RUSSIAN ARCTIC OIL: A NEW ECONOMIC & STRATEGIC PARADIGM?

By: Jean-Michel Valantin

Between April and July 2016, the current Russian energy conquest of the Arctic led to the shipment of more than 230.000 barrels of oil from the Russian Arctic.

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They came from two recent on-shore fields, and from the Gazprom Prirazlomonoye off-shore oil rig (Irina Slav, “Russia Ramps Up Arctic Oil Production”, OilPrice.Com, July 21, 2016). The latter is the first of the glacial Barents Sea.

The 2016 flow from the Russian Arctic almost doubled compared with 2015.

In the meantime, the Russian ministry of Defence is driving a massive process of militarisation of the Arctic, through the creation of the Joint Strategic Command North (Jonathan Wade, “Russia’s Joint Strategic Command North (JCSN)“, The Sentinel, November 26, 2015).

The military manoeuvres in the Novaya Zemla and Franz Joseph Land Archipelago, as well as in other Arctic and Far East regions, such as Kamchatka and the Sakhalin Islands, and Southern Siberia are recespecial_forces_military_of_russia_02nt witness to this militarisation. Between the 12 and the 17 March 2015, they gathered more than 38.000 service men, including 3.000 Special Forces, more than 50 surface ships and submarines, and 110 aircraft, during five days,  (Vladimir Isachenkov, “Russia’s Arctic Military Drills Are Truly Massive”, Russia Insider, March 18, 2015).

We shall see that this massive financial, industrial, technical, military and political effort behind the development of the Russian Arctic is in fact the driver of a new way to transform present Russian economic and strategic uncertainties into new opportunities for economic development and national security (Charles Emmerson, The Future History of the Arctic, 2010). In order to accomplish this, the Russian authorities are using the deep consequences of climate change as a support for their energy strategy.

This is typical of the new convergence between current economics, geopolitics and the emergent “Anthropocene” geological era. (Jean-Michel Valantin, “The Anthropocene Era and economic (in)security”, The Red (Team) Analysis Society, 320px-nasa-28yrs-arctic-warming19 September 2016). The international geophysics community thus qualified this new era because humankind has become the main geological and biological force on the planet, and this immense force is driving a planetary change that affects the atmosphere, the lithosphere, the hydrosphere, the cryosphere and the biosphere (J R Mac Neill, Something New Under the Sun, 2000).

The global driver behind this change is the permanent growth of the human-driven technosphere, which encompasses and alters the whole planet (Mark Williams, Jan Zalasiewicz, PK Haff, Christian Schwargl, Anhtony Barnofsky, Erle Ellis, “Extreme Make Over : Human kind’s unprecedented transformation of the Earth”, University of Leicester Press, 29 June 2015”.

Then, we shall focus upon the way the Russian Arctic’s endeavour also allows Russia to become a first class actor of the new energy and maritime Northern market, opened by the combination of climate change and resource competition. This mammoth economic, industrial and military strategy is quickly becoming a giant magnet for technological innovation and Asian investments.

The Russian Arctic answer to economic and strategic uncertainties

Given the current state of economic and geopolitical affairs in Russia, the current conquest of the Arctic could easily appear as a political, industrial and financial dead-end. In effect, since 2014, the U.S. and the European Union have imposed upon Russia economic sanctions, because of the incorporation of Crimea in the Russian federation, and because of the tensions in Ukraine (see our series, Hélène Lavoix, Crisis and War in Ukraine, The Red (Team) Analysis Society).

They also forbid technically advanced Western oil companies to develop industrial partnerships with Russian companies (Colin Chilcoat, “Is Russia the King of the Arctic by Default?”, OilPrice.com, Oct 22, 2015 and Andy Tully, “Western Sanctions Halt Exxon’s Drilling in Russia’ Arctic”, Russia Insider, 19 September, 2014) . These sanctions are impacting the Russian economic growth.

In the same time, oil prices have plummeted, dramatically diminishing the vital Russian oil and gas revenues (Jean-Michel Valantin, “Oil Flood (2)- Oil and Politics in a (Real) Multipolar World”, The Red (Team) Analysis Society, January 12, 2015).

Furthermore, since September 2015, the Russian military is involved in Syria, and has to sustain politically and logistically this endeavour.

Last, but not least, the Arctic remains one of the most extreme environments on the planet, even if it is quickly warming and is physically disrupted, which is one of the strongest signals of the emergence of the Anthropocene (Waters, Zalasiewicz et al., “The Anthropocene is functionally and stratigraphically distinct from the Holocene”, Science, 08 January 2016).

