A New Arctic Era
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Oil&gas production in the northern areas of the old continent is considered a long-term investment, its viability and profitability vary greatly depending on the costs of retrieving the estimated resources and future expectations of oil and gas prices

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Adecade ago, during the summer of 2007, the Arctic region reappeared as a center of world politics. It famously hit global headlines in August 2007 with a blurry picture of a Russian titanium flag, planted more than 4,000 meters beneath the North Pole at the bottom of the Arctic Ocean. Earlier that summer, Greenland—the world’s largest island-became the "mecca of climate tourism" when the President of the European Commission, José Manuel Barroso, Italian Prime Minister Romano Prodi and German Chancellor Angela Merkel experienced global warming and the melting of Greenland’s ice sheet first hand. And in September 2007, images of an ice-free Arctic Ocean ruled the airwaves as the extent of the Ocean’s sea ice reached a record low. It was a period when global climate change captured public interest. The region’s (sea) ice was disappearing; and with the melting of the north polar ice cap the "solid state" of the Arctic was called into question. Eventually, the region became a matter of international discussion. Ironically, the very melting of the Arctic ice yielded commodities that have essentially contributed to the ice’s decline in the first place: fossil fuels. In 2008, the U.S. Geological Survey published an evaluation of the oil and gas resource potential north of the Arctic Circle. It indicated that the region may contain 22 percent of the world’s undiscovered conventional oil and natural gas resources-numbers that created public hype with forecasts of a new "Arctic Gold Rush." It was further estimated that the Eurasian continent holds about 63 percent of the total resources (mainly gas-prone) while the North American continent holds about 35 percent (rather oil-prone).

Oil&gas reserves in the Barents, Pechora and Kara Seas

The Arctic, and especially its European part, was quickly branded as the new energy Eldorado, with the discovery  of oil and gas reserves in the Barents, Pechora and Kara Seas fuelling Norwegian and Russian optimism about relocating their future energy production further north. For example, discovered in 1981, the Norwegian Snøhvit-in the Barents Sea-is Europe’s first and the world’s northernmost gas field with a connected liquefied natural gas (LNG) facility. Coming on stream in 2007, the gas field had original reserves of 265 million standard cubic meters oil equivalent, with its LNG mainly being delivered to Europe and Asia. On the Russian side of the Barents Sea, the Shtokmanovskoye (Shtokman) gas field, which was discovered in 1988, is one of the world’s largest natural gas fields, with proven reserves of 3.9 trillion cubic metres of gas. Yet the field’s development is currently on hold due to its high development costs and related questions of profitability. In contrast, the Prirazlomnoye oil field, located in the Pechora Sea and discovered in 1989, is the first offshore oil development in the Arctic. It contains over 72 million tons of oil reserves with the first consignments being dispatched in April 2014. Its oil platform now produces 10,000 tons of oil per day. Further east, the Yamal peninsula holds about 26.5 trillion cubic metres (tcm) of gas, accounting for 85 percent of Russian natural gas production, all concentrated in the broader area of the Yamal Nenets Autonomous District. Arctic oil and gas production is typically considered a long-term investment. Its viability and profitability essentially depend on two interrelated pillars: 1) the costs of retrieving the estimated resources and 2) future expectations on oil and gas prices that can be obtained on a global market that is constantly in flux. Accordingly, the European Arctic has experienced many ups and downs, high hopes and tough reality checks, over the last decade. Nevertheless, multinational oil and gas companies remain interested in the exploration and exploitation of Northern/Arctic resources. In the following sections, we explore the main acquisitions that concerned the European North in recent years. We also briefly observe the state-of-the art in the Russian Arctic and make some considerations on the impact of Western sanctions.

The rise in Northern energy

Between 2012 and 2016, upstream mergers and acquisitions in Europe have oscillated from USD 7 billion in 2014 to a peak of over USD 85 billion in 2016. Among the key commercial operations in the European Arctic in recent years, Wintershall’s growing involvement in the Norwegian Arctic and its partnership with Statoil stands out. In January 2013, Wintershall finalized its acquisition of shares from Statoil in the fields of Brage, Vega and Gjoa (Brage: 32.7 percent, Vega: 30 percent and Gjoa: 15 percent), in the Norwegian North Sea. Wintershall thus raised its production in Norway from approximately 3,000 barrels of oil equivalent (boe) to almost 40,000 boe per day. With Brage, Wintershall took over the operation of a major production platform on the Norwegian continental shelf for the first time. In return, Statoil received a 15 percent share in the development project Edvard Grieg (located west of Stavanger in the North Sea) from Wintershall and a financial compensation of USD 1.35 billion. Statoil and Wintershall deepened their partnership and agreed on a further transaction in 2014 worth USD 1.25 billion. Wintershall acquired additional shares in the two producing fields Gjøa and Vega from Statoil. Its total stake rose to 55.6 percent in Vega and 20 percent in Gjøa. Thanks to these acquisitions, Wintershall has expanded its output in Norway significantly and now produces around 60,000 boe per day. In the same deal, Wintershall took over the operatorship of Vega in March 2015. Wintershall also has a 24 percent stake in the development project Aasta Hansteen, which is led by Statoil (51 percent) and also includes OMV (15 percent) and ConocoPhillips Skandinavia (10 percent). Aasta Hansteen is located in the North Sea at approximately 300 km off the Norwegian coast, and has recoverable reserves estimated at 47 billion standard cubic metres. Drilling at Aasta Hansteen is planned to start towards the end of 2017 or the beginning of 2018. Gas will be channeled to Nyhamna in Møre and Romsdal county in Norway through the 480-km Polarled pipeline, a joint project of Statoil (37 percent), Wintershall (13.2 percent), Petoro (11.9 percent), OMV (9 percent), Shell (9 percent), TOTAL (5.1 percent), RWE Dea (4.7 percent), ConocoPhillips (4.4 percent), CapeOmega (2.8 percent) and Edison (2.3 percent). As part of the 2014 transactions, Wintershall acquired 19 percent of the Asterix discovery, where Statoil retained 51 percent ownership and operatorship. Moreover, Wintershall owns a 50 percent stake and is operator of the Maria field, located in the southern Norwegian Sea; other shareholders are Petoro (30 percent) and Centrica (20 percent). The Maria field is being developed for production in 2018 and has an estimated 180 million boe. In 2013, Statoil entered into a partnership with Austrian OMV, with the aim of freeing up cash for large investments in new discoveries. OMV acquired 19 percent of Gullfaks and 24 percent of Gudrun, two oil and gas fields in Norwegian waters. It also bought 30 percent of Rosebank and 6 percent of Schiehallion, two fields west of the Shetland Islands, as well as options for 11 exploration licences in the Faroe Islands. Statoil reduced its ownership share in Gullfaks from 70 percent to 51 percent, and from 75 percent to 51 percent in Gudrun, but retained its operatorship on both fields. For these acquisitions, OMV paid Statoil USD 2.65 billion, making it the largest deal in the Austrian oil company’s history. The deal also increased OMV’s reserve base by nearly a fifth and boosted its production by about 13 percent.

