With Russian President Vladimir Putin on hand, the Russian Arctic offshore oil platform Prirazlomnaya, the first offshore oil rig to begin commercial drilling operations above the Arctic circle, sent off its first shipment of oil on April 18.
“The start of loading the oil produced at Prirazlomnaya means that the entire project will exert a most encouraging influence on Russia’s presence on the energy markets and will stimulate the Russian economy in general and its energy sector in particular,” Putin said. “this is, in fact, the beginning of our country’s enormous work on oil production in the Arctic.”
Gazprom is a giant Russian energy company responsible for about 10 percent of the country’s GDP. Russia has already invested over $4 billion in developing this Arctic oil field, discovered in 1989. The new Arctic crude oil blend, called ARCO, is lower quality than the main Russian export from the Urals and will cost less. Gazprom said the first shipment will head to a large European energy company.
Last fall 30 Greenpeace activists tried to stop production preparations at the platform before being arrested and charged with piracy. The charges were later reduced to hooliganism and the activists were eventually released with all charges dropped.
The Prirazlomnaya field contains about 72 million tons of recoverable oil (610 barrels total), with production expected to reach six million tons a year sometime after 2020. The entire Arctic holds up to one-third of the world’s remaining undiscovered oil and gas resources, with most of that being offshore. With the International Energy Agency recommending that in order to keep global warming below two degrees Celsius more than 60 percent of proven oil reserves need to be kept in the ground — let alone unproven ones in the Arctic — Russia’s boundless enthusiasm for Arctic drilling is exasperating for the climate community.
The economic benefits may not live up to the hype either.
“Russia’s Arctic prize won’t be as big as many think,” reports Nick Cunningham for oilprice.com. “The Prirazlomnaya project is costly and would not have been economical if the Russian government had not granted it special tax breaks. But, even with heavy backing by the government, Gazprom estimates that the field will only be producing 120,000 barrels of oil per day, beginning in 2020. That would only add about one percent to Russia’s oil production.”
Russia is looking to expand oil production in the Arctic as many of its current oil fields are waning after being in production for many years. However oil production in the Arctic offers a number of hurdles, including harsh weather, lack of infrastructure, and high costs, making it a tough bet for a long-term replacement source of oil.
Royal Dutch Shell serves as an example of the toll these challenges can have. Having invested over $5 billion in Arctic drilling projects and more than five years fighting legal challenges, the company has currently suspended offshore drilling projects in the Arctic, in part due to concerns that they underestimated potential environmental damages. Last spring, ConocoPhillips also announced that was also suspending its plans to drill in the Arctic Ocean in 2014.
In announcing Shell’s decision not to pursue Arctic drilling this year, Shell’s CEO Ben van Beurden noted a January ruling by the 9th U.S. Circuit Court of Appeals that agreed with environmental groups that the federal government had underestimated how much oil drilling would happen, and what the potential consequences could be. However, this is seen more as a temporary setback than a lasting decision.