Rus­sia be­gins to tap vast oil, gas re­serves in Arc­tic, Siberia

The Washington Times Weekly - - National - By Pa­trice Hill

First of two parts

AbovetheArc­ticCir­cle,NENETZ AU­TON­O­MOUS DIS­TRICT, Rus­sia — Ly­ing un­der the tundra, thick forests and wilder­ness here is Rus­sia’s wealth, the key to its fu­ture and an im­por­tant life­line for the world econ­omy.

Rus­sia has just be­gun to un­lock the vast oil and gas re­sources of its re­mote Arc­tic and east­ern Siberian plains and ocean shelves. De­vel­op­ing those re­sources will re­quire over­com­ing­harsh,even­bru­tal,con­di­tions and build­ing costly and ex­ten­sive pipe­lines and trans­porta­tion net­works to de­liver them to con­sumers in Asia, Europe and the UnitedStates.Th­e­seim­porter­slook to Rus­sia in­creas­ingly for the fuel that­keep­s­their­carsrun­ningandthe world econ­omy grow­ing.

Rus­sia al­ready ranks as the world’s largest sup­plier of nat­u­ral gas and sec­ond-largest sup­plier of oil be­cause of the gi­ant oil and gas fields­first­tapped­in­west­ernSiberia near the Ural Moun­tains in the 1960s.

But Rus­sia is one of the few na­tion­sleft­thathas­the­p­o­ten­tial­to­sub­stan­tially in­crease its con­tri­bu­tion to fast-grow­ing world en­ergy needs — whether in the United States or de­vel­op­ing coun­tries such as China, In­dia and Rus­sia it­self, where the use of cars is grow­ing rapidly.

Saudi Ara­bia nar­rowly ex­ceeds Rus­sia’s 9.5 mil­lion bar­rels a day of pe­tro­leum out­put and also is ramp­ing up to meet grow­ing de­mand. But oil an­a­lysts say Rus­sia has the world’s largest un­de­vel­oped re­serves of oil, and no coun­try can ri­val its wealth and breadth of en­ergy re­sources, from oil and gas to coal, nu­clear and hy­dro­elec­tric power.

The un­par­al­leled min­eral re­sources de­rived from an ex­panse of landspan­ning11­time­zone­shasen­abled Rus­sia to emerge as the world’s en­ergy su­per­power.

Rus­sia’s rise as an en­ergy gi­ant be­gan when pro­duc­tion from the west­ern Siberian fields peaked at 12.5 mil­lion bar­rels a day in 1988. Butout­put­fromtheag­ing­field­scol­lapsed with the Soviet Union in the early 1990s, and re­cov­ered only af­ter the in­tro­duc­tion of West­ern in­vest­ment and tech­nol­ogy at the end of the decade.

By2003and2004,Rus­sia’sout­put was grow­ing again at dou­ble-digit rates, and its in­ter­na­tional profile as an en­ergy su­per­power came fully into view.

Cog­nizant­thatthesurgin­goi­land gas sec­tor held the key to Rus­sia’s wealthande­co­nomic­suc­cess,Pres­i­den­tVladimirPu­tinin2003s­tarted to re­assert state con­trol over strate­gi­cally im­por­tant oil busi­nesses that had been pri­va­tized in the 1990s, start­ing­with­thedis­man­tlin­gofRus­sia’s lead­ing oil com­pany, Yukos and the jail­ing of its founder, Mikhail Khor­dokovsky, on tax-eva­sion charges.

That­washisopen­ing­bid­tore-es­tab­lishRus­si­aasaneco­nomicpower and to ex­ploit the coun­try’s min­eral wealth­toachieve­broad­ere­co­nomic and po­lit­i­cal goals. Since then, the state has con­sol­i­dated con­trol over athird­oftheoil­sec­torand­nearlyall of the gas sec­tor through the state mo­nop­oly Gazprom, and Mr. Putin has used the state’s power to press Rus­sia’sin­ter­estsin­do­mes­ti­can­d­in­ter­na­tional po­lit­i­cal and eco­nomic dis­putes. Feel­ing Rus­sia’s power

Rus­sia’s dom­i­nance as an en­ergy provider is felt most keenly in Europe, which gets a quar­ter of its oil and nearly half of the gas it uses to heat homes and pro­vide elec­tric­ity through enor­mous net­works of pipe­lines lead­ing from re­mote oil and gas fields in Rus­sia and Cen­tral Asia.

