By Ian Wylie
Russia is making a serious play for Arctic resources — and its plans will affect everyone.
At Baltiysky Zavod, the Baltic Shipyard in in Saint Petersburg, the keel has already been laid on the LK-60, the largest and most powerful icebreaker in the world. Equipped with two nuclear reactor units delivering 60 megawatts of power to its propellers, the ship will be able to bulldoze through crusts of ice up to three metres thick.
This icebreaker won’t sail until the end of 2017, but it’s one of three billion-dollar LK-60s on order and even its name — the Arktika — underlines Russia’s intentions in the Arctic. Currently in the region, the US Coast Guard has three icebreakers, while Canada has 13. Russia has 30.
Russia plays a pivotal role in the Arctic’s present, and its oil exploration and shipping route activities over the next 12 months are likely to dictate the scale and pace of economic development across the region.
President Putin’s aggressive ambitions for operating on Russia’s extended Arctic continental shelf seem to gather steam with every denunciation of his policy in Ukraine. Economic sanctions have, so far, had little impact on joint exploration deals that Russia’s oil and gas giants, Rosneft and Gazprom, have signed with ExxonMobil, Shell, Statoil, Eni and BP.
If the Arctic shipping routes become navigable for longer as a result of greater polar ice melt, there will be a more realistic opportunity to consider the Arctic open for greater economic activities. That’s the view of Carolyn Kissane, clinical associate professor at New York University’s Center for Global Affairs: “Russia is already moving forward with increasing shipping through the Northern Sea Route. If Russia continues to be aggressive in opening its territory of the Arctic then this will definitely be a trigger for more engagement from the other Arctic states.”
The Arctic is of huge economic importance to Russia. Along with Alaska’s northern economy, Russia’s northern areas of Sakha, Khanty-Mansi and Yamalo-Nenets account for almost two-thirds of economic activity within the circumpolar North. Russia generates 20% of its GDP and 22% of its exports from its Arctic region.
But the last 12 months have been particularly significant. In March, Russia was given the go-ahead by the UN Commission on the Limits of the Continental Shelf to press ahead with claims to an area the size of Switzerland located in the Far Eastern Sea of Okhotsk. Known as the ‘Peanut Hole’, it is believed to be rich in oil and gas. The following month, in the Pechora Sea south of Novaya Zemlya, a 70,000-tonne tanker of Arctic oil was shipped from Gazprom’s Prirazlomnoye oil field — the first commercial offshore oil development in the Arctic.
“It’s an unprecedented and major move by Russia, which will continue to push even further north to tap its continental shelf,” says Joël Plouffe, researcher at the Centre for Research on the International Relations of Canada and Québec. “And, if granted by UNCLOS, Russia may one day be operating on its extended continental shelf in the Arctic Ocean. We are years, decades away from that, but this is putting pressure on others — including US private interests and on Shell, which is trying to produce oil in the Alaskan Arctic.”
In August, in spite of Ukrainian conflic related economic sanctions that prohibit US companies from participating in joint ventures with Russian energy companies, Rosneft and its American oil partner ExxonMobil began drilling for oil at the Universitetskaya-1 well in the Kara Sea. Rosneft chairman Igor Sechin has declared that the oil reserves — discovered in September — could be as large as those exploited in Saudi Arabia.
“It is politically significant as it shows how powerful economic relations shape international relations,” says Plouffe, of the $600bn project, “and also how it is difficult, in today’s globalised world, to isolate Russia.”
Russia also has plans to develop critical infrastructure along the Northern Sea Route, where shipping is predicted to increase by ten- and thirty-fold by 2020. A $26m plan is in place to establish 10 search-and-rescue centres along Russia’s Arctic coast by 2015. At the same time, Putin has talked of creating a ‘united system’ of naval bases, next-generation submarines and icebreakers to defend Russia’s interests in the region. Non-maritime building blocks of the Arctic transport system — pipelines, aviation routes, railways and roads — are also on Russia’s agenda.
