikRossiyskoy Akademii iVauk,Vol. 67, No. 10, 1997, p. 906;

5 = FTInternational Gas Report, April 2, 1999, p. 6;6 = Perechen’, 1995; 7 = Belonin and Podolski, 1995, as quoted in Bjmkvoll and Sandvilq 1997, p. 42;8 = Bjmlcvoll and Sandvik, 1997,p.51; 9 = Malovitskiy et al., 1998, pp. 8-12;10= Ekonomicheskie ipravovye voprosy nedropolzovaniya v Rossii, 3, February 9, 1999, pp. 5-6;11 = Statoil -Ukestatus, May 28, 1998.

Present Drilling Activity

The reduced level of exploration activity since the early 1990s is a sign of the current

economic crisis in Russia and the inability to generate investment for long-term projects,

but it can also partly be regarded as an adjustment to a more normal situation where

surveying, exploration, and field development are more in balance. It can be argued that

during the Soviet period, the level of seismic surveying in the Barents Sea, and in other

parts of the USSR, was “exaggerated” in relation to production capabilities. According

to this view, the main task now is not to identifi new structures, but to develop the more

promising ones of the many that already have been identified. This is also a major reason

behind Gazprom’s Arctic Exploration Program, elaborated in 1995, which emphasizes

drilling in promising structures for the period to 2010 (Nikitin and Rovnin, 1996). The

program since has been integrated into government plans.

Against this backdrop, one would expect substantial efforts to drill test wells in the most

promising structures. However, the drilling in identified structures is proceeding quite


10

slowly. As of 1998 drilling had only occurred at 6 of the 16 oil- and gas-bearing or

potential oil- and gas-beting structures that had been identified. The responsible entity,

the Murmansk drilling organization Arktikrnomefiegazrazvedka (AMNGR), drilled 5 or

6 wells every summer in the Barents Sea during its “best” years at the end of the 1980s,

but the number more recently has been between Oand 2. The organization received 14

licenses in 1993 for geological exploration valid until 1997 (Perechen’, 1995), but it did

not manage to fulfill the drilling program. Gazprom received three licenses for

geological exploration in 1995 that extend to 2000 for the Yuzhno-Dolginskaya,

Alekseyevskay~ and Varandey-More fields (ibid.), and the Norwegian state oil company

Statoil also has been participating in the drilling at Varandey-More. A similar agreement

also has been concluded for Medinskaya More, which was transferred to Gazprom fi-om

AMNGR. Gazprom has been co-operating with both Statoil and Norsk Hydro on another

block — Severo-Dolginskaya. These three companies signed an “intention agreement”

in May 1998 on joint exploration and development of blocks in the Pechora Sea (Statoil-

Vkestatus,No. 20, 1998).7 The Russian-Finnish joint-stock company Pechormomeft (see

below) also acquired two exploration licenses for Kolokolomorskoye and Pomorskoye

in the Pechora Sea and shot seismic profiles therein 1997–1998.

No drilling has yet been carried out in an offshore area that is disputed between Russia

and Norway.* But analyses based on seismic surveying conducted prior to 1982, when

a moratorium on seismic surveys was imposed, indicate that there maybe commercially

viable reserves in the area. In 1999, the Russian Ministry of Natural Resources ordered

Russian seismic companies to submit reinterpreted data on the disputed area (Belykh,

2000, p. l).’ The prevalent attitude among specialists in the Murmansk geological

7 However, in the fall of 1999 it became known that Statoil had decided to scale down its upstreamengagements in Russia and for the time being discontinue the cooperation with Gazprom in the Pechora Sea(Alexander’s Gas Oil Connections, Vol. 4, No. 2, Thursday, December 9, 1999;http:llgasandoil.comfgoc/company/cnr95037.htm).

*Norway has been negotiating since 1974 with the Soviet Union, and later Russia, over a delimitation linefor the continental shelf and economic zones in the Barents Sea. Norway holds that the boundary should bedrawn according to the median-line principle in international law, whereas Russia maintains that a sector-line principle should be applied. These two claims leave a sizeable disputed area between the two countries(some 155,000 km’), much larger than the Norwegian shelf in the North Sea (see Moe, 1994, p. 133).

9The Murmansk Arctic Geophysical Expedition also carried out some work on the fringes of the disputedarea about 10 years ago.

FridQof Nansen Institute

11

organizations seems to be that prospects are favorable for finding exploitable resources

there and from time to time rumors surface about the location of large oil fields in this

area.’” However, there is little understanding of the Norwegian negotiating position—

that co-operation in exploration and production can only be established once a firm

delimitation line has been drawn.”

Even if only the most moderate estimates are considered, it is clear that the Barents,

Pechora, and Kara seas are substantial petroleum provinces. However, this is not

sufficient grounds for concluding that substantial development projects are justified or

will be initiated. Other driving forces and constraints to development must be considered

before much can be said about the probability or timing of development.

STATUS OF DEVELOPMENT PROJECTS

The fragmented information available in industry journals and newspapers, Russian as

well as foreign, tend to exaggerate the level of petroleum-related activity in the Russian

Barents Sea. Wishful thinking is mistaken for firm plans, and plans are confused with

actual development. Sometimes the discrepancy is simply the result of misinterpretation

of Russian statements; at other times commercially interested parties deliberately distort

realities to improve the perception of their own activities or to better their strategic

position. Such problems are not unique to Russia, but the relatively small number of

independent sources of information makes the problem more serious. And in the

analyses in the Western media there may still be a tendency to think in terms of central

plans and authority when it comes to Russia. Especially information coming from

government agencies is invested with more authority than is warranted in today’s Russia.

The discussion below is an attempt to provide a realistic picture of ongoing hydrocarbon

development offshore in the Barents Sea, but the caveats above also are relevant for

10A recent example of such speculation presented as fact can be found in an article by a Lukoil publication(Razrabotka, 1999). The article also advocates the use of decommissioned platforms from the North Sea inthis area.

11In Russian material the disputed area is often referred to as a “zone of joint economic interests betweenRussia and Norway” (e.g., Gazovayapromyshlennost, No. 7, 1999, p. 7).

Fnd~of Nansen Institute

12

individual pieces of information quoted here.

Prirazlomnoye Field

There is no oil or gas production taking place offshore as of today, with the exception of

a very limited production in the beach zone on Kolguyev Island. Production at this site

has been going on since 1987 and some 22,000 tons of oil were produced in 1998.

However, the most imminent “real” offshore project is clearly the Prirazlomnoye field

in the Pechora Sea. Nevertheless, it is highly uncertain when the field will actually start

producing. This field was one of the two exploration and production licenses granted to

Rosshelf (see Table 1 and below) in early 1993.]2 The idea at the time was that the field

could be developed within a few years and provide a cash flow that could help finance

the development of the other license, the super giant Shtokmanovskoye field.

However, development has proceeded quite slowly. A feasibility study for the project

was concluded and accepted in 1996 and construction of a platform designed by Brown

& Root started at the huge Sevmashpredpriyatiye shipyard in Severodvinsk, outside

Arkhangelsk. But it has proven difficult to attract sufficient financial resources to the

project. Initially, Gazprom and the Australian oil company BHI? planned to cover 15

percent of the costs each, with the International Finance Corporation (under the World

Bank) providing 40 percent; the remaining 30 per cent was to be covered by commercial

loans from Russian and foreign banks. In early 1997, the total investments in developing

the field were estimated to be $1.5 billion (Russian Petroleum Investor, February 1997,

p. 52).’3But BHP announced in the autumn of 1997 that it wanted to reduce its share in

the Prirazlomnoye project (RussianPetroleum Investor, October 1997) and abandoned

active participation early in 1999, assuming a “non-working” interest in the project. This

action reflected a negative assessment of the commercial prospects for the project

12Rosshelf – ‘The Russian company for development of the continental shelf’ founded in 1992 by a numberof naval shipyards and defense-industry design bureaus seeking to accelerate their transition to a marketeconomy by shiffig output to equipment for offshore oil production (see the section on naval shipyards).

13According to Gazpro~ the price of the platform alone is expected to be 800 mill. USD (GazpromCompany, 1999).

Frid~of Ntmsen Institute

13

(Business Wire, News Alert, January 29, 1999. According to Rosshelf, the protracted,

passive position of the Australian company has complicated the search for a financial

solution (Slukhi, 1999).

A German company, Wintershall AG (a subsidiary of BASF) has become a new partner

in the project (BASF/Gazprom, 1999). The exact scope of its participation is still

unclear, but it seems to be primarily of a financial nature. It maybe natural to see the

participation in the context of the extensive collaboration between Gazprom and

Wintershall in the European gas market.” Independent assessments of the platfonn-

building process are not available, but in the autumn of 1998 Gazprom maintained that

it was 19 percent complete (Gazprom, 1998) and could be finished by 2002 (Russia’s

Gazprom Outlines, 1998). According to the field development plan, production is

planned to reach a level of 6 million tons annually after a few years (Australians, 1997).

The pace of development for this project is highly uncertain, as indicated above, and 2002

is unrealistic. Aside fi-om the financial problems, the Russian partner is in need of

technical expertise from an experienced offshore company in order to develop and

operate the field, at least initially, and it is doubtful whether Wintershall can perform this

role alone. Gazprom reportedly for some time has let it be known that it would like to

see Statoil perform this role. (Upstream, April 14, 1997). Other companies also have

been approached. Nevertheless, despite the uncertainties, it is likely that Prirazlomnoye

will become the first active offshore project in the area of the Barents and Kara seas.

Shtokmanovskoye Field

The Shtokmanovskoye gas and condensate field, located 650 km northeast of Murmansk,

was discovered in 1988. It is one of the largest offshore gas fields in the world, with

*4Wintershall and Gazprom formed a joint company in the early 1990s — Wingas — to market Russian gasin Germany and as an alternative to the traditional buyer — Ruhrgas. They also formed other partnershipsand Wintershall was singled out as a preferred partner. More recently, the relations with Ruhrgas havebeen extended to a level that clearly leaves Wintershall in a minor, but still important, role. For more onthe Gazprom-Wintershall cooperation, see Estrada et al., 1995, pp. 261-264.


14

proven natural gas reserves of 3,200 BCM. This is about twice as much as in the Troll

field in the North Sea, which presently is the biggest productive offshore gas field in the

world. Shtokrnanovsko ye also contains condensate, 22 mill. tons’s ( VestnikRossiyskoy

AkademiiNauk,Vol. 67, No. 10, 1997, p. 906), which enhances its commercial attraction.

Six exploration wells have been drilled thus fiw(Nikitin et al., 1999a).