With Europe hooked on Rus­sian gas, its de­mand for it is ex­pected to grow by 64 per­cent in the next 25 years, spurred by re­quire­ments of the­global-warm­ingtreatythat­force it to rely on such low-car­bon fu­els. The Euro­pean Union was in­stru­men­tal in per­suad­ing Mr. Putin to sign the treaty two years ago in a stroke that served to put the treaty into ef­fect world­wide and to deepen the con­ti­nent’s en­ergy de­pen­dence on Rus­sia.

For­mer satel­lite coun­tries of the Soviet Union such as Ukraine, Be­larus, Lithua­nia and Latvia rely al­most en­tirely on Rus­sia for their oil and gas, giv­ing Rus­sia con­sid­er­able lever­age that it uses fre­quently.

Un­til re­cently they paid deeply sub­si­dized rates — about one-fifth the prices paid by West­ern Europe — un­der ar­range­ments dat­ing back to the Cold War that gave Rus­sia spe­cial trad­ing priv­i­leges with their in­dus­tries.

Ayear­ago,Mr.Putin­stirred­con­ster­na­tion in the West by us­ing Rus­sia’s power for the first time to cut off gas­toUkraine­andMoldovain­abid to force them to pay higher prices. The­p­loy­gen­er­at­ed­bad­pub­lic­i­ty­for Mr. Putin, but it worked. Ukraine, Ge­or­gia, Moldova, Be­larus and other for­mer Soviet states are now pay­ing sub­stan­tially more for their gas, and Rus­sia is reap­ing the profit.

Michael Klare, au­thor of “Blood and Oil,” said the in­ci­dent il­lus­trated howthe­world­is­di­vided­in­toen­ergy “haves” and “have-nots.”

In the 21st cen­tury, “pos­sess­ing a rich ac­cu­mu­la­tion of en­ergy is the equiv­a­lent of a nu­clear arse­nal in the 20th cen­tury,” he said. “Be­ing a ‘have-not’ cre­ates a strate­gic vul­ner­a­bil­ity.”

Rus­sia’s boom­ing en­ergy ex­ports since 2001 not only have raised its sta­tus in the world but also have ig­nited a ma­jor re­vival of Rus­sia’s econ­omy, which fell into a deep re­ces­sion in the decade af­ter the Soviet Union col­lapsed. The boom to­day is help­ing to ease the poverty and so­cial ten­sions that sur­faced in the 1990s while re­new­ing Rus­sia’s con­fi­dence as a world leader.

Rus­sia’s econ­omy has grown at ro­bust rates be­tween 6 per­cent and 7 per­cent. Moscow has be­come the dwelling place of bil­lion­aires and a thriv­ing mid­dle class, the most ex­pen­sive city in the world and a cen­ter of con­spic­u­ous con­sump­tion.

Soar­ing ex­port earn­ings from oil and gas have filled gov­ern­ment cof­fers, lifted flag­ging Rus­sian in­dus­tries and cre­ated a surge in in­come. The av­er­age wage in Rus­sia has dou­bledsince2003,led­by­growthin gov­ern­ment em­ploy­ment and wages, ac­cord­ing to Stan­dard & Poor’s Corp.

Many Rus­sians say things are look­ing up for them and can re­cite a tale about how their life has im­proved.

Eu­ge­nia Chugain­ova, a young Mus­covite who works for the Rus­sian news agency RIA Novosti, said her mother was un­able to af­ford choco­lateswhen­she­was­growingup dur­ingth­e1990s­inRus­sia’sfar­east­ern Kam­chatka Penin­sula. But re­cently, im­proved eco­nomic con­di­tions have en­abled her and her fam­ily not only to en­joy choco­lates but also to take va­ca­tions out of the coun­try. Tide lifts all boats

Rus­sia’s gov­ern­ment also has been a prime ben­e­fi­ciary of the en­ergy boom. It reaps 80 per­cent to 90 per­cento­foil­rev­enueearned­above $30 a bar­rel at a time when Rus­sia’s Urals blend of crude has been sell­ing for about $61 a bar­rel on world mar­kets.

With steep taxes on oil and gas pro­duc­tion and ex­ports ac­count­ing for half of gov­ern­ment rev­enue, of­fi­cial cof­fers are brim­ming. That sur­plus has en­abled Rus­sia to in­crease pen­sions and wage pay­ments, pay off its for­eign debt, and amass a stun­ning $330 bil­lion war chest of cash re­serves and oil sta­bi­liza­tion funds.

