The Russian economy, despite loud statements about its impending diversification, still depends on oil prices and hydrocarbon trading. However, the reserves of existing deposits are not infinite, and before they are exhausted, they need to find an alternative. The most promising direction for this is the Arctic, but this severe land will not give up its riches just like that.
The area of the Russian sector of the Arctic shelf, within the boundaries established by international agreements, currently stands at 4.1 million square kilometers. This is a huge space, approximately comparable to the size of the European Union , and half of it is made up of potentially oil and gas bearing territories.
According to the Ministry of Natural Resources of Russia, the resources of the Russian Arctic currently amount to approximately 511 billion tons of oil equivalent. This is about 65% of the world’s potential hydrocarbon resources, or about 2/3 of all reserves currently being developed in the world.
“The volume of projected reserves in the Arctic is about 65% of the projected reserves of the whole world. And the world is drilled by exploration wells by 60-70%, in the USA – by 90%. That is, there are practically no chances to discover new deposits. Cheap oil in the world is no more. This is either the deep-water shelf or the Arctic. Without the Arctic, the future development of the world energy industry is impossible, ” Leonid Krutakov, an associate professor at the Financial University under the Russian government , said on the Russia 24 TV channel .
However, to get to these natural resources will not be easy. Although the Arctic is the largest prospective oil and gas producing region in the world, today it is an almost clean field, where there is neither a transport nor a mining infrastructure. And all this in an extremely, extremely harsh climate.
The development of hydrocarbon production in the Arctic will require not only the construction of drilling rigs and field facilities, but also sea terminals, tank farms, airfields, roads, construction of icebreakers, oil tankers and ice-class gas carriers. According to Rustam Tankayev, a leading expert of the Union of Oil and Gas Industrialists of Russia, an entire country is to be built.
“Because there is nothing there. The Northern Sea Route, as we know, was abandoned, now it comes to life. Now a lot is being done to make it work. But in order to make it work, first, we need strong points, ports that will allow the bunkering of ships, allow current repairs and so on. And, of course, we need the court itself. They need to be built, ”the expert stressed.
The development of this project, known as Vostok Oil, will be undertaken by Rosneft . However, the implementation of such a large-scale project from scratch requires the mobilization of a significant amount of resources, and not even one of the largest companies will be able to cope with this task alone – it is expected that investments in the project will be from 5 to 8.5 trillion rubles.
Spend to earn
To achieve an acceptable level of return on invested capital is possible only in the framework of integrated projects with a long life cycle. Such projects require the creation of certain investment conditions, experts believe.
“The idea is to create investment incentives for the development of the most important region of the Arctic. As you know, now the next step is the development of new oil and gas provinces in Russia, without which it is impossible to maintain production in the long term. And the Arctic is on the top of this list, ”said Valery Andrianov, senior analyst at VMT-Consult, on the air of Business FM.
According to him, if the state does not take measures to stimulate investment in this region, then it will not be possible to establish production there. This will lead to direct losses of the state budget, and in the long run – to the loss of oil exports and the corresponding damage to the Russian economy.
In addition, work in the Arctic is comparable in complexity to space exploration, so such a project could become a driving force for the development of the technological component of the Russian economy. “The Arctic is not only the East Oil project, it is not only a whole country, it is an opportunity for our technological breakthrough,” says Leonid Krutakov.
The development of the Northern Sea Route, which is intended to become a key transport artery between different parts of Eurasia, was designated as one of the national goals in the “May Decrees” of President Vladimir Putin . For the successful implementation of this project, the cargo traffic along the Northern Sea Route should be increased to 80 million tons by 2024, but without the oil and gas resources of the Arctic region it is impossible to ensure the loading of this route.
The project for the development of the Arctic fields “Vostok Oil”, which was proposed by the company “Rosneft”, provides for the construction of sea terminals with transshipment of up to 100 million tons per year. It will be built 5,500 km of pipelines, airports, power lines, and so on.
Another national goal set by Vladimir Putin is the growth of the Russian economy ahead of the world. However, so far it has not been possible to achieve tangible success in solving this task – on the contrary, fewer entrepreneurs believe in speedy economic growth.