However, the technical difficulties in developing the field are substantial. First is the

distance to shore, but great water depths (some 280 to 380 m), drifting ice, and high

waves also can pose problems. The productive layers are located between 1,380 and

2,340 m (ibid.). However, conclusions horn technical evaluations of the site are that the

field can be developed with existing technology. But Gazprom, which in reality controls

the project, would need the participation of foreign companies with offshore experience,

both for technical and financial aspects of the project. A group comprising Norsk Hydro,

Fortum, Conoco, and TotalFina is currently assisting Gazprom. Their work includes

improvement of the geological data, development solutions, and commercial evaluations

of the market for gas and condensate from the field.

The company officially maintains that it plans to start building one of several platforms

in 2001 and that a production level of 60 BCM can be attained in 2010-2012 (Russia’s

Gazprom Outlines, 1998).16 With the inclusion of the adjacent Ledovoye and

Ludlovskoye fields, Gazprom envisages an “offshore gas production center” with an

annual production capacity of 90 BCM (Nikitin et al., 1999a). This would be almost

twice the volume presently exported from the entire Norwegian continental shelf.

The exact transport route for gas extracted flom the field has not been decided. The plan

mostly discussed thus fiarentails a pipeline to Teriberka, east of Murmansk, with one line

extending to the city of Murmansk. But other landing points, notably the Pechenga

terminal (see below) also have been mentioned. Another pipeline would transport gas

15Recent statements from Rosshelf give an even higher number for gas reserves — 4,000 BCM (GazpromTurns, 1999).

16Gazprom recently has announced that it would like to see production start as early as 2006 (GazpromTurns, 1999).


15

southward via Belomorsk and Petrozavodsk. The gas thus could find its way to European

markets via Finland and Sweden or directly to Germany through a pipeline under the

Baltic Sea. Establishment of a plant for liquified natural gas (LNG) plant near Murmansk

is being considered. Such a project would be the basis for exports overseas, particularly

to the U.S. market.

REGIONAL INTERESTS

According to the Constitution of the Russian Federation, Russian mineral resources are

the property of the state. But a major factor is that they are managed jointly by state

authorities at the federal level, and regional authorities at the regional level (see Kryukov

and Moe, 1998). However, the hydrocarbon resources on the Russian Arctic shelf (i.e.,

those located beyond 12 nautical miles from the shore) do not belong in the category of

joint management, being managed exclusively by the federal authorities. Nevertheless,

the adjacent coastal regions, Murmansk and Arkhangelsk oblasts, and the Nenets

Autonomous Okrug, have an interest in influencing the further development on the shelf

in order to maximize regional benefits and protect the local environment. Below we shall

attempt to identi~ the real as well as the perceived interests of the two oblasts. The

analysis is structured around four key factors that we believe play an important role when

regional interests are defined.

Fridtjof Nanseiz Znstitute

16

1. Existing hydrocarbon development capabilities. The regions’ hydrocarbon

development capabilities (i.e., those related to oil and gas development) will influence

the opportunities of the two oblasts to play an active role in the development process

itself. In Murmansk Oblast, these capabilities are linked primarily to a cluster of offshore

exploration and seismic companies. No such institutions are present in Arkhangelsk

Oblast, although the naval shipyards in Severodvinsk are striving to assume the role of

a regional offshore complex.

2. Possible spin-off and multiplier effects fi-omdevelopment. Regardless of their own

role in the development process, it is likely that the regions will attempt to maximize

industrial spin-off effects. These may be linked to supply bases, landing facilities,

refineries, and processing plants, and the two oblasts in question will to some extent have

to compete with each other for such bases and facilities.

3. Improved energy supply to the regions. Both Murmansk and Arkhangelsk oblasts have

experienced serious problems with oil and gas supplies over recent years, and perceived

possibilities of improving this situation seem to play an important role for the regions’

policy in the field of oil and gas development.

4. Prospects for onshore and coastal-zone oil and gas development. Prospects for

onshore and coastal-zone oil and gas development may greatly affect the regions’

priorities, since such development would result in the accrual of direct revenues from

production to the regions themselves. The situation in each of the two oblasts and the

Nenets Okrug is discussed in greater detail below.

General Situa.tz”onin Murmansk and Arkhangel’sk Oblasts and the NenetsOkrug

Murmansk Oblast has around 1 million inhabitants, and nearly 400,000 of them live in

the city of Murmansk. Prior to World War I, the number of inhabitants was only a few

thousand, but in the early 1920s large-scale in-migration began, linked to the


17

development of the fisheries, the mining and metallurgical industry, and the naval bases

that were to become the home of the Northern Fleet.” Murmansk Oblast became

characterized by a typically “Soviet” economic structure, with a high degree of

urbanization and a predominance of large heavy-industrial enterprises.

Since the early 1990s, production has fallen sharply both in the fisheries and the mining

and metallurgical complex,ls and the latter enterprises – many of which are very large and

have a dominant position in the town where they are located – have experienced problems

competing under market economic conditions. The military complex has been

particularly hard hit as a result of force reductions and reduced military spending, and

many former officers have joined the ranks of the unemployed. Although Murmansk

Oblast has freed much better than many other regions in the Russian North, the problems

dominant in all the traditional branches of the economy have created a great need for

alternative economic activity, and oil and gas development is considered one of the most

promising possibilities.”

Arkhangel’sk Oblast has around 1.5 million inhabitants. The two largest cities,

Arkhangel’sk and Severodvinsk, have populations of 375,000 and 235,000 respectively

(Arkhangel’sk, 1999, p. 5). Unlike Murmansk, Arkhangel’sk Oblast has had a sizable

population for hundreds of years, and its economic structure is characterized by a blend

of “Russian” and “Soviet” features. The region is less urbanised than Murmansk, and

because of the milder climate, agriculture plays an important role in the rural areas. As

in Murmansk and most other regions of the Russian North, the economy of Arkhangel’sk

Oblast is largely based on the export of raw materials and semi-processed goods. The

region contains vast timber resources, and wood processing and pulp and paper

production are the most important industrial activities. For several decades there has

17 Those who relocated to the Kola Peninsula from other parts of the Soviet Union were attracted by thespecial economic privileges rendered to inhabitants of the Far North, and many of them returned to theiroriginal place of residence upon retirement. Since the early 1990s, these privileges have become lessimportant, and living costs have soared as state subsidies have dwindled. In the same period, the totalpopulation of the oblast has decreased by 130000, according to official statistics (Murmansk 1998, p. 23).

18 Total industrial output in 1996 was approximately 65 percent of the level for 1990 (Murmansk, 1998, p. 51).

‘9 Additional background information on Murmansk oblast can be found in Hmmeland and Jorgensen, 1999a.


18

been great pressure on the most accessible forest areas, since a poorly developed

irdiastructure has prohibited the exploitation of other areas. Consequently, productivity

in this sector started dropping as early as 1987 (Castberg, 1994), and in the 1990s, this

tendency has become even more acute.

Other significant branches of the economy are transportation the military ship-building

and ship-repairing industries, and the fisheries. The former of these sectors has been

greatly affected by the overall decrease in economic activity. As in Murmansk,

productivity in the fisheries sector has dropped significantly, and the onshore fish-

processing industry has virtually come to a standstill in both oblasts, since most of the

fish is currently being exported abroad. State orders to the military industrial complex

dropped radically after the breakup of the Soviet Union. Thus, the city of Severodvinsk,

which is totally dependent on its naval shipyards, is experiencing deep economic and

social problems (see below).

The Nenets Autonomous Okrug is located in the northeastern corner of Arkhangelsk

Oblast. The okrug has less than 50,000 inhabitants, and the titular nationality – the

Nentsy – constitute a minority in the okrug, where the bulk of the population is Russian.*”

The industry and infi-astructureof the okrug were developed only to a very limited degree

in the Soviet period. However, part of the oil-rich Timan Pechora basin lies in Nenets

Okrug, and exploration and exploitation of hydrocarbon resources has now become the

most important economic activity. Most of the Nenets still live a semi-nomadic life,

while the oil- and gas sector is dominated by Russians (see Blakkisrud, 1997). In the

Soviet period, the okrug was formally subordinated to Arkhangelsk Oblast. In the

Russian Federation of today, however, the okrug is a subject of the Federation in its own

right, although territorially it remains a part of Arkhangelsk Oblast. This change in status

has led to conflict between the okrug and the oblast over the right to the oil- and gas

resources located in the Nenets Okrug (see Moe, 1994, pp. 138-140).

20According to recent population statistics, by January 1, 1998-46,600 people lived in the okrug(Goskornstat Rossii, 1998, p. 100). This was down from -54,000 in 1989, when the most recent census wasconducted. At that time the population was composed of 65 percent Russians, 11 percent Nentsy, 9 percentKomi, and 7 percent Ukrainians (Harris, 1993, p. xx).


19

As is the case in Russia in general, the public sectors in Murmansk and Arkhangelsk

oblasts are under-financed. Federal subsidies have been reduced, and the tax base is

weak. Thus, most fimds go toward solving acute problems in the social sector, and little

is left for investment in infrastructure. Nevertheless, the two regions score somewhat

better than the Russian average on most economic indicators, with Murmansk being the

more prosperous of the two. However, in some ways, the economic crisis has affected

the population more profoundly in the Russian North than in other parts of the country.

First, the opportunity to grow one’s own food —which has made a substantial

contribution to meeting many Russians’ nutritional needs and even precluding outright

starvation in some cases —is more limited in the North. This applies especially to

Murmansk Oblast. Second, and more important in the context of this report, shortages

in the supply of energy have major impacts in areas with cold winter temperatures.

Regional Complexes Suppoti”ng Offshore Development

Unlike Arkhangel’sk Oblast, Murmansk Oblast possessed an existing industrial complex

capable of supporting offshore hydrocarbon development, reflecting the role of

Murmansk as a staging ground for exploration of the Arctic shelf during the Soviet

period. It was home to several geological and geophysical organizations possessing both

the competence and the equipment necessary to carry out this work. Most of these

organizations still exist, and the most important of them are the following:

●

●

●

●

●

●

AMNGR, or Arktikmomeftegazrazvedka (Arctic Marine Oil- and Gas Exploration

Company);

MAGE (Marine Arctic Geological Expedition);

Sevmorneftegeofizika (Northern Marine Oil and Geophysics);

AMIGE (Arctic Marine Engineering and Geological Expedition) —a geological

company;

NIIMorgeofizika (Murmansk Research Institute for Marine Geophysics); and

Soyuzmorgeo (Scientific Production Association for Offshore Geology and


20

Geophysics) — a coordinating body of the Ministry of Fuel and Energy, recently

moved to Gelendzhik in Krasnodar Kray.

. VNIIokeangeologiya (The scientific research institute for ocean geology) and

. Murrnanskiy morskoy biologicheskiy institut (Murmansk institute of ocean biology)

are also relevant in this context.