Oil- and gov­ern­ment-fi­nanced con­struc­tion and mod­ern­iza­tion pro­ject­sare­sproutin­gup,an­dapre­vi­ously al­most nonex­is­tent ser­vices sec­tor is grow­ing briskly.

Mr. Putin hopes to fur­ther lift the liv­ing stan­dards of or­di­nary Rus­sians by us­ing the coun­try’s oil-gen­er­ated cash to up­date Rus­sia’s lag­ging agri­cul­ture and health sec­tors, im­prove its ed­u­ca­tional sys­tem and fund a pro­gram of low-cost mort­gages for lower-in­come peo­ple to buy homes.

“Rus­sia has come a long way” since its state of vir­tual bank­ruptcy in 1998, when it de­faulted on its in­ter­na­tional debt and shook world mar­kets, said Clifford Gaddy, Rus­sia an­a­lyst at the Brook­ings In­sti­tu­tion. The oil- and gas-fu­eled boom cul­mi­nat­ing in near-record oil and gas prices to­day has cre­ated “one of the most dra­matic re­ver­sals of fate in re­cent eco­nomic and per­haps geopo­lit­i­cal his­tory.”

De­spite Rus­sia’s oc­ca­sional as­ser­tion of it­self as a “petro-bully” in Euro­pean af­fairs, he said, vul­ner­a­bil­i­ties lie hid­den be­neath Rus­sia’s new­found strength, be­cause the na­tion re­mains de­pen­dent on the prices of oil and gas stay­ing high.

In ad­di­tion to the de­pen­dence of the gov­ern­ment, eco­nomic growth and many jobs on the oil and gas rev­enues, Rus­sia’s en­ergy wealth sup­ports the econ­omy in many other, less vis­i­ble ways, Mr. Gaddy said. Rus­sia still pro­vides deep sub­si­dies to its con­sumers, who pay one-sixth as much as Gazprom’s West­ern Euro­pean cus­tomers for gas.

Rus­sian in­dus­tries ben­e­fit from be­low-mar­keten­er­gyprice­sandthe pref­er­ence of state-con­trolled en­er­gy­compa­niestouseRus­sian­prod­ucts such as pipes and rail cars, even though they are not com­pet­i­tive with West­ern-made goods, Mr. Gaddy said.

Those ben­e­fits could evap­o­rate quickly if oil and gas prices dive, as they did in the 1980s and 1990s when gluts emerged on world mar­kets, he said.

Mr. Putin is keenly aware of how tran­sient the coun­try’s gains could be, and that is a prin­ci­pal rea­son, Rus­sian of­fi­cials say, why he has for­ti­fied the coun­try’s cash re­serves and is seek­ing to use the oil riches to bol­ster less fa­vor­ably en­dowed sec­tors of the econ­omy. Toil, trou­ble in Arc­tic

IfRus­sia’srichre­source­shave­be­come the ba­sis of the coun­try’s strength and eco­nomic hopes, tap­ping into them is far from easy, as they lie within some of the most in­ac­ces­si­ble and harsh en­vi­ron­ments on earth.

In the Arc­tic, among some of the most­promis­in­gre­cent­ly­dis­cov­ered oil­field­sneartheed­ge­ofthe­ice-cov­ered Kara and Bar­ents seas, a staff of 500 year-round tech­ni­cians and en­gi­neer­sworks­forSev­er­nayaNeft or “North Oil,” a sub­sidiary of Ros­neft, the state oil com­pany. They brave tem­per­a­tures of 40 de­grees be­low zero or lower to keep the oil flow­ing.



der­ground, and it’s not a good cli­mate,likeSaudiAra­bia,”saidSergei Nesterenko,di­rec­tor-gen­er­alofSev­er­naya,one­ofthree­in­ter­na­tion­aloil con­sor­tium­sop­er­atingintheTi­man Pe­chora re­gion.

Still, he views Rus­sia’s oil riches with pride. “It’s one of the el­e­ments that will en­able Rus­sia to reach the same de­vel­op­ment level as most mod­ern coun­tries to­day.”

Rus­sia’s Arc­tic and Siberian ex­panses are in many ways a fi­nal fron­tier both for Rus­sia and for hu­mans liv­ing in the oil age. The win­ters here are so bru­tal that work­ing in the fields is life-threat­en­ing and comes to a halt when tem­per­a­tures drop be­low 45 de­grees be­low zero.

That deep freeze hap­pened in Rus­sia’s Siberian and Arc­tic oil fields for 20 days last win­ter, bring­ing pro­duc­tion to a stand­still, much as Hur­ri­canes Ka­t­rina and Rita stopped the flow of oil from the Gulf of Mex­ico in 2005.