The Dragon's Arctic interest

In 2012 and 2013, two Chinese companies made their first acquisitions in the United Kingdom’s offshore fields. In July 2012, Sinopec acquired a 49 percent share in the Talisman Energy’s North Sea assets through its subsidiary Addax Petroleum UK. The joint venture deal was valued at USD 1.5 billion. The deal transferred to Sinopec nearly 16,000 barrels of oil per day and gave it experience operating offshore. Moreover, in 2013 the Chinese CNOOC acquired the Canadian Nexen for USD15.1 billion, China’s largest takeover of an oil and gas company. CNOOC thus gained control of the Buzzard oil field, the United Kingdom’s largest oilfield. Through Nexen, the company also acquired 36.5 percent of the Golden Eagle project, 70 km northeast of Aberdeen, Scotland. According to CNOOC, the deal increased the company’s production and reserve base by 20 percent and 30 percent, respectively. Also in 2013, Abu Dhabi national energy company Taqa purchased stakes in three fields in UK North Sea waters, corresponding to roughly 21,000 boe per day of production, for USD 1.058 billion.. Also worthy of notice in terms of growing Asian investments in the European upstream, in March 2013, Total sold to the Japanese Mitsui a 25 percent interest in the Tempa Rossa field, located in the Basilicata region of southern Italy, while retaining a 50 percent share and operatorship (Shell holds the remaining 25 percent). Commercial operations also took place in the Dutch North Sea. In 2014, Chevron sold its interests in 11 offshore blocks on the Dutch Continental Shelf to Oman-based Petrogas. In 2013, the blocks had an average net daily production of approximately 2,000 barrels of crude oil and 41 million cubic feet of natural gas.

The major BG Group-Royal Dutch Shell gamble

The most significant commercial operation of 2015 in the region was RWE’s sale of its oil and gas production unit RWE Dea to LetterOne Group, the investment business set up by the Russian Alfa Group conglomerate, for approximately USD 7 billion. The deal led to the creation of DEA. Subsequently, DEA bought from E.ON equity interests in 43 licences including the shares of the three producing fields Skarv (28.1 percent), Njord (30 percent) and Hyme (17.5 percent) in the Norwegian North Sea, thus bringing DEA’s production there to about 75,000 boe per day. In 2016, Royal Dutch Shell’s acquisition of the BG Group, a Britain-based oil and gas producer, was the largest deal, worth approximately USD 50 billion. The acquisition allowed Shell to become the world leader among listed companies in liquefied natural gas, a field in which BG was a key player. It also enabled Shell to acquire a leading position in Brazilian offshore waters, thereby complementing the company’s experience in deepwater oil and gas field in the Gulf of Mexico and Nigeria. The deal was also the largest energy merger since the substantial drop in the oil price beginning in late 2014. The drop in the oil price - and Western sanctions - have not halted investment and production in the Russian Arctic either. Although several oil multinationals, including Exxon Mobil, were forced to halt activities in the region (such as exploration in the Kara Sea), crude oil production in the Russian Arctic is expected to grow by 10 percent in 2017 compared to the previous year. The increase is partly due to the growing capacity at the ice-resistant Prirazlomnaya offshore oil platform, the only one of its kind in the world. In 2016, Arctic oil production accounted for 16.8 percent of all Russian oil production, with an expected slight rise in 2017. On the other hand, Arctic gas activity from the Yamal peninsula accounts-as already indicated-accounted for more than 85 percent of total Russian gas production. Investments in the Yamal LNG facility (launched in 2013, with ownership as follows: 50.1 percent Novatek, 20 percent each for Total and CNPC and 9.9 percent for China's Silk Road Fund) and the export of gas-employing ice-capable LNG carriers via the Northern Sea Route will strengthen Russia’s position in the global gas markets.

 

*Andreas Raspotnik is a Senior Fellow and Member of the Leadership Group at The Arctic Institute, Center for Circumpolar Security Studies in Washington, DC.


Marco Siddi is Senior Research Fellow at the Finnish Institute of International Affairs in Helsinki, where he focuses on EU-Russia relations and energy politics.