Gazprom Drills $70 Billion into Arctic Exploration, Plans to Double Crude Production by 2020

By Mike Caggeso
Associate Editor

Gazprom Neft OAO (OTC:GZPFY) - Russia's largest company and the world's largest producer of natural gas - plans to double its crude production by 2020 and spend $70 billion developing Arctic fields, Chief Executive Officer Alexander Dyukov told Moscow-based newspaper Kommersant. 

Dyukov didn't specify how the company plans to raise or invest the $70 billion and said that a final draft of the company's strategy will be completed this month, Bloomberg reported. 

But in order to meet its steep boost in production goals, Gazprom must first acquire a license to develop the Arctic's Prirazlomnoye deposit, as well as try to convince the government to ease heavy extraction taxes.

"If this doesn't happen, it will be hard to ensure continued production growth in Russia," Dyukov said.

International Scorn

Perhaps the company's biggest roadblock will be the international sentiment against oil companies tapping reserves under the still Arctic waters, an area the eight-nation Arctic Council warns recovers especially slow from oil spills because of difficulties reaching remote locations during the constant cold and icy conditions.

"Oil spills can kill large numbers of animals by covering them in oil, and create long-term contamination that can affect populations and ecosystems for decades," a report by the Arctic Monitoring and Assessment Programme (AMAP), an Arctic Council body, said.

Economically speaking, the Arctic may hold as much as a quarter of the world's untapped oil and gas, Reuters reported. And with production slowing in maturing oil fields in Siberia, Gazprom and other Russian oil companies are trying to expand operations.

That makes ignoring such a large reserve in Russia's backyard even more difficult.

Government Friendly Gazprom

Gazprom is 50.01% owned by Russia's government. On top of that, First Vice Prime Minister Dmitry Medvedev [the very likely successor to influential President Vladimir Putin] is chairman of Gazprom's board of directors.

And yesterday (Monday), Gazprom's board announced that exiting Prime Minister Viktor Zubkov is one of the candidates competing for Medvedev's position on the board, Reuters reported.

All three officials are aligned under the very powerful United Russia party, and the government's stake in Gazprom carries considerable sway over the company's actions.

If Zubkov doesn't somehow take the board's reigns, the government won't feel too upset, as the country's energy minister, chief executive, and economy minister are also nominees for the 11-seat board.

After March 2 elections and Gazprom's shareholder meeting in June, it's very possible that all of Gazprom's plans will come to fruition.

In December, Russia, Turkmenistan and Kazakhstan inked a deal to construct a natural gas pipeline along the Caspian Sea, an operation that will increase Russia's hold on Europe's energy consumption.

News and Related Story Links:

• Bloomberg:
  Gazprom's Oil Unit Plans to Double Output, Invest $70 Billion

• Reuters:
  Arctic oil activity seen up, eco-risks loom-report

• Arctic Monitoring and Assessment Programme: 
  Home Page

• Reuters:
  Gazprom confirms PM Zubkov running for board

• Money Morning:
  New Pipeline Subverts U.S. Efforts to Diversify Gas Supply