Are the Russians on the Verge of a Major Arctic Oil Coup?

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As I move into the main meetings here in Moscow, something unexpected has joined the conversations on oil prices, European pipeline prospects, liquefied natural gas (LNG) trading scenarios, and the prospects of unconventional shale.

That something is venture capital funding.

The Kremlin has developed several venture capital funds with potential state-supported investments amounting to at least $12 billion.

It may be early yet, but I see signs of where these new efforts may be directed.

You should watch out for two aspects with this story.

The first must happen in Russia.

But the second is likely to take shape in an unexpected place: Boston, MA.

Here's why. It has to do with Arctic oil.

Several years ago, then-Prime Minister Vladimir Putin declared that the under-used and under-equipped shipbuilding sector would be transformed into a global leader in the design and construction of offshore platforms and drilling rigs.

Of even greater interest was the initial challenge given at the time - to develop a whole new generation of ice-resistant platforms for Arctic drilling.

Moscow had already recognized it could arrest a serious decline in its mature Western Siberian fields only by moving out in three directions. They are:

  • Into highly promising but infrastructure-poor Eastern Siberian;
  • Onto the continental shelf; or,
  • North of the Arctic Circle.
Then the U.S. Geological Survey (USGS) issued its long-awaited Circum-Arctic Resource Appraisal (CARA).

This major multi-year effort evaluated petroleum resource potential for all areas north of the Arctic Circle (66.56° north latitude) having at least a 10% chance of one or more significant oil or gas accumulations (50 million barrels of oil equivalent or above).

CARA concluded that 84% of the total undiscovered oil and gas left in the world is sitting offshore, the bulk of it in three huge Arctic basins.

Russia, the survey concluded, controlled the largest single chunk of it.

But the remainder of what was extractable would also require new equipment to exploit, regardless of who controlled the fields. Russia would be the first in, with several projects already moving to production. Russia would also need the equipment first.

That has already taken place. The country completed the world's first ice-resistant drilling platform at a former Russian naval shipbuilding base and successfully towed it out above the Arctic Circle. It will be set up for production next year.

The Boston Connection to Arctic Oil

Moscow has demonstrated it can do the job. What it now needs is an infusion of Western technology and expertise, along with a major injection of investment.

The Russian venture funds will provide some of that "private sector" stimulus (forgetting for a moment that the funds may be categorized as private but actually are comprised primarily of state funds).

But the country needs to parlay these billions into much larger commitments by private venture funds in other parts of the world, especially those providing access to markets where the needed technology is located.

That introduces the Boston connection.

Established in 2006, but becoming an element of broader interest only recently, RVC-USA is an American arm of the state-supported Russian Venture Co. and is headquartered not too far from the Charles River Basin. To date, it has funded several of the larger ventures.

From all the Russian initiatives, there have been 45 deals in the past five years having an aggregate value of less than $700 million and comprising a widely divergent market penetration.

It's a start. But it's not what the Kremlin or the venture initiatives have in mind. With the transition to Arctic oil exploration, the country will require significantly more investment.

Which leads me to suggest that we are about to see a larger venture initiative advancing, with some interesting action coming through Boston.

There are other indications emerging. For the first time, the number of financial representatives invited to these annual meetings almost equals the number of representatives from Russian oil companies.

And also for the first time, all seven Russian state-sponsored venture funds are present, as is RVC-USA.

I think we may be on to something interesting shaking out before the next of these sessions takes place at the end of 2013.

For investors, these new developments in Arctic oil could open up a whole new range of investment opportunities.

I'll keep you in the loop on how these conversations turn out.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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