When the exploration activity on the Arctic shelf was at its peak in the late 1980s,

Arktikmomeftegazrazvedka (AMNGR) clearly harbored ambitions of securing a leading

position in the subsequent development phase, and of transforming itself into an oil

company. A&r the activity lost momentum in the early 1990s, several of the exploration

organizations in Murmansk Oblast have taken part in cooperative projects with foreign

partners, as a survival strategy. In some cases, the ultimate objective has been to compete

for production licences on the shelf. MAGE, Sevmomeftegeofizika, and AMNGR (51

percent) formed the company Pechormomeft, together with Finnish Neste and Kv=mer

Masa Yards (49 percent), with the objective of participating in offshore activities. The

Norwegian Institute for Continental Shelf Research (IKU) has co-operated with

NUmorgeofizika, and the Norwegian geophysical company Fugro-Geoteam has a joint

venture with MAGE, known as Sevotezun, that has encompassed co-operation in Russian

waters as well as abroad.

The organizations constituting the offshore complex still employ thousands of people in

aggregate, but as their finding and activity have diminished, so has the number of

employees. Some of the organizations have experienced personnel cutbacks of 50

percent or more. MAGE reduced its staff from well over one thousand to 300 (Belykh,

2000, p. 22). AMNGRs physical capabilities also have been sharply reduced. Only one

jack-up rig (A4wvnamkaya) is currently in operation in the Barents and Kara Sea area.

Three semi-submersible rigs (the She@) have been sold, and one jack-up (Kolskaya) has

been leased and operates abroad, as do the organization’s two drilling ships (W&v

Muravlenko and Valentin Shashin) (Murmanskiy Vestnik, January 13, 1999, p. 2).

AMNGR is still a fully owned state enterprise, but claims to have received no state

finding for the last four years. The organization has survived by leasing out its

equipment, and by taking on occasional assignments for Gazprom. AMNGR also is


21

involved in the only production of oil currently taking place on the Arctic shelf, near the

Kolguyev Island. However, this production is fairly limited, and while it provides some

income, is not reported to be particularly favorable from an economic point of view.

For these companies, the key to accelerating developments on the continental shelf is to

create greater possibilities for foreign involvement. The companies may try to obtain the

right to invite their own investors to take part in fi.u-therexploration. However, there

seems to be a prevailing perception within the organizations that time has passed them

by. The situation is quite different today than in the early 1990s, since the organizations

have shrunk, and since so much of remaining capacity is tied up abroad and thus

impossible to mobilize quickly if an opportunity were to arise.

Arkhangel’sk Oblast also has a significant oil and gas sector, but the activity has

traditionally been directed toward exploration and development of onshore resources.

The bulk of the regional expertise in this field was concentrated in the state-owned

geological organization Arkhangelskgeologiya, which has since become an oil

exploration company controlled by Lukoil under the name Arkhangelskgeoldobycha.

The company currently is engaged in both exploration and exploitation of oil deposits in

the Nenets Autonomous Okrug. “However, Arkhangelskgeoldobycha has neither the

experience nor the expertise or equipment, necessary for playing a role in the

development of offshore resources.

Nevertheless, after the breakup of the Soviet Union, the Arkhangel’sk region began to

challenge Murmansk’s status as the “Arctic offshore capital.” This is closely connected

with an effort to convert the large military shipyards in the area to offshore-oriented

production and is addressed in detail in the next main section of this paper.


22

Industrial Spin-off Effects from Shelf Development

From the above, it remains unclear to what extent companies based in the coastal regions

will be able to participate directly in the development process as license

holders/operators. What is clear, however, is that if large-scale development is going to

take place, there will be substantial regional spin-off effects that will give rise to new

economic activity. There will be a need for supply and service bases, kmding and

reloading facilities, and possibly also refineries and production of equipment.

The geographic location and characteristics of Murmansk Oblast is a great advantage in

this respect. Along the northern coast of the Kola Peninsula there are a multitude of

fiords and bays that usually are ice free in winter.” The port of Teriberka, some 50 km

northeast of Murmansk, seems most promising as a landing point for gas from

Shtokmanovskoye and other gas and condensate fields in the Barents Sea. If the gas is

to be brought ashore in Teriberka, a 547 km long triple-gas pipeline will be constructed,

which will run from the Shtokmanovskoye field to the coast, possibly with extensions to

other fields.22A gas pipeline connecting Murmansk and Arkhangel’sk to the Russian

pipeline network is currently under construction, although progress on this project has

been extremely slow. Reportedly it has reached Kostomuksha in the Karelian Republic.

The short-term objective of this pipeline is to improve the gas supply to the regions.

However, if the Shtokmanovskoye field is developed, the gas will flow in the opposite

direction to markets in the south. The establishment of an LNG facility also has been

considered.

Because of the shallowness of the Pechora Sea, development of oil fields in this area will

probably require the construction of a reloading port for oil somewhere along the Kola

coast. The Gulf of Pechenga, not far from the Norwegian border, is the most likely

location for this port. A prefeasibility study was completed in 1996 by AOOT

Giprospetsgaz and the Norwegian consultant company Barlindhaug, which envisages the

2*This favorable site characteristic was the rationale behind the establishment of the Northern Fleet, which hassix submarine bases in this area.

22Notably Ledovoye, Ludlovskoye, and Fersmanovskaya (Nikitin et al., 1999b, p. 12).

Fridtjof NamsenInstitute

23

construction of a crude oil terminal in the Bay of Liinahamari, which is located in the

Gulf of Pechenga, as well as construction of an LNG plant and methanol plant (The

Northern, 1996). There has been much attention devoted to these plans in Murmansk

Oblast, and the study was commissioned by the regional administration. Gazprom

representatives stated in April 1998 that the port should be ready to operate by 2002

(Russia’s Gazprom Plans, 1998), but no activity besides planning has occurred thus far.

If the Shtokrnanovskoye field is developed, the Kola Peninsula will be the natural

location for base and service facilities, and the construction of a service base in the Kola

Bay, right across from the city of Murmansk, was initiated as early as the late 1980s

(Bergesen et al., 1987). There has also been some hope that the service assignments

might help revive the naval shipyards in in Murmansk Oblast. However, the work on the

service base has been temporarily abandoned. Currently, the question of the location of

base facilities for the oil fields in the Pechora Sea is higher on the agenda, since these

fields will most likely be developed before any in the western part of the Russian Barents

Sea.

For Arkhangelsk Oblast and the Nenets Autonomous Okrug, the most likely spin-off

effects from development on the shelf will be linked to development of deposits in the

Pechora Sea. These may include landing and reloading points for oil, as well as refineries

and supply bases. For several years various proposals for terminals have been discussed,

primarily to serve the onshore fields that are likely to come on-stream first, but which

also could be integrated with pipelines from offshore fields. Several points along the

Nenets coast have been evaluated, although no

complicating factor is that powerfil forces want

Russian oil pipeline network controlled by the oil

A conflict may arise concerning the location

final solution has been reached. A

to connect the onshore fields to the

pipeline monopoly Transneft.

of bases for the development of

Prirazlomnoye and other deposits in the Pechora Sea. Both Murmansk and Arkhangelsk

oblasts, as well as the Nenets Autonomous Okrug are attempting to promote themselves

as suitable base locations. Several factors enter into the equation. Most important, an

adequate infrastructure has to be in place, and the distance from fields to base should be

Frid~of Nansen Institute

24

as short as possible. The first of these criteria is sufficiently important to render the

chances of Nenets very slim. The okrug has no road or rail connections with the rest of

Arkhangel’sk Oblast. Arkhangel’sk and Murmansk are both conceivable as locations for

supply bases. However, the distance to Murmansk is shorter, although not by much. An

even more important point in Murmansk’s favor is the fact that the White Sea freezes in

the winter and is only navigable with icebreaker assistance at that time of the year. Thus

it seems that Murmansk is the most likely choice.

Energy Supplies to the Regions

Ensuring an adequate supply of energy for the cold season is a recurrent challenge

throughout the Russian North. In recent years, there have been serious difficulties in

providing sufficient heat, gas, and electricity supplies to consumers in both Murmansk

and Arkhangel’ sk oblasts.23Every autumn, the regional newspapers print articles on the

situation concerning supplies of mazut (the heavy fuel oil used in many district heating

plants) and gas virtually every day. These difficulties affect almost every inhabitant in

the area as well as the local industry, and there is a constant pressure on the regional

politicians to do something about them.

Traditionally, there has been a supply problem with regard to energy in these areas — not

enough energy was available locally — which was compounded by a poorly developed

infi-astructure for its transport and distributio~ as well as by technical problems. Today,

however, the problem is mainly a financial one: Neither the regions as such nor the

individual consumers are able to pay filly for the required energy and energy supplies

are halted periodically. However, many regional politicians still seem to think in terms

of the planned economy, where buying power was rarely a problem, while the fact that

demand generally exceeded supply indeed was. Thus, they seem to regard the frequent

23In December 1998, for example it was reported that people in Arkhangel’sk preferred to rent an apartmentin the old wooden houses of that city rather than in modem blocks of apartments equipped with all themodem conveniences. The reason was that the old houses are equipped with stoves; thus, theinconvenience of having no indoor plumbing was outweighed by the fact that it was possible to stay warm(Nash Sever, December 1998, p. 14).

Fridtjof Nansen Znslitute

25

energy crises first and foremost as a question of insufficient supply of oil and gas. This

distortion strongly influences their views on development of “their own” hydrocarbon

resources. It is envisaged as vital that the regions gain direct access to such resources,

in order to ease the perceived shortages in supply. As a consequence, opportunities for

regional control over development, as well as the geographic location of deposits to be

developed, are aspects that tend to be overemphasized at the regional level. These

questions will be further elaborated in the next section.

“Regional” Oil and Gas Resources

Regional priorities are intricately interconnected with jurisdictional questions involving

resources of the shelf. The location of a given oil or gas deposit determines the extent

to which regional authorities have a voice in the development process, as well as their

share in the resource itself.

According to the Law on the Continental Shelf (enacted in 1995), oil and gas on the

Russian shelf is under exclusive federal management. Resources located within the 12

nautical miles from shore, however, fall within the shared jurisdiction of the adjscent

subject of the federation and the federal authorities, as do onshore resources. Financially,

this joint jurisdiction implies that 60 percent of revenues fi-omresource exploitation are

to be assigned to the regional budget, whereas the remaining 40 percent goes into the

federal budget. Moreover, if the subject in question is an autonomous okrug, which

forms a territorial part of an oblast or kray, the aforementioned 40 percent is to be split

between the oblast’/kray budget and the federal one (Zakon, 1992).

