The political aspects of the international cooperation in the oil and gas industry of the Barents Euro-Arctic region

The share of oil and gas in the global energy consumption will remain almost constant until 2040. It was 53.6% in 2010 and it could be 51.4% by 20401. The group of researchers from the Geology, geodesy and cartography Service of the United States under the study “Examination of the Circumpolar resources: assessment of undiscovered oil and gas resources North of the Arctic circle” came to the conclusion that in the future the Arctic could become the largest oil and gas province in the world (total estimated volume of undiscovered oil and gas reserves in the Arctic is about 413 billion barrels of oil equivalent (b.o.e.). This conclusion was based on the probabilistic analysis of various geological sedimentary rocks. Russia has about 70% of undiscovered gas resources of the Arctic (shelf reserves are mainly disposed in the southern part of the Kara sea and in the Eastern part of the Barents sea)2.

In response to the recent events in the oil and gas industry in the Arctic (JSC “Gazprom” became the second company able to start the commercial development of oil and gas fields on the Russian shelf in the Arctic3, “Rosneft” discovered a new field of ultra-light oil in the Kara sea4) the study of the oil and gas industry is becoming increasingly important, despite volatile oil prices: more than 100 USD a barrel, and then the fall down to less than 60 USD. Analysts agree that prices will recover, but they are unable to name the time limits required for recovery5 . Although in 2013 the predicted decline was only down to 96 USD per barrel by 2015, and then a gradual increase up to 163 USD per barrel by 20406. Political aspects are the key factor in the formation of international economic cooperation in the oil and gas industry, as long as the countries of the Barents region are the members of different political alliances and have different interests on the world political arena, which complicates the interaction between them. This determines the need of a detailed study of this problem to define the possible areas of cooperation and coordination of interests of all interested parties.

Legal analysis

The basic document for the cooperation in the Barents Euro-Arctic region is the Kirkenes Declaration of 1993, established the Council of the Barents Euro-Arctic region. The Declaration emphasized the severe environmental conditions, vast territory and low population density, low degree of cross-border cooperation of local authorities and local private business as the specific features of the region. The decision to create the Council of the Barents Euro-Arctic region was made in order to develop the cooperation. Priority areas of cooperation: economy, trade, science and technology, tourism, infrastructure, education, cultural exchange, projects aimed to provide better living standards of indigenous peoples of the North. The parties emphasized the need of inclusion of the environmental component into all the activities in the region through the establishment of the common criteria for the exploitation of natural resources and prevention of environmental pollution, especially radioactive and chemical waste. Development of economic cooperation at the level of companies, the energy efficiency of the region's economy, the agricultural industry and food production of high quality, the conversion of military enterprises on a commercial basis are declared as well7.

Every country of the studied region has developed its own Arctic strategy. For the Russian Federation the main goal “in the sphere of socio-economic development is expanding the resource base of the Arctic zone of the Russian Federation, able to meet the Russian needs in hydrocarbon resources, water biological resources and other types of strategic raw materials”8. The main objective of Finland is to become a key actor in the Arctic affairs because the Arctic is close to the Finnish market where Finland must be active and successful in connection to its economic experience in the development of mineral resources in the Arctic. Also Finland is interested to become a leader in training, research and economic activity in the sphere of marine technology and transportation and to participate in developing oil and gas resources in the region. First of all, Finland is ready to offer the development in the field of environmental assessment, energy efficiency and wants to improve the processing sector9.

Sweden is also interested in international cooperation in the region and is ready to offer expertise of the energy efficiency. Sweden is committed to the development of cooperation within the Arctic Council, the Barents structures, the EU and the Council of Ministers of Northern countries, stressing the importance of cooperation between the structures mentioned above. Economic development of the region is one of the key objectives of the Swedish strategy: Sweden aims to reduce trade barriers, to provide the sustainable use of energy resources in the region and to respect the international law on the development of deposits and cross-border cooperation10.

Norway, as well as Sweden, has emphasized the need to respect the international law, and to develop the international cooperation. Norway declares that the development of resources, new trade routes and human resources are the key issues. Also the Norwegian Government aims to develop cooperation between research and business institutions, and stresses the importance of infrastructure development11.

Thus, it is possible to say that the Barents Euro-Arctic region has developed its own legal framework of international economic cooperation based on international law and reflection of the peculiarities of the region. In general, the mutually beneficial and equal cooperation of the countries in the region, with a special attention to the environmental aspects of cooperation in all spheres was declared. Every country of the region has certain resources that can be useful for all of the actors, and be a reason for the mutual interest of the parties to each other. At the same time, each party considers itself as the key actor in the region. This fact may create some tension in the relationships.