In effect, the Arctic and subarctic region is going through a major atmospheric warming of more late_spring_ocean_ice_8429843175than 4° in less than a century (Joe Romm, “Arctic Death Spiral Update: What Happens in the Arctic Affects Every Where Else”, Think Progress, May 3, 2016). As a result, it becomes increasingly more attractive for industrial investment, especially because the Arctic could contain more than 13% of the world’s undiscovered oil reserves and 30% of the undiscovered gas reserves, as well as other important mineral deposits, without forgetting fishing potential, and the opening of new trade routes.

Thus, Russia, while facing economic difficulties would try to find economic salvation in an endeavour that is, however pregnant with new possibilities, complex and costly, which might question the way forward chosen, as well as the likelihood of success.

However, after delays in Arctic projects were announced in 2014, interpreted as hesitation (Colin Chilcoat, “Is the Arctic Dream Dead?” Russian Insider, Dec 02, 2014), Russian companies, chief among them the national companies Lukoil, Rosneft and Gazprom and their client companies, restarted their Arctic efforts and, as mentioned above, began on-shore and off-shore oil and gas exploitation. In parallel, the Russian military has seen its budget rising by more than 20% (SIPRI Yearbook, Armaments, Disarmement and International Security, 2016). The Joint Strategic Command North and a military arctic fleet were created, while giant sea-land manoeuvres took place in Northern Siberia (Wade, ibid).

Dominating the future Arctic economic and geopolitical opportunities

This impressive Russian effort is even more important to understand that Russia is a global energy giant, and works at keeping this status. Currently, Russia possesses vast reserves of oil and gas, with more than 80 billions barrels of proven reserves and 44,6 trillion cubic metres of natural gas reserves, superior to those of Iran (US Energy Information Agency, “Russia”, July 28, 2015).

Yet, according to the International Energy Agency, the Russian oil production is nearing its peak and could know a phase of decline, from a current daily production of 10,4 million barrels to 9,5 millions, as soon as 2020 (Selina Williams and James Marson, “Russian Oil: Output Grows as Prospects Shrink”, The Wall Street Journal, January 24, 2016). This will be followed by a continuous decrease.

Thus, the fact that the whole Arctic region could have reserves of almost 90 billion barrels of crude and a mammoth 1669 trillion cubic feet of natural gas, when Russia owns an important part of the region (Emmerson, ibid), means that the development of the Arctic could add new and important reserves to the existing dwindling ones.

So, the warming Arctic becomes a mammoth opportunity for Russia.

However, the related industrial and military development of this immense, extreme and changing region needs to go with a profound transformation of the technical approach if it is to succeed  (Emmerson, ibid).

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Accessing and exploiting the oil and gas reserves is only one part of the Russian development strategy of the region. Opening the Northern trade route is also part and parcel of the Russian strategy.  Thus, in the same time, the civil Arctic fleet of icebreakers is acquiring a new diesel icebreaker and three new giant nuclear icebreakers of the new “Project 22220 series” generation. One of them is the enormous “Arktika”, capable to break 3 metres thick ice. The three vessels are added to the Rosatomflot, the maritime arm of the giant nuclear company Rosatom (RT, “Russia Floats Out Arktika Icebreaker, set to be world’s largest”, 16 June, 2016).

Those giant ships have six months autonomy, and are meant to open the passage to the Russian and Chinese cargo convoys along the Northern route all over the year. This maritime road follows the Siberian coast to and from the Bering Strait to the Russian and European northern ports from Norway to Rotterdam (Jean-Michel Valantin, Arctic fusion: Russia and China convergent strategies, The Red (Team) Analysis Society, June 23, 2014).

It must be kept in mind that the Northern route is becoming less difficult to navigate, because of the effects of global warming on the extent, mass and periodicity of ice. These climate change consequences are going to deepen over the years to come (Joe Romm, ibid).

In other terms, the Russian political and economic authorities are grounding their Arctic strategy in a deep understanding of the short and long term consequences of climate change. This may allow Russia to remain an energy global giant beyond the next twenty years, despite the current and coming energy, geopolitical and planetary changes.

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In other terms, the industrial and military forms of development are two dimensions of the “grand strategy” of Russia that is aimed to expand Russian influence, while securing the Russian Arctic area. In the same dynamic, the military is also an industrial and territorial development actor, with the necessary capabilities to reach difficult areas, such as the Siberian archipelago and to establish a first presence, in order to create a pioneer front, necessary for the long-term civilian development.