Murmansk Oblast has attempted to extend its influence to resources located within 200

miles from the shore. In an appendix to the bilateral agreement between the Russian

Federation and Murmansk Oblast on delimitation of authority between fderal organs and

those of the oblast (Dogovor, 1997, Art 2), management of resources within the 200-mile

economic zone outside extending from the Murman coast is termed a question of “joint

execution” — sovmestnoye vedeniye. It is not quite clear what this term means, but

Fndtjof Nansen Institute

26

according to Murmansk officials at a minimum it means coordination — soglasovaniye

(Selin, 1999).

None of the oil and gas fields thus far discovered in the Barents Sea are located within

the 12-mile coastal zone of Murmansk Oblast, but some “interesting geological

structures” purportedly have been identified along the eastern Kola coast. These are said

to be a continuation of the structures in the Timan Pechora province, and some experts

believe that the prospects for making new discoveries in this area are quite good.

However, no conclusions can be drawn until thorough exploration (including drilling) has

been performed.

With respect to Arkhangel’sk Oblast, it can be assumed that the large onshore oil deposits

in the Nenets Autonomous Okrug makes development of the resources on the shelf a

lesser priority to the regional (Arkhangel’sk) authorities. Admittedly, the fact that Nenets

gets the lion’s share of revenues from oil located on its territory maybe considered an

argument to the contrary. However, the same situation will apply to offshore deposits

within the coastal zone, since these are located in the Pechora Sea, which borders on

Nenets. The fact that onshore resources are more accessible and less costly to develop

than resources on the shelf is a weighty argument in their favor. Furthermore, there is

some indication of oil deposits onshore in an area not fm from the city of Arkhangel’sk.

If this is proven to be the case, development of these resources will probably receive the

highest priority from the regional authorities.

NAVAL SHIPYARDS – ASSET OR CONSTRAINT?

Many observers, both in Russia and abroad, are highly sceptical

participation of the naval shipyards in offshore development and

regarding the

fear that their

involvement will act as a constraint on the development process. The purpose of this

section of the paper is to discuss whether this attitude is warranted. Initially, we

describe the general features and current situation

27

of naval shipyards located in


northwestern Russia, before examining how the shipyards in northwestern Russia have

responded to the challenge of conversion, and to what extent they have succeeded in

making the switch to production of civilian goods. Finally, attention is focused on the

establishment of Rosshelf, and the results obtained thus far regarding construction of

offshore equipment at the yards.

General

The naval shipyards in Severodvinsk and on the Kola Peninsula were built up primarily

to cater to the needs of the Soviet Navy’s Northern Fleet, established in 1936. As the

Northern Fleet expanded throughout the following decades, so did the shipyards. The

yards on the Kola Peninsula (unlike at Severodvinsk) have focused mainly on the

service and repair of naval vessels. Four of them are large enterprises with several

thousand workers each: (1) Sevmorput’, located in Murmansk; (2) Shkval in Polyarnyy;

(3) Safonovo in Roslyakovo, a town administratively subordinated to Severomorsk; and

(4) Nerpa in Snezhnogorsk.24 The former three are owned by the Northern Fleet and

hence are directly subordinated to the Ministry of Defense, whereas Nerpa has been

subordinated to the Ministry of Economy since 1997.

The shipyards in Severodvinsk are characterized by a broader array of activities and a

higher technological level than those on the Kola Peninsula. Production of submarines

and other military hardware, as well as modernization and repair of naval vessels are

carried out there, mainly at two very large yards: (1) Severnoye Mashinostroitel’noye

Predpriyatiye (Sevmash), which has about 30,000 workers (Sevmash, 1999, p. 64); and

(2) Zvyozdochka, which has around 8,000 employees (Kuznetsov and Velikhov, 1997).

In 1958, the Soviet Union’s frost nuclear submarine was built at Sevmash, and the

enterprise became the most important contractor of nuclear submarines for the Soviet

Navy. The core activities at the Zvyozdochka shipyard are repair and modernization

24For more on the shipyards and the communities in which they are located, see Hmmeland and Jmgensen


28

of submarines and other naval vessels.

Throughout the 1990s, the economic situation at the naval shipyards has steadily

declined. As the activity of the Northern Fleet has been reduced, so has the need for

service and repairs, and necessary repairs are often postponed indefinitely because of

financial constraints. Thus, in 1997, the shipyards on the Kola Peninsula were reported

to be operating at a level of 10 to 50 percent of full production capacity (Polyarnaya

pravda, October 10, 1997, p. 1). Moreover, the Fleet is heavily indebted to the

shipyards for work performed but not paid for,zs and the impoverished enterprises are

mostly unable to pay the workers their wages on time. As a result, strikes and

demonstrations among the workers have occured regularly in recent years, and social

conditions in the towns depending on the shipyards are deteriorating (Hmmeland and

Jm-gensen, 1999b, pp. 129-135).

Despite their more diversified activities, the Severodvinsk yards were just as dependent

on the military complex as were those in Murmansk Oblast, and the consequences of

the reduced demand for their products and services have been devastating. As an

illustration, the output of submarines in Russia as a whole declined tiom 12 in 1990 to

only 2 in 1996 (Milittwbalansen 1997/98). Thus, activity at Sevmash, an enterprise

equipped for carrying out construction of several submarines simultaneously, has

plummeted. Wages paid to workers at the Severodvinsk yards — when paid at all —

are reported to be far below the subsistence minimum.zc Here, as on the Kola

Peninsula, there have been strikes and protests, and the issues reported in the local

press demonstrate high social tensions. Considering these circumstances, it stands to

reason that the local and regional authorities, as well as the shipyard managers, are

eager to maximize the yards’ participation in work related to the development of the

(1998, 1999a) and Rowland (1996) – Ed., PSGE.

25In early July 1998, this debt had amounted to 65 million rubles (at that time approximately $10 million),according to the commander of the Russian Navy, Admiral Vladimir Knroyedov (Poljwrnaya pravda, July3, 1998, p. 1).

26According to an article in a Severodvinsk newspaper, even a qualified specialist does not receive more than150 to 200 rubles (less than $10) per month (Severnyy Rabochyy, January 11, 1999, p. 2).


29

shelf.

Conversion

Even prior to the dissolution of the Soviet Union, in the late 1980s, diminishing state

orders to the naval shipyards in northwestern Russia brought the question of conversion

to civilian production onto the agenda. This section of the paper addresses how the

yards have approached the conversion issue and describes what has been achieved since

the initial steps taken more than a decade ago. First, it should be kept in mind that

total conversion of the yards has never been an option. What has been attempted is

diversification, with defense production remaining the core activity. The “need” to

keep existing defense capabilities intact has been a precondition for conversion of these

yards (Fattakhov, 1995).27 Thus, at least in Severodvinsk, the management has

approached the question of conversion with a clear bias towards dual technology and

high-tech solutions. As an example, even civilian shipbuilding has been viewed as too

simple a task. To quote a Sevmash engineer, this would be like “using ultra-modern

computers to drive in nails (Fattakhov, 1995, p. 2). ”

Financial constraints have been a major obstacle to conversion at the shipyards, as at

most other defense enterprises. In an article printed in Novyye Iz,vestiya (August 5,

1998), commenting on the production of offshore equipment in Severodvinsk, it was

reported that the Russian state had done very little to help finance conversion for this

purpose. Moreover, it was pointed out that the $12 million allegedly invested by

Rosshelf/Gazprom comprised merely a fraction of the necessary funding.

The sheer size of the shipyards, both physically and in terms of personnel, has

27Like many defense enterprises in Russia, the Sevmash and Zvezdochka shipyards probably are hoping fordefense procurement to increase again. The hopes of these particular two yards maybe justified, since theSeverodvinsk yards represent the country’s largest submarine construction and repair facilities. Withrespect to the yards on the Kola Peninsula, it is conceivable that military repair and service works might beconcentrated at some of them with the remainder filly converted at some fiture stage.


30

constituted another barrier to effective conversion, particularly seen in conjunction with

the wish to retain capabilities. It will be very difficult to offer offshore equipment at

market prices if this production is used to subsidise the maintenance of idle space and

the salaries of idle workers. However, in addition to the perceived need to protect the

“unique technology” of the yards, social considerations may have made managers

reluctant to outsource activities that have the potential of becoming profitable. They

may not even be allowed to do so by the owner of the enterprises - the Russian state.

Reflecting the aforementioned preconditions and restraints, the partial switch to civilian

production that has occurred at the shipyards seems to have transpired in haphazard

fashion, in part independently of whether actual conversion has been implemented.

Despite the wish to concentrate on high-tech projects, both the Severodvinsk and the

Kola yards have embarked on the production of a certain volume of consumer goods

and other items that have little or nothing to do with the yards’ core activities.

Examples include medical equipment, agricultural machinery, nuts and bolts, and even

furniture (Fattakhov, 1995). There is no information available on the precise extent or

range of this production. Some of it appears to be small in scale and ad hoc, based on

the tools and equipment available at the yards — in fact, a temporary survival strategy.

However, some larger projects, requiring considerable investments in new equipment,

have also been initiated. For instance, Sevmash is reported to have launched a

conversion project involving production of equipment for making peat briquettes (ITAR

TASS, January 3, 1999).

Despite the claims of yard authorities that “we can do anything,” the most successful

civilian projects initiated thus far have been those requiring the least technological

adaption. In particular, it has been difficult to make projects economically viable in

those cases where they are less technologically demanding than the average defense

production project. As an example, the production at Zvezdochka of advanced ship

propellers for superliners has been a commercial success. This does not seem to apply


31

to the construction at the same enterprise of hulls for Russian fishing vessels.” In the

former case, the technical skills of the workforce is the very quality which makes

Zvezdochka’s products competitive. The same quality has almost become a drawback

where the latter project is concerned. This illustrates the problem of “technological

overkill” that is apt to occur when unnecessarily sophisticated equipment and

production modes are applied to the construction of relatively simple items.

In this context, production of offshore equipment was singled out at an early stage as

the most promising conversion option for the shipyards. The next section describes

efforts by the yards to realize this option through the creation of their “own” offshore

company — Rosshelf.

‘The Shelf Will Feed Everybody... ”

The quote above was the headline of an article in which the production of offshore

equipment was presented as a universal solution to the problems at the naval shipyards

(Fattakhov, 1995). Although the yards did not possess any expertise in this particular

field, they were technologically advanced and their engineers were experienced in the

field of marine technology.” Therefore, it was argued that they could easily learn to

master the new techniques. According to Sevmash representatives, their enterprise

actually signed a contract with Sakhalinmorneftegaz as early as 1989 on the delivery

of an ice-resistant platform to be used in production of oil from an offshore field to the

north of Sakhalin. However, the latter company allegedly abrogated the contract two

years later, citing financial difficulties (ibid.). In reality, the shipyards were in no

position to compete for such assignments in an open market, since they had no

28The latter project is co-financed by Norway, with the trawlers being equipped at Kwemer Kirnek inKirkenes.