Project activity

A number of international energy projects were declared under the framework of the Council of the Barents Euro-Arctic year. The working group on energy was established at the 5th session of the BEAR Council in 199812. Several projects got a special attention: the project on construction of oil drilling platforms of the ice class, mentioned in the speech of N. Isakov, the representative of the Arkhangelsk region in the BEAR Council13, and the establishment of two oil extraction companies: Russian-French-Finnish “SeverTEK” and Russian-Norwegian “Nord” mentioned in the speech of the Deputy head of the Nenets Autonomous district administration Y. Konovalov14. More ambitious projects had been discussed at the 6th session of BEAR Council in 1999: creation of energy efficiency centers in the Barents region and financing support facilities for the energy projects and development of information networks15. Analysis of the materials had shown that the projects mentioned in the documents had not been implemented or had been partially implemented. This allows concluding that BEAR cooperation is experiencing stagnation.

National projects seem to be more beneficial. In Norway is expected to produce LNG on the basis of the "Snøhvit" until 2040, “Statoil” plans to invest 21 billion NOK (EUR 2.5 billion) in production in the next 10 years16. The Norwegian state company “Statoil” had the intention to spend 5.72 billion USD for the development of its oil production capacity in the Arctic, by investing in the development of the “Aasta Hansteen” field, which, according to expert estimates, may contain at least 47 billion m³ of gas. Extraction will be carried out with the use of the world's largest “Spar” platform and the 480 km length pipeline will be built for the transportation of gas to the onshore station17. Johan Castberg project includes the development of three oil fields: “Skrugard”,” Havis” and “Drivis”18. Norway, with its largest hydrocarbon deposits in the Barents and North seas, is the European leader in oil extraction and oil production and the world's third largest gas exporter19.

Russia also has promising deposits in the Arctic. More than 200 oil and gas fields are found in the Barents, Pechora and Kara seas and there are some other fields: North-Kildin and Murmansk condensate deposits, “Shtokman” in the Barents Sea and “Rusanovskaya” in the Kara Sea20 and etc. However, the Russian “Shtokman” project is temporary suspended, but its implementation could be started by 201721. In 2012 the Norwegian company “Statoil” left the project, “Gazprom” and “Tota” became the only participants. "Gazprom" has not completely terminated the project yet, but the leaders of the company do not exclude the possibility that the “Shtokman” field will by the future generations22. According to experts, it would be more profitable for “Gazprom” to focus on other projects because of the “shale revolution” in the USA. “Gazprom” has the “Yuzhno-Kirinskoye” field on Sakhalin located closer to the Asia-Pacific region markets. The “Nord stream” project is successful. Two pipelines have already been put into operation and two more has been planned to be done, since the amounts of gas supply has been increased by December 2014 from 20 to 30 billion m³23.

The company "Rosneft" intended to continue the exploration in the Pechora Sea in 201524. “Exxon” was interested in “Rosneft” Arctic projects. So, a contract with “Rosneft” was signed. Its aim is to develop the oil fields in the Kara Sea. There is also the agreement with “ENI” on cooperation in the Barents Sea25. However, cooperation with Western partners are might be risky because of the sanctions imposed in 2014 by the US and EU. Great number of projects could be done together with foreign partners before the sanctions. Cooperation between the Norwegian company "Statoil" and Russian "Rosneft" could be the joint development of the “Castberg” field on the Norwegian continental shelf26. At the XVII St. Petersburg International Economic Forum “Rosneft” and “Statoil” signed an Agreement on the completion of certain milestones under the

Agreement on cooperation on the Russian shelf in the Barents and Okhotsk seas27. “Lukoil” had planned to participate in the licensing round for the development of the Norwegian oil fields on the shelf28.

Despite the external similarity of Russian and Norwegian conditions, there are significant differences. Thus, the Norwegian shelf is well researched and resources of Norway are limited to fields opened in 2000s. For Russia there is a "veil of uncertainty": on the one hand, awareness of the presence of oil and gas fields on the shelf, but their amounts are not updated, while Russian companies are reluctant to operate in this region, because, according to researcher A. Moe, they are not willing to work at the offshore fields, because of the high cost of their development [1].

