Shell (NYSE: RDS.A) Partners with Russia for Arctic Oil

Brian Hicks

Written By Brian Hicks

Posted April 9, 2013

Arctic oil: it might just be the darnedest thing to tap into, but it’s not stopping Gazprom Neft from giving it a try.

Gazprom Neft, the oil-arm of Russian state gas company Gazprom, will be creating a joint venture with Royal Dutch Shell (NYSE: RDS.A). In the deal, operations will be conducted onshore in Western Siberian shale reserves and offshore in Russia’s Arctic Sea.

Offshore Oil RigRussian President Vladamir Putin will formally announce the agreement next week as he visits the Netherlands, where the Anglo-Dutch Shell resides.

The deal comes as no surprise, as Gazprom has been seeking out foreign partnerships in an effort to exploit its promising but troubling Arctic Sea riches.

Efforts became more evident after the heavy tax on oil and gas was altered to attract outside interests. Companies like Shell possess the technology and expertise in drilling advancements that would be needed to develop the Arctic Sea.

Having Shell as a right hand will prove essential, RT reports, as Executive Director at the National Energy Security Fund Konstantin Simonov said:

“Such projects are complicated, require massive investment and need technology that may not yet exist. No country could cope with such a mission alone.”

The offshore blocks in the Arctic require hydraulic fracturing and forms of horizontal drilling, techniques that are still largely unfamiliar in the Russian oil landscape that is dominated by conventional drilling methods.

This is a natural progression for Shell, who has made evident its desire to go deeper into Russian territory; it is already involved in operations with Gazprom at the Sakhalin gas project in the sub-Arctic seas of Eastern Siberia.

According to the Telegraph, Shell chief executive Peter Voser said last summer:

“From a strategic point of view we are open to further investments in Russia and therefore are looking at opportunities either [in] oil or LNG. We have talked with the various players. Those talks include Gazprom.”

The two industry giants have worked side by side successfully for years now, and tackling this monster that is the Arctic Sea will be its greatest feat yet.

Problems Arise

But therein lies the problem. The roaring sea plays by its own rules—a set of rules that evidently Shell is unabashed by, as the company has decided on rolling up its sleeves to face the beast head on.

It was only a matter of months ago that Shell was forced to delay it high-profile Alaskan Arctic operation for possibly a year for what is being deemed a set of missteps. The U.S. has imposed a set of criteria that Shell must follow before it can resume operations in Alaska.

This latest agreement draws criticisms of its own, and while everything may look hunky dory on paper, the actual development of the site won’t be achieved in the foreseeable future, some experts believe.

This is because technology simply hasn’t caught up yet. And while technology lags behind—or is, at the very least, on shaky ground—investors are much less likely to take the risk.

Even in Shell’s Chukchi Sea oil reserve, which did seem to offer promise, the company was forced to pack it in as the winter season rolled in. This was after pouring $4.5 billion into the project and drilling a few choice wells. At least it’s a start for next season in 2013.

And it’s not just Shell who is feeling the sea’s wrath. BP (NYSE: BP) suspended its Arctic oil project last year after a constant battle with costs and technical issues.

Gazprom, too, has had to nix a project in the Barents Sea after it didn’t add up economically.

But despite every opportunity and sign to pull out, these oil companies are steadfast and determined to prove successful in the Arctic, where it is believed a vast reserve of untapped oil lies.

Obtaining access in the Arctic would secure Russia’s long-term status as one of the world’s leading producers, and it may even topple the rest of its competition.

Russian Oil

Rosneft (PINK: RNFTF), the Russian state majority-owned oil company that is now the world’s biggest, has been quite busy recently, striking deals with ExxonMobil (NYSE: XOM), Statoil (NYSE: STO) and ENI (NYSE: E), who are all slated for Arctic exploration.

And just last month, it was confirmed that BP (NYSE: BP)—its 20 percent stakeholder—will be looking at future projects.

It is clear that Russia is going to find a way to break ground in the Arctic Sea. It may be slow going to start, but it’s going to happen.

Fears may be imminent (God forbid an oil spill ever occurs in those Arctic waters), but nothing can deter the Russian conquest.


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