Work­ing in the ex­treme con­di­tions re­quires so­phis­ti­cated tech­nolo­gies and costly in­vest­ments in plants,pipesand­drillinge­quip­ment that are for­ti­fied against the cold.

But get­ting the liq­uid gold out of the ground is only the first step in a long and ex­pen­sive process of get­ting the fuel to the cities and high­ways where it is con­sumed. Build­ing the pipe­lines, ports, tankers and re­finer­ies needed to sat­isfy the de­mands of con­sum­ing na­tions re­quires at times her­culean ef­forts and tens of bil­lions of dol­lars in in­vest­ment.

The Gulf Stream keeps the Bar­ents Sea ice-free, en­abling Rus­sia to use ports at Mur­mansk and Arkhangelsk for load­ing and trans­port­ing oil and, po­ten­tially, gas in liq­ue­fied form. But the Kara Sea is frozen for two-thirds of the year, meaningany­de­vel­op­ment­therewill have to use re­mote-con­trolled sub­sea pro­duc­tion tech­nol­ogy, which can­pro­duceoil­be­neaththep­ac­k­ice and be fun­neled to mar­ket through as-yet un­built pipe­lines.

The west­ern Siberian Arc­tic, where oil and gas were dis­cov­ered long ago, al­ready has a de­vel­oped in­fra­struc­ture, but it lies nearly 2,000 miles from ma­jor cities in Euro­pean Rus­sia and even farther from Euro­pean and Asian mar­kets. The Arc­tic coast­line be­tween west­ern Siberia and Alaska is even more re­mote and in­ac­ces­si­ble.

In the vast wilder­ness of east­ern Siberia, Rus­sia is plan­ning to build one of the world’s long­est pipe­lines, span­ning2,500miles­fromTaishetin cen­tral Siberia to the Pa­cific shores so that rich reser­voirs of oil can be shipped to mar­kets in Ja­pan, China, South­east Asia and the U.S. West Coast.

The pipe­line, to be built by Rus­sia’s pipe­line mo­nop­oly, Transneft, faces high en­vi­ron­men­tal hur­dles — cross­ing near Lake Baikal, a U.N. World Her­itage Site. Once fin­ished, the cost of trans­port­ing oil in the pipe­line is ex­pected to be high — be­tween $6 and $10 a bar­rel. How much is there?

Un­til pipe­lines are built, the amounto­foi­landgaslyin­gun­derthe largely un­touched wilder­ness and ice of the Arc­tic and east­ern Siberia re­mains only a guess. With­out any means of de­liv­er­ing the oil to mar­ket,com­pa­nieshave­madeon­lylim­ited ge­o­log­i­cal sur­veys and ex­ploratory ef­forts, and no­body can quan­tify how much oil is there. But many in the oil busi­ness be­lieve the re­serves are po­ten­tially im­mense.

TheU.S.En­er­gyIn­for­ma­tionAd­min­is­tra­tion es­ti­mates Rus­sia’s proven oil re­serves at 67 bil­lion bar­rels — seem­ingly mod­est at less than a third the size of Saudi Ara­bia’s. But a U.S. ge­o­log­i­cal sur­vey in 1998 con­cluded that Rus­sia’s vast un­ex­plored re­gions most likely con­tain undis­cov­ered re­serves of oil that are “larger than any other coun­try in the world.”

Bri­tish Pe­tro­leum, which re­cently signed a let­ter of in­tent with Ros­neft to ex­plore for oil and gas in Rus­sia’s Arc­tic, es­ti­mates that 25 per­centofthe­p­lanet’sundis­cov­ered oil and gas are within the Arc­tic Cir­cle.

BP says the Arc­tic may hold 250 bil­lion bar­rels of oil-equiv­a­lent re­serve, and a fur­ther 250 bil­lion on the Ya­mal Penin­sula, in north­west­ern Siberia. If BP is cor­rect, that sup­ply would ri­val the oil re­serves of the en­tire Mid­dle East. In ad­di­tion, a re­cent study by en­ergy ad­vi­sory firm Wood Macken­zie said the Ya­mal has mas­sive re­serves of gas. Rus­si­aal­ready­own­saquar­terofthe world’s known gas re­serves.

One fac­tor hold­ing down es­ti­mates is that Rus­sian busi­nesses tend to be con­ser­va­tive in re­port­ing re­serves for tax rea­sons. Rus­sia heav­ily taxes not only oil pro­duc­tion and ex­ports but also un­tapped re­serves held by com­pa­nies.