29According to Yuriy Kondrashov, Assistant Chief Engineer at Sevmash, building the platform to be usedin the exploitation of the Prirazlomnoye field is complicated, “but completely withii the capacity ofthose who for years have been fulfilling analogous tasks when building submarines” (Fattakhov, 1995,p. 13).


32

experience in this field, and no investment capital for retooling their facilities.

Government backing was necessary if they were to achieve their goals.

Over time, as orders failed to materialize, yard managers apparently determined that

they needed to take additional steps to ensure that the yards would be awarded the

desired contracts. As stated by the Sevmash’s General Director, David Pashayev, “we

understood that we would only receive orders for ice-resistant platforms if we went

from being simple contractors to becoming part of an oil company working on the

deposits on the shelf. . . . And since there was no such company, we had to create one

ourselves (Fattakhov, 1995, p. 11).

The Establishment of Rosshe~

The need to ensure financial support fi-omthe government, and the wish on the part of

the defense industry to gain some influence over assignments, was the rationale behind

the establishment of the Rosshelf joint-stock company. Academician Yevgeniy

Velikhov, son of one of the ‘founders’ of Sevmash, and director of the Kurchatov

Institute, — a leading research institution within the Russian nuclear complex — seems

to have played the lead role in this process. A letter signed by Velikhov and other

prominent figures from the defense industry was sent to Russian President Boris

Yel’tsin in late 1991, proposing the creation of “a national share-based company

incorporating Russia’s largest defense, oil, and gas enterprises” with a view to

development of the resources on the shelf. Velikhov subsequently met with Yel’tsin to

discuss the plans, and apparently succeeded in winning the President’s support.

By February 1992, a working group had been formed that embarked on an active

promotion campaign for the project, meeting with a range of government and other

officials. Responses to the project proposal varied widely. As noted by Velikhov and


33

Vyacheslav Kuznetsov30in their book A History of RossheZf, “Radical liberals, who

were numerous in the government at that time, did not like to hear about state support

of national industry . . .The new company was coming into being in a bitter struggle and

in a violent clash of opposing interests” (Kuznetsov and Velikhov, 1997, pp. 18-19).

Scepticisrrt was particularly strong in the Ministry for Fuel and Energy. However,

the proposal was backed unconditionally by the Minister of Industry, Aleksandr Titkin

and, not least, by Viktor Chernomyrdin, then chairman of the Management Board of

Gazprom, which at that time was a state concern.” In early April, the initiative was

approved by governmental decree, and on May 29 Rosshelf was registered in

Severodvinsk. It consisted of the military shipyards as well as a handful of defense

design bureaus as the main partners. Yevgeniy Velikhov was elected Chairman of the

board of directors and President of Rosshelf. Via Rosshelf, the yards attempted to

assume the role of offshore operator, and ultimately to obtain licenses for development

of the shelf.

At the time, a consortium of Western companies established in 1989 – Arctic Star –

in which AMNGR had become a participant, had carried out a feasibility study for

Shtokmanovskoye in agreement with the Soviet oil and gas ministry. The companies

in this group possessed considerable offshore experience and they were led to

understand that the consortium would be given permission to develop the field.32

Rosshelf decided to carry out its own feasibility study for the development of the

Shtokmanovskoye and Prirazlomnoye fields, in order to compete for both licenses.

Despite the attempts to pass Rosshelf off as an offshore oil company, the idea that the

enterprise alone could obtain the licenses was clearly unrealistic. However, arguments

regarding the necessity of protecting Russian state interests and the national industry

were supported by many government officials, and by striking a deal with Gazprom,

30Kuznetsov was an employee of the Kurchatov Institute and also a member of the working group.

3] Kuznetsov and Velikhov (1997) argue that support from Gazprom was one of three primary factorscontributing to the successful establishment of Rosshelf.

32See Moe (1994, p. 135). Arctic Star ultimately consisted of Norsk Hydro, Conoco, and the Finnishcompanies Imatran Voima, Metra, and Neste, with AMNGR as the Russian partner.


34

which was awarded a controlling share in Rosshelf, the latter succeeded in obtaining

combined exploration and production licenses valid until 2018 both for Prirazlomnoye

and Shtokmanovskoye (Perechen’, 1995). In November 1992, President Yel’tsin signed

a decree granting the licences to Rosshelf and instructing the company to work out a

long-term program for the development of the Arctic shelf. In December, the “Arctic

Star” consortium declared itself dissolved. At the next general meeting of Rosshelf’s

stockholders, in June 1993, Gazprom’s Boris Nikitin was elected General Director of

Rosshelf.

The efforts of Rosshelf were now directed toward the development of the

Shtokmanovskoye and Prirazlomnoye fields. Rosshelf entered into cooperation with

the Australian company BHP Petroleum, which, along with Gazprom, financed further

exploration activity, as well as some initial reconstruction of the Nerpa, Sevmash, and

Zvezdochka yards, where platforms and other equipment were to be constructed. It was

decided that one production platform would suffice for the Prirazlomnoye field, and

two for Shtokmanovskoye. The construction of the PrirazIomnoye platform began at

Sevmash in 1995. The platform is designed by Brown & Root Ltd., which also

participated in the feasibility study for Prirazlomnoye, whereas the St. Petersburg

Rubin bureau designed the foundation.

A long-term program for the development of the Arctic fields, which was one of the

licensing requirements specified in the presidential decree, was prepared in 1994.

According to thk program, the Prirazlomnoye and Shtokmanovskoye fields were to be

developed in 1998/1999 and 2003-2005, respectively. By 2010, 10 additional oil fields

were to be developed in the Pechora Sea. The program envisaged the construction of

(among other things) 17 drilling rigs and platforms, 30 other surface and underwater

facilities, and a fleet of ice-breaking oil tankers. As the main contractor, the

Severodvinsk yards would receive enough orders to stay in operation for decades.

Indeed, it was estimated that the number of new jobs in the offshore industry as a whole

would reach 140,000 within 8 to 10 years from the beginning of the program’s


35

implementation.

Thus far, Rosshelf/Gazprom’s ambitious plans have only been realized to a very limited

degree. Out of six new floating units (including the production platform for

Prirazlomnoye) that were to be constructed by the year 2000, none has been completed,

and in some cases construction has not even started. The construction of the

Prirazlomnoye platform was scheduled to take three years, starting in 1995, but in

November 1998, Boris Nikitin stated that the Prirazlomnoye platform was only 19

percent complete (Gazprom Surprised, 1998). Plans for the parallell construction of

two smaller drilling rigs have also been greatly delayed. The foundation for one of

them - the jack-up “Arkticheskaya” - was launched in July 1999, but much work

remains to be done on the rig. It is supposed to begin operations in 2001, although

“this will only happen if normal financing is provided from the commissioner”

(Severnyy Rabochiy, July 22, 1999, p. 1). No work has been done on the other rig.

The reason cited for these delays is financial constraints. Even prior to the August

1998 events, it had become evident that the economic burden Gazprom had taken on

by backing Rosshelf might prove too heavy. Part of the problem may have been that

Gazprom had counted on financial support from the state for conversion of the

shipyards. In 1996, Boris Yel’tsin had signed a decree (“On the Creation of an

Industrial Production Base for the Development of Hydrocarbon Deposits on the

Continental Shelf of the Arctic Zone”) that specifically envisaged financing of

conversion programs. According to an article printed in Mwyye IZvestiya (August 5,

1998), the edict was annulled surnmarfly after the 1996 presidential elections. Vladimir

Vovk, head of Gazprom’s Offshore Projects Administration, was quoted in the article,

maintaining that “The government saddled us with problems it should have taken on

alone, or at least shared with us”; he further expressed the view that conversion first

and foremost will serve state interests (Pravda Severa, April 6, 1999, p. 3). Lack of

money for conversion is not the only problem, however. Rosshelf is reported to be

heavily indebted to Brown& Root for planning work already performed, and the latter

Fnd~of Nansen Institute

36

company has temporarily halted work on the Prirazlomnoye platform until they receive

payment (ibid.),

Meanwhile, the Severodvinsk yards have increasingly directed their efforts towards the

export market. Zvezdochka has been particularly active in this field. The enterprise has

entered into an extensive cooperation with Norwegian Kv~rner. Acting as a

subcontractor for Kwerner, Zvezdocblcahas delivered parts of two Norwegian production

platforms, contracted by Statoil. According to the director for Kvaxner activities in the

former Soviet Union, the quality of the constructions delivered by Zvezdochka is “at least

as good as what we can produce in Norway” (Tjann, 1999). In order to meet the demands

of foreign contractors, Zvezdochka had to use new technologies and construction

materials which conformed with specified Western standards (’Zvezdochka’, 1999, p.

57). But we are inclined to believe that any problems of a technical nature will be easier

to overcome than those connected with economics and management. Thus it has been

argued that the cost of the Prirazlomnoye platform will exceed the cost of ordering the

same type of platform from Norway (Novye lzve.stiya, 5 August 1998).

In their public statements, the managers of the naval shipyards have often conveyed the

impression that the transition from construction of submarines to that of platforms is

a relatively easy one in principle. They have emphasised that the cost of a platform is

about the same as that of an average submarine, and that the production capacities and

technology required are similar. If, indeed, the $12 million cited above is only a

fraction of the funding required to carry out the necessary conversion, such statements

appear to be overly optimistic. The experience of co-operation with foreign companies

in recent years may to some extent have convinced the yard managers that they must

approach the issue of conversion to production of offshore equipment in a more realistic

way. Thus, Zvezdochka director Nikolay Kalistratov now says that “One of the key

conclusions concerning our strategy for participating in oil and gas projects, is that we

must act according to the principle of a step-by-step approach “from simple to

complicated” [tasks]...” (’Zvezdochka’, 1999). Such a statement bode well for the

future.


37

LICENSING

Legal framework

Russia has a licensing system for hydrocarbon resources based on the Law on Subsurface

Resources (1992), and revised several times later. The system prescribed is not

fi.mdamentally different from, say, the Norwegian system, including tenders for

exploration and development licenses, payment for the use of underground resources, and

provisions for mandatory work on the licensed blocks. The system was general, and

intended to apply to all kinds of mineral resources, both on- and offshore. The actual

jurisdiction over resources would differ, however, depending on whether the resources

were on- or offshore (see below).

In various negotiations between Russian and foreign partners, production-sharing

agreements became the favored mode of cooperation. However, the legal basis for such

agreements was delayed for a long time in the Russian parliament. Drafl laws went

through several “readings” in the Duma and a law was finally adopted and went into

force on January 11, 1996.

Production-sharing contracts are most commonly used in developing countries with an

insufficient legal flamework for “ordinary” operations by foreign oil companies, and also

are used as away to “train” domestic oil companies in countries where production is just

starting and there is no experienced oil indusby. Production-sharing agreements (l?SAs)

also take the burden of financing exploration and development from the host country.

