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Putin says sanctions have not stopped Russian Arctic hydrocarbons development

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Putin says sanctions have not stopped Russian Arctic hydrocarbons development

London — Russian president Vladimir Putin said Tuesday that Western sanctions against Russia have hampered, but not stopped, development of hydrocarbons in the Russian Arctic.

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Speaking at an Arctic Forum that several other regional leaders attended, Putin said sanctions "couldn't halt the process of Arctic development." "To some extent [sanctions] interfere, but not critically, to a certain extent they have pushed us to actively develop our own technology," he said.

Western sanctions targeting Arctic offshore oil development, as well as some financing to Russian companies, entered into force in 2014, coinciding with the beginning of a period of oil price volatility that further raised questions over the commercial viability of Russian Arctic energy projects.

While some plans, most notably ExxonMobil's involvement in Rosneft's Pobeda project, were casualties of these measures, Russia has continued to develop energy projects in the region, ramping up production at offshore oil project Prirazlomnoye and onshore Novy Port, and launching Yamal LNG.

S&P Global Platts Analytics sees economics playing a bigger role than sanctions in slowing the pace of oil and gas development in the Russian Arctic.

"Sanctions have slowed Arctic development, as demonstrated by Exxon pulling out of the Pobeda project," Paul Sheldon of Platts Analytics said.

"But similar to the case of Russian shale development, economics are likely a larger factor. As long as cheaper, conventional reserves remain available, Arctic and shale will not be a top priority, regardless of whether Western sanctions are eventually removed."

Platts Analytics assumes Russia's offshore Arctic projects breaking even at $75/b, while Russian energy minister Alexander Novak earlier estimated that projects in the region are attractive at around $60/b.

Putin said Russian production remains competitive against other producers, however.

"If oil prices fall below, say $40/b, then the profitability of oil production, and oil production growth in the US will be questionable, but not in Russia," Putin said.

Regarding of the costs of Arctic oil production, Andrei Patrushev, Gazprom Neft deputy CEO for offshore development, said the company is making significant progress on reducing these costs. "The cost of production at Prirazlomnoye after we have completed all capital investment will be less than $10/b," he said, during the Arctic Territory of Dialog forum.

Prirazlomnoye is Russia's only producing Arctic offshore oil project and was launched in late 2013. Patrushev said production there will be 3.2 million mt, or around 64,000 b/d in 2019, rising to 3.7 million/3.8 million mt in 2020.

Analysts see sanctions and volatile oil prices, as well as the technological and logistical challenges of operating in the Northern region continuing to hamper development, however.

Platts Analytics forecasts that no new Arctic deepwater production will start up until post-2035, due primarily to costs and US sanctions, and taking into account the need for additional exploration in the area.

"But the success of recent projects such as Novy Port, Prirazlomnoye and East Messoyakha show that more production growth in the Arctic is highly likely, despite US sanctions," Sheldon said.

Putin Tuesday pointed to Russia's "colossal" reserves - 13 billion mt of oil, around 95 billion barrels, and 95 trillion cu m of gas, as driving positive forecasts for future growth.

Despite sanctions, Platts Analytics sees Western majors as remaining the most likely partners for Russia's Arctic upstream projects. "Regarding which foreign companies could join the search for Russian Artic oil, it would be the ones with deep pockets, large project execution experience and good technology. Putting sanctions aside, ExxonMobil, Shell, BP, Total, Eni and Equinor would be good candidates," Rene Santos of Platts Analytics said.

DOMESTIC BARRIERS

Other Russian officials speaking at the forum called for more drilling and fewer administrative barriers to exploration and development in Russia's offshore Arctic region, to ensure that oil and gas resources there come on stream in the next 20 years.

Deputy natural resources minister Dennis Khramov said that despite extensive seismic study in recent years, drilling volumes in the region are currently insufficient to support future growth.

"Without serious, large-scale drilling, we won't make the discoveries, and if we don't make discoveries, in 20 years' time when demand peaks, when onshore fields decline, and when other provinces open up, we may be left behind," Khramov said.

Patrushev as well as deputy energy minister Pavel Sorokin also cited convoluted administrative procedures as a barrier to further growth.

Patrushev said Gazprom Neft's Prirazlomnoye project is regulated by around 180 documents and 20 state bodies, whereas in Norway to produce oil offshore there are six documents and two state bodies.

"If we can, without ecological, or other, dangers reduce administrative barriers it will become a driver for development of Russia's Arctic offshore," he said.

Putin said an Arctic strategy up to 2035 should be approved in the autumn session of the State Duma.

-- Rosemary Griffin, rosemary.griffin@spglobal.com

-- Nadia Rodova, nadia.rodova@spglobal.com

-- Edited by Jonathan Fox, newsdesk@spglobal.com