Russia’s Arctic Energy Expansion: A Geopolitical And Economic Gambit

Authored by Simon Watkins via OilPrice.com,

Russia’s Arctic Northern Sea Route allows the country to continue exporting oil to China despite sanctions, highlighting the route’s strategic importance.

Russia aims to significantly increase the NSR’s cargo capacity, supported by vast Arctic oil and gas reserves.

This Arctic development serves both economic and geopolitical purposes, including reducing dependence on the US dollar in energy trade.

The continued use of the Arctic Northern Sea Route (NSR) by Russian oil tankers sanctioned following its 24 February 2022 invasion of Ukraine underlines the ongoing critical importance of this route and the country’s Arctic hydrocarbon fields to President Vladimir Putin. That the final destination of one such high-profile vessel using the NSR path is China highlights one reason why Putin has pushed the expansion of the NSR and of Russia’s Artic operations so forcefully since the invasion of Ukraine’s Crimea region in 2014, as analysed in my latest book on the new global oil market order. Geopolitically, China is not just another major world power to Russia, but rather it crucially holds one of only five Permanent Member seats on the United Nations (U.N.) Security Council – these being occupied by the U.S., UK, France, China, and Russia itself. Just one veto on this Council is needed to block any significant U.N. Security Council resolution, including the authorisation for the stationing of any collective peacekeeping force in a country or indeed military action against one. It is China that has ensured that neither of these serious moves have been made against Russia either after its 2014 invasion of Ukraine’s Crimea or the widescale 2022 invasion. 

Aside from a pledge to do the same thing for Beijing in the event of it undertaking a similar ‘reunification’ of the territory it believes should be part of its own ‘mainland’ – such as Taiwan – Russia’s principal reciprocation for this diplomatic largesse remains a steady stream of oil and gas exports to China costing less than the official OPEC+ pricing benchmarks. A large portion of these goes through pipelines, including the ‘Power of Siberia’ gas transit route, which is set to deliver 30 billion cubic metres (Bcm) this year and 38 Bcm in 2025. Another growing part of Russia’s energy deliveries to China is planned to come from liquefied natural gas (LNG) in the years ahead, with an additional 10 Bcm of gas intended to be supplied in this form by the end of this year, as also detailed in my latest book on the new global oil market order. LNG became the world’s emergency energy source following the sanctions placed on Russian gas flows after its invasion of Ukraine. Unlike gas delivered through pipelines, LNG does not require years of costly infrastructure build-out before it can be moved, and it is not necessarily subject to long-term contracts priced to reflect these expenses. Instead, it can be bought quickly in the spot market if needed, and shipped to wherever is required extremely quickly. It is safe to say that any further major military escalation in the world – resulting perhaps from China making good on its threats to forcibly retake Taiwan if necessary – would only exacerbate LNG’s importance in the global energy sector.

Ensuring that China receives the oil and gas that Russia can continue to leverage into ongoing geopolitical support is crucial to Moscow, in addition to providing the increasingly sanctioned country with vital financial support. In a global energy shipping market in which Russia finds itself increasingly blocked off due to international sanctions, the NSR still enables it to deliver energy to China with relative ease. The only problem has been that due to its location in the frozen Arctic, ships have been unable to sail at all during March, April, and May, and have struggled to do so at other times as well. Consequently, Russia has been working on a major initiative to ensure that the NSR remains fully functional all year round, according to a senior Moscow-based oil analyst exclusively spoken to by OilPrice.com. “Thirty-three million tonnes of cargo was moved in 2021, 34 million [tonnes] in 2022, and just over 36 million [tonnes] last year,” said the Moscow-based analyst. “Rosatom [the Rosatom State Nuclear Energy Corporation, which manages a fleet of nuclear-powered icebreakers, among other things] and Novatek [Russia’s second-largest gas producer and spearheading its Arctic LNG developments] have told the Far East and Arctic Development Ministry that they can support an increase to 100 million tonnes by 2026 and 200 million tonnes [or cargo] by 2030,” he added. 

Russia certainly has the Arctic resources to power this enormous expansion of exports, with an estimated 35.7 trillion cubic metres (Tcm) of gas and over 2.3 billion metric tons of oil and condensate in the region. The majority of these are in the Yamal and Gydan peninsulas, lying on the south side of the Kara Sea, as also analysed in my latest book. According to comments from President Putin, the next 10 to 15 years will witness a dramatic expansion in the extraction of these Arctic resources, and a corollary build-out of the NSR as the primary transport route to monetise these resources in the global oil and gas markets, especially to China. It was revealed in late 2021 that a massive new gas field in the Kara Sea itself had been discovered by Russian oil giant, Rosneft. Named after the Soviet military hero Marshall Georgy Zhukov, with natural gas reserves estimated at 800 Bcm, it is located in the Vikulovskaya structure, part of the East Prinovozemelsky-1 licence area, over which Rosneft has exploration and production rights running from 11 November 2020 to 10 November 2040. Rosneft is also developing the Vostok Oil project in Russia’s Far North that includes the Vankor cluster, Zapadno-Irkinsky block, the Payakhskaya group of fields and the East Taimyr cluster. Overall, it is estimated to hold proven liquid hydrocarbon reserves of at least 6 billion metric tons (about 51 billion barrels), all close to the NSR. Rosneft chief executive officer Igor Sechin told President Putin that with exploration underway at the Vostok Oil project, and the design work for a 770-kilometre oil pipeline and port having been completed, the scheme would create a “new oil and gas province” on Siberia’s Taymyr peninsula.

Russia’s Arctic gas and oil drive is also a vital part of Russia’s and China’s continuing efforts to subvert the U.S. dollar-based hegemony in the energy market, as also analysed in my new book, particularly as it features one of the world’s biggest oil and gas producers and one of its biggest buyers. Very early in the Arctic LNG projects’ history, Novatek’s chief executive officer, Leonid Mikhleson, said that future sales to China denominated in renminbi were under consideration. This was in line with his comments on the prospect of then-further U.S. sanctions – following Russia’s annexation of Crimea in 2014 – that they would only accelerate the process of Russia trying to switch away from U.S. dollar-centric oil and gas trading. “This has been discussed for a while with Russia’s largest trading partners such as India and China, and even Arab countries are starting to think about it… If they do create difficulties for our Russian banks then all we have to do is replace dollars,” he said. Such a strategy was tested in 2014, when the state-run Gazprom Neft tried trading cargoes of crude oil in Chinese yuan and roubles with China and Europe, to reduce Russia’s dependence on crude trading in dollars, in response to the initial Western sanctions against Russia’s energy sector. The thrust of these comments was echoed by former executive vice-president of the Bank of China, Zhang Yanling, in a speech in April 2022 that the then-latest sanctions against Russia would “cause the U.S. to lose its credibility and undermine the [U.S.] dollar’s hegemony in the long run.” She further suggested that China should help the world “get rid of the dollar hegemony sooner rather than later.”