Finland has no direct access to the Arctic seas, but it is interested in cooperation with Russia in the development of Arctic resources. The shipbuilding industry is one of such directions of cooperation In December 2010 “United Shipbuilding Corporation” (USC) and “STX Finland” signed an agreement to establish a joint company “Arctech Helsinki Shipyard” in Helsinki for the production of ice-class vessels for the Arctic. In 2014, USC brought its share up to the 100 % by buying a 50% share of the “Arctech Helsinki Shipyard Inc” shipyard29. Finland has considerable experience in oil refining, which is a significant part of Finland's competitiveness in the region: the famous Finnish company "Neste Oil" deals with high quality and environmentally friendly processing of oil, and is in the top 100 of most sustainable companies in the world30. Also Finland is ready to provide expertise of “clean technologies” — environmentally friendly manufacturing and telecommunications [2], to participate in the future construction of the marine infrastructure along the NSR [3], however, this experience can be used both for the construction of NSR marine infrastructure and for oil and gas development on the shelf.

Sweden is active in political and economic processes of the Arctic by involvement of its companies as subcontractors into the development of the shelf. Primarily Sweden was interested in the development of ore resources and improvement of ecological situation in the region. The latter is a promising direction for the Swedish-Russian cooperation: Sweden supported the initiative of the “Barents window" aimed at eliminating environmental "hot spots" in North-West Russia [4].

So, the most promising areas for cooperation in gas and oil industry are: cooperation between Russia and Norway, possible use of Finnish experience in oil refining and the willingness of Sweden to conduct environmental review of energy projects. In overall, the collaboration looks promising, but its progress is very slowly due to a number of factors, including sanctions against Russia.

From the point of view of establishing a model of cooperation there is an interesting article by Fadeev, RIAC expert, where the author describes two possible approaches to cooperation and recommends Russia to follow the protectionist approach (due to the current great interest of the international community in projects on the territory of Russia), i.e. attracting foreign companies to a limited extent, advises to use the experience of Norway in the development of the shelf [5].

Political factors of cooperation

BEAR official documents and national legislation of the BEAR countries declare a sustained commitment to cooperation focused on common goals that would benefit all the actors of collaboration in the region. However, de facto, cooperation is extremely limited: projects declared back in the 1990s were not implemented. The majority of existing projects on extraction of hydrocarbons on the shelf are in the early stages of implementation. The most prominent example is the “Shtokman” project: the deposit was discovered in 1988 and was suspended for an indefinite time. Certainly, there are a number of economic reasons hindering the development of cooperation: the high cost of mining of hydrocarbons on the shelf due to the heavy ice and a high risk for the ecosystem of the region, the fluctuations of demand and prices31 for petrochemicals on the market, where the halving of oil prices had happened in 2014. However, it is impossible not to take into account a number of geopolitical factors.

For Russia, the Arctic is an important strategic region. This is visible both in the key documents, for example, “Fundamentals of state policy of the Russian Federation in the Arctic for the period till 2020 and the further prospect” and in other statements. In the message to the Federal Assembly Vladimir Putin mentioned the need for the development of the Arctic region32. In addition to Russian companies Arctic projects involve Western partners (“Exxon”, “Mobil”, “Total”, “Eni”) and even companies from India33. Currently projects are being developed slowly due to the lack of urgent need for offshore fields’ resources and the need for careful preparation for the work with the balance between economy and ecology.

From the point of view of foreign researchers, the main obstacle is the internal political instability of Russia. The Stockholm environment Institute has released the report “Russia's Interests in oil and gas resources of the Barents Sea”. The author analyzed a number of articles by Russian researchers of the oil and gas industry and outlined the declaratory character of Russian interests and its unwillingness to act [6].

Currently the Arctic is interesting to the states with the access to the Arctic sea and therefore involved in the regional processes. The interest in the Arctic was declared by China which is actively collaborating with Russia in natural gas production on the shelf with the “Rosneft” company34. The Minister of petroleum and energy of Norway Tord Lien invited China to take part in the development of Norwegian offshore fields. According to the Russian researcher L. Voronkov, professor of MGIMO, the interest of non-Arctic countries introduces a certain uncertainty into the relationships: if Arctic countries declare their interests in their regularly published Arctic strategies, non-Arctic states leave their partners in the darkness, they “are subjected only to their own well-known reasons” [7].