If in February, 25% of businessmen were waiting for the revival of business activity next year, in June there were only 15% of such optimists, IHS Markit analysts refer to the survey . This is the worst result since February 2016, not reaching even the world average of 18%. The share of producers of goods who believe in economic growth turned out to be quite minimal (the same 15%) in the entire history of observations since the beginning of 2008.
In June, the cumulative PMI index (reflecting the change in business activity in the manufacturing and service sectors) dropped to a three-year low – to 49.2 points from 51.5 in May. This is below the critical value of 50 points, separating the growth of activity from the recession.
According to IHS Markit economist Sian Jones, under current conditions, a business is forced to focus on risk, not on opportunities, this leads to a narrowing of the planning horizon and abandoning the game for a long time. “As a result, we are seeing record dividend payments by Russian companies against the backdrop of a stagnating economy,” he stated.
To stimulate economic growth, large infrastructure projects are needed, such as the development of the Arctic – it will affect not only the oil market, but also provide a multiplicative effect for the entire economy, which according to preliminary estimates could exceed 30 trillion rubles until 2038.
“The creation of infrastructure will give a multiplier effect to the economy, which KPMG experts estimate at about 2% of GDP by 2050, 30 trillion rubles to 2038. That is, this is a huge multiplicative effect in the economy, this is Russian equipment, drilling rigs, power lines, airports, roads, and so on, ”said Sergei Suverov , a senior analyst at BCS Premier, on Russia 24 .
Profit from empty space
The implementation of the Vostok Oil project will require both attracting investors and state benefits, primarily tax ones – their size is estimated at up to 2.6 trillion rubles. Moreover, according to experts, tax incentives will be 2-3 times less than the funds that will come from the business. The project will allow the development of new fields to be involved, says Mikhail Delyagin , director of the Institute for Globalization Problems .
“In the tax regime that we have, it is impossible to develop the Black Soil Region. But in the Arctic, accordingly, fundamentally new mechanisms need to be debugged, and, very importantly, the proposal is not to help the company. Not. The proposal is to help the project and any participants in this project, ”the expert explained on the Russia 24 television channel.
The contribution of the project to the GDP of KPMG experts estimate up to 2% per year until 2050, and the budget gain is 4.4 trillion rubles from tax revenues, increase in dividends and the effect from related industries. The project would be workable and without tax breaks, but this would require funding at 4-5%, which is now impossible.
“In principle, if the price of a loan is human, not like in the West, not like in developed countries, but at least 4%, then tax investments will not be needed. But this requires the normalization of the entire socio-economic policy of the Russian Federation, ”states Delyagin.
Earnings on benefits
Vostok Oil will not be the first project implemented with the help of tax incentives. A successful example of such cooperation between the state and business is the plant for the production of liquefied gas Yamal LNG, built by Novatek in partnership with Total , CNPC and the Silk Road Fund. As a result, by 2020 Russia will supply over 27 million tons of liquefied gas to the world market – more than Malaysia, the third largest LNG producer after Qatar and Australia, today exports.
In addition to tax breaks, the project received direct government subsidies: in 2015, the government approved the purchase of Yamal LNG bonds for 150 billion rubles from the National Wealth Fund. In addition, at the expense of the state, three quarters (71 billion of 96 billion rubles) were financed by the construction of the cargo port of Sabetta.
Another example of the provision of effective interaction between the company and the state is investment incentives provided by Rosneft for the development of the Samotlor project. As a result of the investment incentives provided, the decline in production at the field slowed down from 5% in 2008-2017 to 0.9% in 2018. The direct tax effect amounted to about 60 billion rubles.
This practice of encouraging projects in the field of hydrocarbon production is also applied in other countries of the world. For example, in the United States, an expanded set of benefits at both the federal and regional levels has allowed American companies to make a shale revolution.
“For 2013, the amount of subsidies of the American government to shale oil is comparable to Russia’s total export earnings from oil exports. That is, if it is not higher, then about the same. These are huge sums, ”says Leonid Krutakov.
The Saudi authorities, in turn, reduced the tax burden on Saudi Aramco, reducing the income tax for the company from 83% to 50%. Due to this, the company began to generate free cash flow and got the opportunity to increase dividends – for 2017–2018. they amounted to $ 91 billion