They offer a simple tax regime and provide a way of “getting started.” The basic

principles for a PSA are a contract between a (foreign) oil company and the government

of the country in question for joint exploration and production in a given area. A national

oil company usually represents the government. This company supplies acreage

Fndtjof Nansen Inslitute

38

(production site), whereas the foreign partner supplies capital, technology, or whatever

is specified in the agreement. Thus the foreign partner assumes all the direct financial

risk. The proceeds fi-om the project are divided between the partners. The actual

proportions are established in each contract, but there is usually one proportion until the

foreign company has recovered all its costs (e.g., 50/50) and another subsequent rate via

which the national oil company gains a larger share (e.g., 30/70) (Jones, 1988, pp. 181-

182).

Clearly two of the general reasons for employing PSAS — an inexperienced oil industry

and lack of a legal framework — do not square well with conditions in Russia. The

country has a huge and experienced oil industry, which only in exceptional instances

perceives any technical need to cooperate with foreign oil companies. Second, the

country is already developing a regular licensing system, and emphasis on PSAS could

be regarded as a step in the wrong direction. There is little disagreement regarding the

third reason for PSAS, however — the need to attract investment resources. The main

idea here is to establish a stable and predictable framework for investors by giving the

agreement a very strong legal basis and protection. It is precisely this fimdarnental issue

that has caused most controversy in Russia. The law included provisions that would give

one side the possibility of changing the provisions of the agreement as a result of

changing circumstances.33Precisely what kind of circumstances were not spelled out, but

some members of the Duma indicated that, for example, a marked increase in the world

market price for oil could justify changes in the PSA. This uncertainty was a major

concern for foreign partners.

Another clause was that only fields designated by the Duma could be developed as PSAS.

Only in May 1997 was the first such list approved by the Duma. The list did not include

all the fields where initial negotiations for PSAShad taken place.34Thus the PSA law did

not remove all uncertainties and, consequently, obstacles to foreign participation. The

lack of political consensus regarding the development of the oil sector in general and the

33For an analysis of the law, see Makhlina (1996).

34In a number of cases, preliminary agreements between Russian and foreign companies had been signed in


39

role of foreign capital and companies in particular still was manifest.

With regard to offshore development, the reasoning behind PSA seemed to fit well. The

enormous financing requirements as well as the inexperience of the Russian industry in

this sector would seem to make PSAS very interesting from the Russian point of view.

Nevertheless offshore projects were not automatically placed on the PSA list, although

the Prirazlomnoye project was on the first list. Outside investors could take some hope,

however, from the fact that a license granted according to the Law on Subsurface

Resources may at a later point be converted to a PSA.

Licensing in the Barents Sea

The first exploration and production licenses in the Barents Sea were issued in 1992, for

Shtokmanovskoye and Prirazlomnoye, as noted above. These licenses were not awarded

according to the formulae above, but as administrative decisions, without any open

tenders, counter to the provisions in the new legislation. However, since 1993 there has

been talk of opening the Barents Sea for regular tenders for exploration and development

licenses. These plans, however, ftiled to materialize or were postponed. In the meantime

severeal licenses for geological exploration were awarded to Arktikmorneilegazrazvedka

in 1993 and Gazprom in 1995 in the same manner. Later the Finnish-Russian joint

venture Pechormomeft was awarded exploration licenses for two blocks. These

exploration licenses gave no guarantees of preferential treatment if development licenses

were later awarded. But holders of exploration licenses would of course be in a better

position to evaluate the prospects of the respective blocks when deciding if they would

apply for a development license. Nevertheless, the exploration licenses cannot be seen

to have been very attractive.

A “Concept for Development of Hydrocarbon Resources in the Barents Sea Province”

was adopted by the Russian government as early as 1995. But only in 1998 did the

Ministry of Fuel and Energy and the Ministry of Natural Resources publish a new and

anticipation that the project in question would be accepted as a PSA.

Fri&jof Nansen Institute

40

more detailed development program for the period 1998-2005, which included open

tenders (Garipov, 1998).35The pkm had been developed in consultation with all affected

authorities, including the military. The announcement of the program provided grounds

for believing that Russian authorities were now committed to increased foreign

involvement. The plan envisioned the participation of several companies, including

foreign ones, in tenders for development and exploration rights in the Barents and

Pechora Seas as the main principle for development. However, some areas where

“special state interests, of a geological-economic or other nature” were concerned, would

be subject to closed bidding rounds, where only Russian companies would be allowed to

participate. In clear language this would mean that the most promising structures and

fields as well as fields in areas considered of special military interest would be off-limits

to foreigners.

The program envisions the organization of four open licensing rounds between 1997 and

2005, including the following blocks (uclmstfi): F’imt round (1997-1998):

Khodovarikhinskiy, Pomorskiy, Kolokohnorskiy, Murmanskoye, and Kolskoye; Second

round (1999-2000): Russkiy and Ledovoye; i%irdround (2001–2002): Papaninskiy and

Tulomskiy; and Fourth round (2003–2005): Mezhdusharskiy and Akhmatovsko-

Andreyevskiy. Closed tenders would include fields that could be developed together with

Pnrazlonmoye to secure the more profitable development of this large field. These would

include such structures as Varandey-Medynskiy, Yuzhno-Dolginskiy, Severo-Dolginskiy,

Alekseyevskiy, and Severo-Gulyayevskiy, the most promising in the Pechora Sea at

present.

The start of the licensing rounds was delayed, and the first tender was announced only

in November 1998, with the details for participation published in February 1999

(Resolution, 1999). The scope of the tender was much smaller than originally planned.

The most attractive blocks — Medinskoye More and Varandey More — were reserved

for Russian companies, whereas two smaller and less interesting blocks — Pomorskiy

35A “Concept for Development of Hydrocarbon Resources in the Barents Sea Province” was adopted by theRussian government as far back as 1995.


41

and Kolokolmorskiy — were open to foreign companies.

The organization of the tender was, surprisingly, left to Yuzhmorgeologiya, a geological

organization based in Gelendzhik in Krasnodar on the Black Sea. And according to a

joint decision by the Ministries of Fuel and Energy and Natural Resources, all

organizations carrying out exploration activities offshore would be required to turn over

all data and information, old and new, to a new federal organization, Rosmorgeotio (also

based in Gelendzhik), or otherwise risk losing their operating license (Bezmatemykh,

1999). 3’ Thus, copies of the geological information hitherto stored in Murmansk was to

be transfened to Gelendzhik.

The scope and set-up of the tender generated considerable criticism in Murmansk. The

Governor of Murmansk Oblast, Yuriy Yevdokimov launched a harsh public attack on the

Ministry of Natural Resources as well as on the Ministry of Fuel and Energy for

compromising the interests of the region and not consulting with regional authorities. He

was enraged that two fields high on the priority list for Murmansk, Murmanskoye and

Kolskaya, had been excluded, as well as by the fact that the tender was to take place in

Gelendzhik. If the “errors” were not corrected, he threatened to develop Murmanskoye

and Kolskaya without consulting the federal authorities (Yevdokimov, 1998).

Through these decisions, the content of the tender as well as the transfer of the geological

data to Gelendzhik, the looming conflict between the federal authorities, in particular the

Ministry of Natural Resources, and Murmansk Oblast, caused by years of impatience,

came to the surface. One may question which decision was most Iiustrating for oblast

oi%cials, the exclusion of Murmanskoye and Kolskaya or their exclusion fi-omthe tender

process. Murmanskoye had been mentioned as a possible regional supply source as early

as 1987, but dropped from public attention after the discovery of Shtokmanovskoye. The

3’ In 1998 “The Russian Information-Analytical Center for Research and Development of the ContinentalShelf, the World Ocean, and the Special Economic Zone” Rosmorgeoinfo was established in Gelendzhik. Itconsisted in part of Soyuzmorgeo, which had been an ail-Union geological organization for the entirecontinental shelf based in Murmansk, but which was transferred as a very much smaller organization toGelendzhik in 1998. Both organizations became part of the Geological Organization of the SouthernContinental Shelf – Yuzhmorgeologiya (Malovitskiy, 1999).


42

reason reflected not only scale differences, but also the fact that the Murmanskoye

deposit turned out to have a very complicated geology. According to a centrally placed

participant in the exploration process, the field has absolutely no commercial prospects

— the cost of extracting relatively small volumes would be prohibitive (Ostisty, 1999).

The Kolskaya block is so little explored that the presence of hydrocarbons is very

uncerta~ representing a single “spot” in a long geological range. Thus placing these two

blocks on the tender list would not have looked good and would have attracted neither

Russian nor foreign oil companies (ibid.)

Results of the First Tender

Even though several companies were rumored to be interested, only one company placed

bids, the Murmansk drilling organization Arktikrnomeftegazrazvedka (ITAR-TASS, July

20, 1999). This was clearly disappointing for the organizers, but not totally unexpected.

The most surprising “no-show” was Gazprom/Rosshelf, which declared that it would not

bid in tenders for rights to hydrocarbon sections of the Barents Sea that it already had

invested in developing (Gazprom Not, 1999).37Gazprom/Rosshelf demanded to be

included in the license or compensated. As mentioned earlier and as reflected in Table

1, Gazprom has been carrying out some activity on Varandey-More as well as

Medinskoye-More based on exploration licenses .38 By March, 2000, however,

Gazprom/Rosshelf withdrew their claim, something that would permit the results of

the fwst licensing round to be finalised.

Arktikmomeftegazrazvedka clearly has the support of the regional authorities in

Murmansk in their effort to increase activity on the continental shelf. However, the

organization does not have the financial strength required. It is therefore expected that

37According to Boris Niki@ general director of Rosshelf and member of Gazprom’s management board,Gazprom has spent about $90 million in drilling in the Prirazlomoye area (Gazprom Surprised, 1998).

38The Finnish-Russian joint venture Pechormomeft in fact had exploration licenses for both blocks thatwere included in the open tender - Kolokolomorskiy and Pomorskiy. on the basis of seismic shot in1997-1998 and re-analysis of data, they decided not to apply for a development license, but one of thepartners — AMNGR — decided to go it rdone.


43

it will seek foreign partners. Although foreign companies did not express an interest in

the fields during the first licensing round, they may well consider a joint project with

AMNGR. However, they will probably not risk a conflict with Gazprom, and any dispute

over rights must be resolved first. Second, as with other major proj ects in the oil sector,

foreign companies probably will demand that the project be organised as a production-

sharing agreement. AMNGR expects that the government will recommend that the fields

be included on the PSA list. However, a decision of the Russian parliament is required

for this actually to occur, and that process is relatively unpredictable. We would expect

the pressure exerted by Murmansk Oblast authorities to be a crucial fwtor in this process.