The Anthropocene, the Arctic and the new opportunities’ frontier

The American and European oil companies are forbidden, under the current sanctions regime, to develop partnerships with Russian companies. Apparently, this could be a major problem for the Arctic projects of Gazprom, Rosneft, Lukoil and the whole oil and gas Russian industry, given the technological discrepancy accumulated during the Soviet era, when the western companies progressed in their drilling, exploitation, and distribution system (Emmerson, ibid, and Marshall Goldman, Oilopoly, Putin, power and the rise of the new Russia, 2010).

However, the Russian reaction of the companies and of the government is to attract a greater number of Russian engineers, and to invest in numerous and massive programs of research and development, despite the financial difficulties triggered by the economic sanctions and the low oil prices (Irina Slav, “Why Arctic Oil is Crucial for Russia’Future”, OilPrice.com, September 2, 2016 and Hélène Lavoix “An Isolated Russia? Think Again” The Red (Team) Analysis Society, September 15, 2014 ).

For example, Rosatom, the Russian nuclear national company is exploring radically new avenues; it is building the first floating nuclear reactor, which will be dragged and connected to different kinds of utilities, such as off-shore oil rigs, or to new port cities.

This first floating reactor, the Akademic Lomonossov, should have a 70 MW capability. It is supposed to be the first of a series of mobile power plants, which could be used by Russian organisations, as well as leased to the operations of numerous other countries, among them China and Indonesia. The Akademic Lomonossov should be launched in 2018 (Nick Cunningham, “Russia to Power Arctic Drilling with Floating Nuclear reactors”, OilPrice.com, April 27, 2015).

In the same time, Russia is multiplying deals with Asian countries interested by the opening of the Arctic energy market. For example, in April 2015, PetroChina and Gazprom signed a deal for the exploration of the Arctic. One year later, in April 2016, two Chinese national banks lent 12 billions dollars on 15 years, in order to support the development of the Yamal peninsula liquefied natural gas plant, followed by an equal investment from Russian shareholders.

The deal took place once the difficulties created by the combination of sanctions and low oil prices were solved. The Yamal plant is pivotal to allow Russia becoming a major actor on the LNG market, because it is expected to produce enough quantities for a long time to conquer a significative share of the global LNG market (Jack Farchy, “Chinese Lend $12 Bn for Gas Plant in Russian Arctic”, Financial Times, April 29, 2016).

The military side of the Russian development of the Arctic goes with the reopening of numerous harbours, created during the Cold War then decommissioned, with the building of military barracks, the opening of land an sea roads, and the creation of a coast guards fleet in addition to the new Arctic fleet. This fleet is 40 surface ships and 40 submarine strong. Even if more than half of these ships are not yet currently usable, it remains a major Arctic capability (Jeremy Bender, “Russia’s Arctic Pivot is a Massive Military Undertaking“, Business Insider, March 12, 2015).

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Meanwhile, 13 deep airfields and 16 deepwater ports and 10 air defence radar stations are being built, or their building is planned for. In fact, the military is playing quite an active role as territorial developer, while imprinting a Russian geopolitical identity to the whole region. The Murmansk port-city will host more than 3000 ground troops, 39 surface ships and 35 submarines (“Russia’s Plan for Arctic Supremacy”, Stratfor, Jan 16, 2015).

These industrial, financial and military developments reveal that the Russian Arctic is currently becoming the new energy frontier, on a continental scale. Indeed, the Russian Arctic project creates positive feedback loops between climate change, industrial development, and innovation, as well as new alliances between the nuclear sector and the oil and gas ones, on the one hand, between national and international investments, on the other.

So, it appears that the current development of the Arctic could certainly become a powerful attractor for innovation and opportunities on a changing planet in the (short) years to come. Russia is transforming the massive challenge emerging from the combination of climate change and resource depletion into a planetary opportunity to prepare itself to be a major energetic and industrial actor during the years and decades to come.

For all industries belonging to the oil and gas production chain, as well as their many sub-contractors, the Russian Arctic development could become a massive market and engine for growth, innovation – and profits. To do so, they need, however, to be able to foresee in details how these developments may evolve not only in Russia, but also in the context of the current extremely tense Western and Russian relationships. Mastering political and geopolitical uncertainties, and as a result, taking, in a timely way, the right decisions, is key to the capability to enter then grow in this new market.

It now remains to be seen how this Russian grand strategy is going to attract the worldwide Chinese “New Silk Road” strategy, while climate change is becoming more and more powerful.

To be (soon) continued

About the author: Jean-Michel Valantin (PhD Paris) is the Director of Environment and Security Analysis at The Red (Team) Analysis Society. He is specialised in strategic studies and defence sociology with a focus on environmental geostrategy

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