However, these all represent high risk investments. The Economist Intelligence Unit does not expect significant volumes of offshore Arctic oil and gas to flow until the late 2020s. As such, there is much at stake for Russia in the Arctic. Of its 113 offshore oil and gas blocks, 67 are in the Arctic. Russia needs Arctic oil and gas to sustain its position as one of the world’s biggest producers, particularly as production peaks at many of its older fields.
“The Arctic is a region where Russia can flex its muscles.”
But Arctic reserves will be much costlier to tap, and Russia will also be under scrutiny to show that it can extract oil and gas responsibly.
“It’s probably a good idea to be cautious and careful with the motives and activities of Russia,” says Kissane. “The possibility of an oil spill is real, and oversight within Russian oil and gas companies is considered inconsistent by many. The impact of a spill could be disastrous for the Arctic ecosystem and there are no guarantees that those responsible would in reality be able to manage the cleanup.”
Leiv Lunde, director of the Fridtjof Nansen Institute in Oslo, disagrees. “There is no reason to panic,” he says. “If peace and stability are retained, Russian companies will continue to need substantive input from technologically-savvy western oil and oil service companies. These companies will have to relate to both a critical world opinion and to investors and stock markets with tough performance expectations.”
Kissane adds that at present, Gazprom and Rosneft are currently the only companies allowed to receive new licences to explore Russia’s continental shelf. “From the perspective of drilling safety and rigorous environmental regulations, the two Russian majors are better prepared [than smaller national rivals].They also have more at stake, which makes them more serious players.”
The exclusivity of these licences puts the Russian authorities in an very strong position. Until more licenses are granted elsewhere, the Gazprom and Rosneft will have significant control of the resources in the Arctic region — though for the time being, both firms are somewhat reliant upon joint ventures. Like most national oil and gas companies, Rosneft and Gazprom lack the experience and know-how to operate in the extreme conditions of the Arctic. International majors such as ExxonMobil and Shell bring not only the equipment to extract oil and gas, but also expertise in building and managing giant projects.
It’s little surprise, then, that the US and EU have imposed sanctions that include restrictions on exports of equipment for deep-water drilling and production in the Arctic. Chairman Igor Sechin is named on a US Treasury blacklist and Rosneft is barred from seeking longer-term finance from American banks.
Lunde believes that further escalation of the conflict between Russia and the West could easily develop into a ‘negative tipping point’ for the Arctic.
“The activity level in the Arctic will be reduced with gradually tougher sanctions,” he says. “Still, don’t underestimate the robustness and tenacity of current cooperative relations between Russian and western petroleum industry stakeholders.”
“We want them in the fold and thinking about responsible economic development … Not even the Russians want an environmental disaster.”
And unless sanctions are effective in impeding the technology and expertise transfer needed, they could actually act as a spur to greater development, argues Kissane. More activity in the Arctic from Russia is likely, perhaps in part as an aggressive reaction to these western sanctions.
“The Arctic is a region where Russia can flex its muscles,” she says. “Some surprise activities are not out of the realm of possibility.”
For Lawson Brigham, distinguished professor of geography and Arctic Policy at the University of Alaska Fairbanks, the Ukrainian sanctions ultimately serve as a reminder of the Arctic’s integration into the global and political economy.
“Russia can’t be thrown out of the Arctic Council, according to the charter,” he explains. “In any case, we want them in the fold and thinking about responsible economic development and environmental protection. Not even the Russians want an environmental disaster.”
Lawson believes that the economic development of the Arctic is now intrinsically linked to President Putin’s ‘adventurism’ in the Ukraine. For his part, the president now views control of the polar area as a matter of serious strategic concern. With exploration in the region critical to Russia’s future as a leading energy supplier, Putin is restoring the once formidable Soviet military presence in the Arctic, building new bases and reinforcing the Northern Fleet with Russia’s newest nuclear attack submarines.
While sanctions may slow down Russia’s exploitation of oil and gas reserves, they could also spur Putin into taking his dispute with the west into the Arctic, sacrificing the carefully-constructed international cooperation and stability of recent years in a race to secure sovereignty and resources. And the conflict in Ukraine suggests Russia has both the ability and the will to use military means to achieve its goals.
This is an extract from Weapons of Reason’s first issue: The Arctic. The third issue: The New Old, is available to order now.
Banner illustration by Adrian Johnson.