Outlook

It is expected that the the second licensing round will be announced in the spring of

2000. For the regional authorities it now seems better to support some exploration

activity on the tracts that will come up for tender in later rounds, thus increasing the

information base on the structures, reducing the risk, and making the tenders attractive

for a wider range of companies. The requisite will exists; the crucial problem is

financial resources. It is suggested that, at a minimum, it would take two more years

of seismic exploration (on the order of $500,000) of the structures along the Kola coast

to select suitable structures for drilling. Exploration drilling would require another two

years. Then if positive finds were made, production could start some seven to eight

years from now (Ostisty, 1999). Two licenses for geological studies (geologicheskoe

izuchenie) in these structures were put up for tender in February, 2000.

But to evaluate the possible pace of development, it is not sufficient to look at the

licensing program, we must also return to the interests of the involved parties.

OVERALL DEMAND PICTURE

In addition to such factors as the geology of offshore structures, the availability of


44

financing, regional politics, and the capabilities of Rosshelf to independently explore and

produce offshore hydrocarbons, an essential component in any decisions regarding the

development of offshore mineral resources in the Russian Barents sea is domestic and

world demand for oil and gas. The situation, in fact, can be quite different for oil and gas,

respectively. In the oil market, the supply side consists of many relatively small

producers, with the development of one additional source not affecting the price in the

market in any substantial way. In this environment, in principle, each project is

considered on its own merits. There maybe political constraints but there is no strong,

co-ordinated national policy with regard to development of oil fields. Russian oil

companies that for all intents and purposes are private and guided by commercial and

strategic considerations on a company level now make the real decisions.

Gas is very different. The gas market is characterized by a demand constraint, at least in

the short to mid-term. Furthermore, the actors on the supply side are relatively few and

each actor has the power to influence price. Thus a rapid increase in supplies from one

producer without an increase in demand will lead to lower prices. Indeed, it may even

be difficult to dispose of the gas physically. Organization of production in the major gas

exporting countries varies, but in all the countries there is some form of co-ordination to

prevent oversupply.” In Russia the gas industry is totally dominated by Gazprom, which

represents a continuation of the old structure of the Gas Ministry, but which also has

become the strongest company in Russia today. It is not a formal monopoly, but in

reality it has full control of production, transmission, and exports of natural gas.40

Thus Gazprom is in a position to take a comprehensive view of development of gas

resources and possibilities on the domestic as well as export markets. For this company,

gas fields in the Barents Sea are options that will have to be compared to others. In the

company’s public statements, the Barents Sea shelf appears to enjoy a relatively high

39For an analysis of structural developments in the gas market and the organization of gas exports see Estradaet al. (1995).

w For an analysis of Gazprom’s development and internal structure see Kryukov and Moe (1996). Recently,substantial assets in the gas industry and also some supply fimctiom as well as export operations (to otherformer Soviet republics) have been transferred to other companies. However, these companies appear tobe largely controlled by or work very closely with Gazprom (see Kryukov and Moe, 1999).


45

priority. It is considered a “main strategic reserve for the Russian gas industry in the near

fiture” (Nikitin et al., 1999a). The official goal is to start development of the field by

2007 (Belousov, 2000, p. 3) and have gas production started in 2010 (Russia’s Gazprom

Outlines, 1998). Still, it maybe questioned whether this is the real priority, or whether

Barents shelf development will be postponed in light of alternative supply options and

developments in demand for gas.

And Russian gas reserves are enormous. Total Russian reserves are usually stated to be

on the order of 48 trillion cubic metres (TCM),4] which constitutes approximately 34

percent of global reserves. The numbers make it clear that reserves in themselves will

not be a constraint for either domestic consumption or exports. But the location and

structure of the reserves are important determinants for the development of costs in the

industry and hence for the possibility of profitable development.

Russia’s proven reserves are quite concentrated spatially: 81 percent are found in West

Siberkq another 14 percent are in European Russi~ and 5 percent are in East Siberia and

the Far East. The role of large fields is another striking characteristic. About 75 percent

of the reserves are located in 20 giant fields with more than 500 billion cubic meters

(bcm) each (Basniyev et al., 1993).

41The Russian, or rather Soviet, classification system differs from those used in the West. The Russian“reserve” category A+B+C1 includes drilled, undeveloped, and indicated reserves. The sources quoted inthis text are usually very vague about what categories they employ. But one should be aware that thewestern term “proven” is stricter than A+B+C 1, which are nonetheless ofien equated with “proven.”Generally, Russian and Soviet reserve estimates are considered to be exaggerated by Western specialists.Traditionally, the Soviet reserve system only took geological and technical parameters into considerationand neglected commercial factors. The unit of measure is also an issue. Billion cubic meters (BCM) areused as the standard unit for gas in this text. But this is not the same as a BCM elsewhere. Russian gas ismeasured at 20”C and one atmosphere of pressure, and so one Russian cubic meter corresponds to 0.93standard cubic meter of Norwegian gas.


46

Figure 2

Russian gas output by producing organisation 1985-98 (BCM)

1SS5 19S6 1SS7 19S8 1989 1990 1SS1 1992 1993 1S94 1S95 1996 1S97 19S8

1-.-.-1■ OJsidewest.~b~ri~

❑ Urengoygazprom

❑ Nadymgazprom

❑Yamburggazdobycha

❑ Other West-Siberia

Sources: Post-Soviet Geography, various issues; InfoTEK

When it comes to production, the geographical as well as field concentration is even

higher. Two fields, Urengoy and Yamburg in the Nadym-Pur-Taz area of the Yamal-

Nenets Autonomous Okrug (Tyumen’ Oblast), represent about 70 percent of Russian gas

production (e.g., see Fig. 2). The third largest field, Medvezh’ye also is located there.

There is no doubt that West Siberia will continue to be the mainstay of Russian gas

production. Even if Urengoy’s production is now fidling and Yamburg is levelling out,

Gazprom considers it possible to increase production from the Nadym-Pur-Taz area by

some 130 to 140 BCM. Economically such a strategy seems quite rational, since

development of new production capacity here can utilize existing infrastructure to a

considerable extent.

There also are sizeable virgin onshore fields that could be developed, such as several

huge gas fields on the Yamal Peninsula, discovered in the 1970s. For a long time, the

official policy was that development of these fields would commence as soon as


47

construction on Yamburg was completed and that the first gas from Yamal would be

produced in 1991. Altogethe; the three largest fields on the Yamal Peninsula could

produce as much as 170 BCM per year if they were filly developed simultaneously. The

start-up has since been postponed several times and the latest official statement is that

production from the largest field on Yamal (Bovanenko) will start in 2010 (Gazprom

Alllll,ld Report, 1998).

There are several good reasons for the delay, including changed development strategy,

environmental concerns, and general economic recession (reducing gas demand), as well

as programs to increase energy efficiency, which have led to far less ambitious estimates

of fbture gas demand. According to the latest forecasts (Gazprom Annual Report, 1998),

domestic consumption is expected to increase again toward the end of this decade and

reach some 370 BCM by 2010 — i.e., only some 45 BCM above the 1998 level.

This is a modest growth compared with estimates from some years ago, but it would still

require that some basic problems in the Russian economy in general, and in the gas sector

in particular, are solved. The non-payment crisis in the Russian economy has hit the gas

industry hard; in the last few years only roughly 20 percent of domestic deliveries have

been paid for in cash. The remainder consists of various barter arrangements and transfer

of property, or the gas is simply not paid for at all. This situation makes it exceedingly

difficult to finance fiu-therdevelopment of the industry. The income from exports has

been vital to sustaining the industry in recent years, and it seems likely that Gazprom will

attempt to induce various savings in domestic gas consurnption,42where gas is still being

squandered due to low payment discipline and low prices.

The prospects for re-introduction of gas from Central-Asia, especially Turkmenistan, on

a large scale is an option that is being increasingly discussed. As late as 1990, some 70

BCM were transported from Turkmenistan to Russia, although this had dropped by 1998

42One such measure is the Gazprom-inspired effort to induce Russia’s electric power plants to use less naturalgas and more coal, thereby alleviating ostensible “shortages” and freeing greater quantities for export (seePlanEcon Energy Report, Vol. IX, No. 4, January 2000, pp. 1-4; VreinyaMN, December 17, 1999, p. 1 inCurrent Digest of the Post-Soviet Press [CDPSP], January 19,2000, p. 10) — Ed., PSGE


48

to only 2.3 BCM. The costs of obtaining this gas would be much lower than in new fields

in the Arctic.43

With regard to export volumes, the outlook is quite good. However, even an increase in

exports of 50 percent over the next 20 years might not increase demand sufficiently to

warrant offshore production in the Barents Sea, because of offsetting gains in energy

eftlciency in the economy and/or expansion of onshore production.

Figure 3

Use of Russian Gas (BCM)

—

600- —

500-

400-

300 -

L3

❑EXpOI-tS-FuSSR

❑ Exp@##est

■ Domestic consumption

200 ❑ lm fls-FussR

100 -

1991 %992 1993 %994 1995 1996 1997 1996

-100-

-200 J J

Source: PlanEcon Energy Report, various issues

43OnDecember 17, 1999, Gazprom CEO Rem Vyakhirev and Turkmenistan’s President SaparrnuradNiyazov signed an agreement whereby 20 BCM of Turkrnen gas will be delivered to Russia in the year2000 at a price of $36.00 per thousand cubic meters (Yremya MN, December 20, 1999, p. 5; see alsoCDPSP, January 19,2000, pp. 10-11)-Ed., PSGE.


49

Although it is clearly beyond the scope of this paper to assess all the dimensions of gas

production, consumption, and exports that have a bearing on the problem, it is clear that

the development of offshore gas fields in the Barents Sea is not necessary to ensure

adequate gas supplies for Russia as a whole, at least not within the foreseeable future.

Therefore, we must consider whether Barents sea gas deposits have any special market

characteristics that might make their development advantageous at a regional scale,

despite abundant supplies at the national level.

OTHER CONSIDERATIONS

As discussed earlier in this report, from a regional perspective increasing the supply of

natural gas through development of Barents Sea deposits would be desirable. However

it is quite clear that the increased volume of regional consumption would not justi~

development of a giant field like Shtokmanovskoye, even if deliveries were paid in fill.

Development therefore will be dependent on export outlook. The location of the source

would suggest the construction of a new transport corridor (e.g., through Finland and the

Baltic Sea or Sweden to continental Europe). Such a new corridor would provide a

certain diversification in the market, in the sense that the market would be less dependent

on the other two main channels for Russian gas — via Ukraine-Slovakia and Belarus-

Poland, respectively. However, a third pipeline corridor also is conceivable even without

gas from the Barents Sea. It could merely be an extension of the Northern Lights

network that brings gas from Siberia to the St. Petersburg region.a

Gas from the Barents Sea would represent a diversification, a reduction of the heavy

reliance on West Siberian gas sources. But would the market be prepared to buy

substantially larger volumes of Russian gas than what would otherwise have happened?

