Russian Disaster Reveals Growing Problem in Supply Access

Dr. Kent Moors

Earlier this week, an oil platform sank off the Russian Pacific coast in frigid, stormy waters.

The Kolskaya had been stationed off far northeastern Russia, and capsized when engineers were moving the jack-up rig from ongoing drilling projects in the Sea of Okhotsk to the western coast of Sakhalin Island. Accounts from the 14 survivors mention waves in excess of 20 feet.

That is enough to flood the operations base and sink the rig.

Details are still coming in on how this tragedy occurred.

But the question of why is one that deserves reflection.

The Kolskaya disaster is a sobering reminder of a growing problem for Russian producers as they push offshore in search of more and more crude supplies.

But it is also a warning that tragedies like this will likely occur again if budget shortfalls and company shortcuts continue to intensify in the years ahead.

The Russian Push North

Russia is now the world's largest producer of crude oil.

However, as I noted earlier this month, Moscow is moving offshore into very hostile conditions to compensate for accelerating crude oil extraction declines in the traditional production basins of Western Siberia.

I have never been on the Kolskaya ("Kola" in English, pictured below), but I have spent time on similar class jack-up rigs.

A jack-up is a floating platform resting on movable legs set in a stationary position on the sea floor. The legs can be raised or lowered to compensate for water depths (usually to a maximum of about 400 feet).

These are amazing pieces of equipment, with facilities to house more than 100 personnel, and the ability to drill dozens of wells at a time. Once the rig has completed a project, a production platform is towed into place, and the jack up moves on to its next job.

And that's what was happening when disaster struck.

The Kamchatka Peninsula-Sea of Okhotsk-Sakhalin Island corridor is a prime target area for Russia's offshore expansion. Current production from Sakhalin (which is due north of Hokkaido, Japan) is essential to ongoing crude oil and natural gas extraction figures, with the future demanding even greater volume from continental shelf development.

As I noted in early December, we know the vast majority of remaining oil and gas is positioned in offshore waters. Much is both north of the Arctic Circle and under effective Russian control.

However, these projects lack sufficient equipment and technology, are incredibly expensive, and are already running well over budget.

As with all of the far northern projects I reviewed during my recent trip to Russia, there is a lack of drilling rigs and a multiple-year delay in getting access to available production platforms. Most of the platforms must be ice-resistant and are constructed from scratch.

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Dr. Kent Moors

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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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