Arctic exploration and risk sharing
A BP-Rosneft agreement to form a strategic global alliance has shown that under specific circumstances Russia and the West could make rapprochement to ensure long-term sustainable energy security. Indeed, the share swap and setting-up a joint venture can be regarded sharing of risks related to the extraction of hydrocarbon resources from the Arctic shelf. Importantly, the two will not use the product sharing agreement regime that had been recognized not fully fitting Russia's interests. Although the both parties are not guaranteed against overly optimistic estimates of the reserves, in general, coming of an international oil giant puts sort of a quality mark on the area of potential exploration. If investigations prove successful, the alliance members will be able to significantly step up their reserves and if the situation favors them, they could start developing the fields in future. In the event of failure the parties will share expenses with a new experience of working in the Kara Sea extreme conditions being the only reward for their efforts. Russia should not count too much on an opportunity to learn new cutting-edge technology as service companies with deep offshore experience will be most likely invited to carry out works on key sites.
The Russian authorities have to solve an uneasy task of working out an optimal tax regime for the project. On the one hand, the government has already made a generous present to the BP shareholders by granting Vostochno-Prinovozemelskie fields to Rosneft; the joint venture will be investigating the fields. On the other, it is clear that using standard mechanisms of rent seeking could lead to the project being profitable only if the hydrocarbon prices are spiking. We consider that the project taxation mechanism should take into account high risks and should not be too soft.
By Vladimir Kreindel,
IFS senior analyst
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