The ‘Russification’ of Oil Exploration
By ANDREW E. KRAMER
OCT. 29, 2014
MOSCOW — The American and European sanctions against the Russian oil industry have dashed, at least for now, the Western oil majors’ ambitions to drill in the Arctic Ocean.
But drilling will continue all the same, Russian government and state oil company officials have been taking pains to point out, ever since the sanctions took effect over the summer.
“We will do it on our own,” Igor I. Sechin, the president of Russia’s state-controlled oil company, Rosneft, told journalists in October. “We’ll continue drilling here next year and the years after that.”
Rather than throw in the towel in the face of Western sanctions intended to halt Russia’s Arctic oil ambitions by stopping technology transfers, the Russians have responded with plans to “Russify” the technology to be deployed in the world’s largest effort to date to extract oil from the thawing Arctic Ocean.
The solution to tapping the Arctic, Yevgeny Primakov, a former prime minister, told a group of high officials in October, “is found first of all in our own industrial base.”
A major hurdle is already cleared: An Exxon-led joint venture discovered oil in the Russian sector of the Arctic Ocean in September, proving the region holds commercially viable volumes of oil.
Rosneft is already laying plans to drill without Western oil major cooperation. Along with Exxon, Eni of Italy and Statoil of Norway had joint ventures to work with Rosneft in the Kara, Laptev, and Chukchi seas above Russia.
After the September sanctions suspended those deals, Rosneft negotiated to rent from Gazprom four Russian ice-class drilling rigs for next season’s exploration work, should Exxon still be sanction-barred from doing the work next summer.
Rosneft has also booked six rigs from North Atlantic Drilling, a unit of Seadrill of Norway, under contracts signed in July and grandfathered in under the sanctions.
The Russians are in early talks with the Chinese over sailing rigs from the South China Sea to the Arctic Ocean, industry executives say.
This spring as the threat of sanctions loomed, Rosneft bought the Russian and Venezuelan well-drilling business of Weatherford, adding to its in-house capabilities.
A further “Russification” of the industry seems inevitable. In October, President Vladimir V. Putin approved the creation of a state-owned oil services company, RBC, a Russian business newspaper reported. The intention is to duplicate, as well as possible, the services purveyed now by Halliburton, Baker Hughes and Schlumberger.
Certainly, some in the oil industry see the Russian official response as bluff, asserting Rosneft has neither the skills nor the capital to drill for oil in its 42 offshore licenses blocks. Under the joint ventures, the Western companies financed and managed the exploration work.
The three companies, Exxon, Eni and Statoil, were to invest $20 billion in exploration, and the company has been mute on how it will replace that. Just this summer, Exxon paid $700 million to drill the Universitetskaya-1 well in the Kara Sea.
Russia, meanwhile, does not even manufacture subsea hardware like well heads. Rosneft’s finances are restricted to 30-day loans under sanctions.
Yet the company and the Russian industry are already tooling up for just such an effort.
The sheer uncertainty of sanctions is pushing the Russian industry to turn inward. Russian companies, even those who prefer to work with U.S. oilfield equipment or services providers because the cost or quality is better, can never know when new sanctions might scuttle a deal.
“The client looks at you and says ‘I like you, I like your product, but you are not dependable,’ ” Alexis Rodzianko, the director of the American Chamber of Commerce in Russia said in an interview.
Russia now has a “hierarchy of procurement” placing domestic and Asian companies first, U.S. companies last.
“The consensus in Russia is this is not a one-off, short-term problem,” Ildar Davletshin, an oil analyst at Renaissance Capital in Moscow, said in an interview, of the Russian effort to pivot to domestic and Asian suppliers.
“Nobody will just sit and wait” for sanctions to be lifted, he said.
Whether Russian technology can fill the gap left by Western oil majors as the country prepares for the extraordinary engineering challenge of oil drilling under the Arctic ice remains an unsettled question within the industry.
Russia brings Soviet legacy technologies, including the world’s only fleet of nuclear icebreakers, awesome machines of immense power, with names like 50 Years of Victory and Yamal, which sail year-round in the Arctic Ocean.
“Let’s not underestimate them,” said one oil company executive who visited Exxon’s West Alpha rig this summer, but could not speak publicly because of company policy. Russians are no strangers to the north, and the cold. “They are determined to do it. They might do it on their own.”
The Russian intention to do just that became clear out on the Arctic Ocean at the end of the short drilling window this summer.
Ice floes were already creeping down from the polar ice cap in tongues when the U.S. government announced Sept. 12 that Exxon was to halt all assistance to Rosneft by Sept. 26, in response to Russian military assistance to a rebel counteroffensive against the Ukrainian Army in late August.
The Exxon crew stopped drilling, though the well was only about 75 percent complete.
In an early indication of the Russians’ intentions to go it alone after sanctions, Rosneft executives told Exxon they would not allow the West Alpha rig to leave Russian waters without finishing the well, according to the oil company executive familiar with events on the platform in September.
If Exxon withdrew American engineers, Rosneft would fly out a Russian replacement crew, putting the localization plan into immediate action, the executive said. Rosneft’s press service contested this characterization of the company’s position, calling it a “fiction.”
In the end, Exxon obtained an extension on its waiver to the sanction from the U.S. Treasury Department, stretching the window for work with Rosneft in the Arctic until Oct. 10.
The Arctic Ocean, Mr. Sechin said later that month in the interview with Bloomberg News at the drilling site in the Kara Sea, is Russia’s “Saudi Arabia” of oil, vast and pivotal to Russia’s national interests.
Rosneft’s website estimates the Kara Sea’s reservoirs hold about 87 billion barrels of oil and the equivalent in natural gas, calling this more than the deposits of the Gulf of Mexico, the Brazilian shelf or the offshore potential north of Alaska and Canada.
After a daylong pause on Sept. 12 to Sept. 13, the Russian brinkmanship worked: The American crew continued drilling and about a week later, in mid-September, discovered a vast oil deposit, holding about 750 million barrels of oil. Mr. Sechin thanked Western partners for the find, and named the field Pobeda, or Victory.