One top ex­ec­u­tive con­fided that with no way to trans­port the oil, Rus­sian oil com­pa­nies have lit­tle rea­son to seek drilling li­censes and get an ex­act mea­sure of the oil and gas un­der­ground. Any oil fields dis­cov­ered would only be­come sub­ject to heavy tax­a­tion by the gov­ern­ment.

For that rea­son and oth­ers, en­ergy an­a­lysts say Rus­sia is in many ways still a sleep­ing gi­ant. Some of its great­est po­ten­tial con­tri­bu­tions to world en­ergy sup­plies re­main dor­mant. Sleep­ing en­ergy gi­ant

Be­yond the huge oil and gas re­sources of the Arc­tic and Siberia, Rus­sia has the world’s sec­ond­largest coal re­serves, be­hind the United States. And with am­ple sup­plieso­fu­ra­nium,ithas­be­gu­nanam­bi­tious pro­gram to in­crease con­struc­tion and ex­port of nu­clear-power plants.

Rus­sian of­fi­cials say they have cor­nered about a third of the ex­port mar­ket for nu­clear power world­wide, with Rus­sian re­ac­tors be­ing built in In­dia, China, East­ern Europe, Iran and other coun­tries. At home, the gov­ern­ment is en­cour­ag­ing de­vel­op­ment of ad­vanced nu­clear tech­nol­ogy for power gen­er­a­tion in hopes of re­plac­ing power plants that run on gas. That de­vel­op­ment would en­able Rus­sia to fun­nel more of its gas re­sources into lu­cra­tive ex­port mar­kets.

Rus­sia also has enor­mous hid­den­strength­in­hy­dro­elec­tricpower, one­ofthe­cleanest­source­sofen­ergy. Some of the world’s most pow­er­ful rivers surge through the Siberian plains and are un­tamed. By one es­ti­mate, only 20 per­cent of Rus­sia’s hy­dro re­sources have been ex­ploited. Even in pop­u­lated re­gions, such as St. Petersburg, as much as 50 per­cent of hy­dro re­sources re­main un­used, of­fi­cials say.

Rus­sia has a ready cus­tomer in China, the world’s fastest-grow­ing ma­jor econ­omy, on Rus­sia’s east­ern paunch and des­per­ate for power an­d­ex­ploitingev­ery­po­ten­tial­hy­dro project within its borders. De­vel­op­ment of Siberia’s rivers is be­ing dis­cussed­with­China,bu­tit­would­hap­pen only if China agrees on a price that makes it prof­itable, said Rus­sianDeputyEn­er­gyMin­is­terAn­drei De­men­tyev.

China is also po­ten­tially Rus­sia’s big­gest cus­tomer for oil and gas. The na­tion dreams of cul­ti­vat­ing a steady, se­cure stream of fuel from Siberia to feed its im­mense and growingap­petite­foren­ergy.But­the cut-rateprices­sought­byChi­na­have caused some re­cent ne­go­ti­a­tions to founder. Still, Rus­sia’s gas dis­putes with Europe have prompted the Krem­lin to push harder on de­vel­op­ing the Chi­nese fron­tier.

Rus­sia has promised to con­struct a spur to China off the oil pipe­line it is build­ing to the Pa­cific coast. In March, Mr. Putin vis­ited the coun­try and an­nounced that Rus­sia would build two gas pipe­lines to China. An­a­lysts say that if that com­pact is con­sum­mated, it could di­vert con­sid­er­able gas from Europe to China and cre­ate pos­si­ble short­falls in Rus­sia’s tra­di­tional West­ern mar­kets.

Nex­tweek:Rus­sia’sre­cent­moves to seize con­trol of strate­gic parts of the en­ergy in­dus­try have slowed growth in pro­duc­tion and raised ques­tions about the speed of fu­ture de­vel­op­ment.

Agence France-Presse / Getty Images

Ice cold black gold: Wring­ing oil and gas from above the Arc­tic Cir­cle is hard, dan­ger­ous work for an em­ployee chang­ing pipes on a drill plat­form in Pri­ob­skoye, west­ern Siberia.

Pa­trice Hill / The Wash­ing­ton Times

A staff of 500 tech­ni­cians and en­gi­neers works at Sev­er­naya Neft fa­cil­i­ties above the Arc­tic Cir­cle in the Ti­man Pe­chora oil fields, among the most promis­ing in Rus­sia’s far north.

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