The temptation of exploiting Arctic oil has drawn China to the global race – and these strategic moves could put the aggressive country in the lead.
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.
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.
On April 16, Exxon (NYSE: XOM) officially entered into a massive offshore exploration partnership with Russia's Rosneft to jointly develop resources in the Kara and Black Seas.
From the Rosneft press release:
"The agreements signed today form joint ventures to manage an exploration program in the Kara Sea and Black Sea. They also set the terms for investments to be made by the partners in Russian offshore projects. The initial cost of preliminary exploration is estimated at over US $3.2 billion.
Neftegaz Holding America Limited, an independent indirect subsidiary of Rosneft registered in Delaware, concluded separate agreements on the acquisition of a 30 percent equity in ExxonMobil's share in the La Escalera Ranch project in the Delaware Basin in West Texas in the United States."
Many companies were in the hunt for the Russian Arctic oil, including BP PLC (NYSE ADR: BP), Royal Dutch Shell PLC (NYSE ADR: RDS.A), Chevron Corp. (NYSE: CVX), Total SA (NYSE ADR: TOT) and Statoil ASA (NYSE ADR: STO), but it was Exxon that walked away with the prize.
The arrangement with state-controlled Rosneft (PINK: RNFTF) gives Exxon a significant advantage over its major rivals -- all of which have struggled in recent years to replace the oil they're extracting with new sources.
Rosneft, in which the Russian government has a 75% stake, estimates the three Kara Sea blocks where Exxon will be exploring contain about 36 billion barrels of recoverable oil.
"If that figure is correct and Exxon is able to produce the fields, we are talking about one of the world's largest oil discoveries in the last 50 years," Fadel Gheit, an energy analyst at Oppenheimer & Co., told MarketWatch. "But it remains to be seen how much of that oil is economically recoverable."
Rosneft estimates total reserves in the area at about 110 billion barrels of oil equivalent - an amount four times the size of Exxon's proven global reserves.
Quid Pro QuoHaving access to reserves of that size will help Exxon rectify its replacement ratio for oil. Earlier this year Exxon reported that for every 100 barrels of oil it produced, it found just 95 barrels of new oil.
Exxon has been more successful in replacing natural gas resources - it finds 158 cubic feet of gas for every 100 it extracts. But with natural gas prices slumping, the company would much rather find more oil.