The lack of delimitation of the Arctic shelf is a pretty significant problem. Currently, the most serious problem is the claims of Canada, Denmark and Russia to Lomonosov ridge. The UN Commission on the law of the sea accepted the application of Canada35 and Denmark36. Russia must submit additions to the application in the second half of 2015. Thus, according to The Arctic Journal, Danish claims include a third of the territory claimed by Russia, and reaches a 200-mile boundary of the exclusive economic zone of the Russian Federation, and the Canadian claims include the North pole, which, according to V. Kaminsky, Director of the Institute of Oceanology, belongs to Russia due to the sectoral principle of the partition of the territory37. According to the author, the Danish experts consider possible expansion of Russia's claims up to the boundary of the exclusive economic zone, but the Danish authorities have denied such a possibility and reminded us of our commitment to the Ilulissat Declaration on peaceful methods of resolving disputes in the Arctic [8]. The presence of these claims in the future means a hard work for the

Danish, Russian and Canadian diplomats, greatly increases the tension in relations between countries that may have a negative impact on the cooperation in the Arctic.

Due to the increased tension in international relations over the conflict in Ukraine, there have been persistent reports on military activity in the Arctic: about terrifying weapons possessed by Russia38, the radar field to protect the Arctic from missiles39, the Joint Strategic Command40, or about the appointment of a special Envoy of the US state Department on the Arctic, a former Admiral41. In October 2014, NATO said that Russian armed warplanes were spotted over the North and Baltic seas, and the Alliance had interpreted this activity as “suspicious”42. The Russian side stressed that the flights were done in the framework of training activities43. Earlier a strange object had been seen in the waters of Sweden, considered as the Russian submarine by the Europeans44. The Defense Ministry spokesman called the actions of Sweden “unfounded”45 and the “Russian newspaper” called the “submarine” near the coast of Sweden an attempt to justify the planned increase of the military budget of Sweden46.

Despite the fact that the information on military aircraft and a submarine was neutralized by the explanations of the Russian authorities, the increasing number and the frequency of such information indicates the tense atmosphere in international relations in general and in the Arctic region in particular. There were calls for increased military cooperation between the Western coastal Arctic States. Norwegian politician Thorvald Stoltenberg felt the need to strengthen military cooperation between Norway, Sweden, Denmark and Iceland [9]. NATO and Russia accused each other of increasing military presence in the Arctic47.

The greatest problem for international cooperation in the region is the sanctions against the Russian Federation. After the introduction of additional sanctions by the European Union on 12 September 201448, got over some oil and gas companies, the obstacles for cooperation in the of offshore fields development had appeared. The equipment for oil and gas production was hit by the EU sanctions49. However, one of the partners “Statoil” said it would continue to cooperate with Russia50. Special representative of the Russian President on international cooperation in the Arctic and The Antarctic, member of the “Rosneft” Directors Board Artur Chilingarov believes that foreign companies want to go back to Arctic projects in Russia51. Perhaps, it can be due to enormous losses. Norway will lose billions of krones because of sanctions; therefore, the issue of a paid higher education system is discussed in the country52.

Russian companies also do not give up: despite the release of the American company “Exxon Mobil” from the development of the field “Pobeda”, “Rosneft” will continue its work there in accordance with the schedule53. The Ministry of energy of the Russian Federation also sees no reason to close or to delay the projects on the Arctic shelf54. Moreover, the Minister Novak believes that drilling and exploration will continue55.

Of course, in the short term perspective the impact of the sanctions is noticeable only in the loss of income of both parties, but in the long term restriction of the economic cooperation and structural problems in the European countries and in Russia. Both parties will experience the consequences associated with changing patterns of supply and demand, the need to find new markets for products, suppliers of goods and services. In the context of this study, the sanctions may lead to a lack of technology for economic development in Russia and to the resource base changes for the countries of the West. It is obvious that political differences can lead to structural economic problems. It may take many years to eliminate the consequences.

Conclusion

At last, we can draw some conclusions. First, countries of the Barents Euro-Arctic region have developed its own legal framework of cooperation based on domestic and international legal acts. Secondly, the region has a great potential for cooperation, in the oil and gas industry as well, due to the presence of some deposits on the continental shelf, the development of which requires experience in the offshore fields’ development and the availability of technologies, including the environment friendly ones and the efficient use of resources. However, the cooperation is slowing down by a number of political factors, such as the lack of political will to commit the decisive action in the region, the presence of unresolved territorial dispute over the Lomonosov ridge, unclear interests of the non-Arctic states in the region, the worsening of the international situation in connection with the crisis in Ukraine and sanctions against the Russian Federation and the increase of military activity in the region.

Despite the factors that hinder the cooperation, the potential of the region is very high, especially in the long term perspective. The actors are aware of it, so cooperation in the region is not terminated, but now it is “frozen” state and will continue to be like that until the establishment of favorable conditions for its development, the reduce of tension, stabilization of the world hydrocarbons market. However, the parties should not forget about the region and should continue its gradual research and development.