It is not possible to answer such a question with much certainty. But it seems reasonable

44Fortum (Neste) and Gazprom have established a 50/50 joint venture – North Transgas Oy - to develop plansfor a pipeline via the Baltic Seato Germany. In connection with a feasibility study of the project,Gazprom’s Boris Nikitin explicitly stated that the pipeline could either be a branch of the Yamal-WesternEurope pipeline or could supply gas from Shtokmanovskoye (Feasibility, 1998). In a recent Gazprompresentation (Eksportnaya, 1999), the project is mentioned without any reference to the Barents Sea.


50

to believe that the market might be favorably disposed toward a source separate from

West Siberia. We do not possess any comparative cost estimates for the Yamal fields and

the Barents Se% but we would expect a project in the Barents Sea to be more costly than

onshore, even though the latter probably will include an undersea pipeline (under

Baydaratskaya Bay) and a longer total pipeline distance. Thus it is highly uncertain

whether the “diversification value” will offset increased development costs.

However, three other circumstances must be taken into consideration. Gazprom has

clearly understood that it cannot develop a field like Shtokmanovskoye on its own. It

lacks the technology, experience, as well as requisite financial resources. In the ongoing

preparatory work Gazprom has included several other companies — Norsk Hydro,

Neste/Fortum, Conoco, and Total. The work carried out by this group includes market

evaluations, improvement of the geological da~ as well as technical solutions. Thus far

the status of the group is informal, but the foreign companies clearly expect to become

formal partners when the field is being developed, and Gazprom is signaling that it wants

to develop the field in partnership with others (Semenyaka, 1999). Several of the

companies also have interests as potential gas purchasers. This may mean that market

access for Shtokmanovskoye gas could be better than for other Russian gas.’s In any

event, the development of Shtokmanovskoye without a long-term commitment from the

demand side for this particular gas is unthinkable.

The possibility of establishing an LNG plant on the Murmansk coast adds to the

attractiveness of the project. This could provide access to markets beyond the reach of

pipelines — for example, the United States. However, the difilculties in establishing a

profitable LNG project in the region already have been demonstrated by the Norwegian

Snow White project off the coast of Finnmark. The most certain element of the

Shtokmanovskoye project in market terms is the export of condensate, which is in high

demand in international markets, and would enhance the overall economic return from

the field.

45But the possibility of joint development (with Western partners) of other Russian gas fields should not be

ruled out.


51

As is clear from the preceding discussion, it is exceedingly difficult to quanti~ the

arguments for and against Shtokmanovskoye. But it does not seem that there are

sufficiently strong reasons or prerequisites for pushing development now. Nonetheless,

for Gazprom as well as the foreign companies involved, Shtokmanovskoye and the

adjscent fields are an option that will materialize one day. As such, they merit attention

and the use of some resources for improvement of the development plan. But such

preparatory work must not be confused with a real start-up.

CONCLUSIONS

Russia does not have a national plan for development of its energy resources. What it has

is an “Energy Strategy” with forecasts of demand and assessments of the possibility of

covering that demand by various energy sources under different scenarios. The present

strategy was adopted in 1995 and covers the period until 2010. However, the strategy is

far from an operational plan; it rather is more an attempt at forecasting developments.

Detailed assessments of both driving forces and constraints to the development of

particular regions and fields must be undertaken on a region-by-region basis, as there is

no integrated policy addressing these issues at the national level.

A recurrent theme in this report has been the role of the regions. The regional authorities

are a power in and of themselves, but they also work at the national level, where regional

considerations, especially in the form of economic development and employment, are

a concern. But the regions of interest in this paper — Murmansk and Arkhangel’sk

oblasts and the Nenets Autonomous Okrug — do not have uniform interests and

priorities, which probably weakens their influence in Moscow with respect to this issue.

In recent years, the policy of the federal Russian authorities has primarily acted as a

constraint on the development of the Arctic shelf. In a nutshell, their attitude seems to

be that it is in Russia’s long-term interest to minimize foreign involvement in the process,

even if this means that it will take longer until the benefits can be harvested. Meanwhile,

Fndtjof Nansen Institute

52

efforts can be concentrated on exploiting more readily accessible onshore resources.

It is reasonable to assume that decision makers in the regions bordering on the Barents

Sea have a different view, considering the benefits that would accrue to the regions from

increased activity on the shelf. However, changes in the political climate toward greater

protectionism can be observed here as well. Moreover, the argument that it is better to

wait in order to harvest more at a future stage may carry some weight in the regions —

at least in certain specific cases.

We believe that the regional authorities in Murmansk Oblast would like to see an increase

in activity on the shelf as soon as possible. Development of the Shtokmanovskoye field

is probably a top priority, since all spin-off effects from this project would benefit the

Murmansk region exclusively, and since this is perceived as important for increasing the

supply of gas to the region. We also believe that the region is highly interested in

development of the Prirazlomnoye field, since Murmansk appears to be the most likely

location for bases, as well as for a reloading port. To the extent that foreign partners are

needed to ensure rapid development, we assume that the regional authorities wiIl

welcome their involvement. Ideally, the partnership would be with one or several of the

regional offshore organizations, but it would not be in the region’s interest to hamper

development by other operators. The regional reactions to the exclusion of Murmanskoye

and Kolskaya from the recent tender show that there is a strong wish to develop deposits

in zones of ‘joint execution’.

The position of Arkhangel’sk Oblast is less clear. It appears that development of the

shelf is viewed as important in this region as well, but Russian leadership in the process

may be considered more of a priority here than in Murmansk. The presence of onshore

resources in the region can make it acceptable to proceed more slowly on the shelf. From

Arkangel’sk point of view it is paramount that Rosshelf is allowed to retain a leading

role in the project. In general, it may be in the interest of Arkhangel’sk Oblast for foreign

companies to play a lesser role in the development of the shelf, if Russian control over

projects implies more contracts for the naval shipyards. With respect to development of

the Shtokmanovskoye field, Rosshelf7Gazprom have announced their intentions to build


53

the platform in Severodvinsk, and a heavy involvement of foreign companies might prove

detrimental to these plans. All in all, Arkhangel’sk Oblast seems to have less to lose and

more to gain by a wait-and-see strategy than does Murmansk Oblast.

In the current situation, it seems clear that the naval shipyards constitute a constraint to

development on the shelf. It has been concluded that both the Prirazlomnoye and the

Shtokmanovskoye fields can be developed with existing technology, and it goes without

saying that the process could have proceeded more rapidly if experienced contractors had

been hired to deliver the necessary supplies and equipment. Conversion of the yards has

proved both time consuming and costly. Even more importantly, the foreign companies

that necessarily must be involved in development for this process to gain momentum

under the current circumstances would probably have been more interested in

participating if contracts for equipment could have been awarded on a competitive basis.

This does not mean that the yards cannot, in the future, be turned into an asset in the

development process. Some of the fields on the Arctic shelf cannot be developed with

today’s technology, and the possibility cannot be excluded that defense enterprises and

design bureaus specializing in marine technology will be able at least to contribute to new

technological solutions that can make development feasible.

Interestingly, even if Gazprom in many ways controls Rosshelfi the gas giant has chosen

also to establish its own subsidiary – Gazflot – as a ‘contracting department’ for offshore

rigs and vessels (Paliy, Lakhov and Loboda, 1999, p. 4-5). This gives Gazprom more

flexibility in chosing development schemes than Rosshelf alone can provide. At present,

Gazflot has one drilling ship in operation – ‘Gazprom 1‘ – and the Arkticheskaya

platform under construction in Severodvinsk will also belong to this division of Gazprom

(ibid p. 4).

The role of the military is not quite clear. No one seems to doubt that the Northern Fleet

has a strong say in offshore developments in the Russian Barents Sea, and it has

traditionally been seen as quite negatively inclined toward almost any development. But

with the establishment of the development plan for the Barents Sea, the military has

FridIjof Nansen Institute

54

appeared to accept fairly extensive development. Still the power to impose restrictions

on particular licenses probably remains.

However, the possibility exists that the military may have changed its position in a

substantive way. Whereas previously the military could detach itself from the regional

economy, it is now more closely integrated into that economy.4GThe prevailing economic

crisis also affects the military, and developments that would improve the economic

situation would benefit the military as well. In Murmansk Oblast, the governor has

worked hard to secure support on the national level as well as born other regions for

improving the financing of the Northern Fleet. He should expect some reciprocity in the

form of the military not obstructing his efforts to improve economic conditions in the

region through oil and gas development. In addition, the argument of regional authorities

that offshore development will increase regional energy supplies is also one that is

expected to go over well with military officials, as the armed forces in the region have

experienced serious energy shortages.

It is widely believed that there has been a conflict within the Russian administration over

offshore tenders. The Ministry of Fuel and Energy has supported open tenders and also

the inclusion of more attractive fields to increase interest in development. Gazprom has

been the main force against such developments. It is likely that the company management

viewed the alliance with Rosshelf as a way to extend its gas monopoly to the shelf,

correctly assuming that Moscow would welcome an actor promising to solve the social

and economic problems prevailing in the regional define complex. Gazprom wants to

retain its leading position in the development of offshore resources, not only gas but also

oil (e.g., RussianPetroleum Investor, February 1999, p. 42).

But the company has many options and can afford to postpone extensive offshore

development until it is in a better position to benefit from such development. But

although the position of Gazprom is quite clear, it must be questioned whether the

46

For a thorough analysis of the relationship between the military and civilian sector on the Kola peninsulasee Homeland and Jargensen(1999b).


55

influence of this giant is strong enough to oppose developments so clearly in the nation’s

economic interest in the longer run.

According to Minister of Natural Resources V. P. Orlov, “the speed of work to conquer

the hydrocarbon resources in the Barents Sea does not correspond to the economic

requirements of Russia and the real production capacities in the region” (Orlov, 1998, p.

4). Despite the interest of the three involved Russian regions in increased activity on the

shelf, it seems likely that development of offshore hydrocarbons in the Barents Sea will

be postponed, at least over the near term. This clearly demonstrates the power of the

opponents of such development at present. Over the longer term, the outlook for

development in the Barents and Pechora seas will be shaped mainly by changes in the

strength of the various forces described in this paper. Among these forces, the three

regions have become more important and likely will continue to grow in importance.

If the regions are able to formulate and present a coordinated vision of offshore

development, then their prospective influence on central decision makers will be

enhanced.

Fn”dtjofNansen Institute

56

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62Fndtjof Nansen Institute

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