Oil majors gambling investors’ money on ‘Russian roulette’ of Arctic ventures – New Report from Greenpeace, Platform and ShareAction
Oil majors rushing to partner up with Russian energy giants in order to gain access to the country’s Arctic resources are gambling shareholders’ money on ‘a five-bullet Russian roulette’ of poor environmental and safety records, lack of transparency and experience in offshore drilling, as well as the uncertain outcome of a Kremlin power struggle over energy policy, a new report by Greenpeace, Platform, and ShareAction shows.
The stark warning to investors comes ahead of Shell’s annual general meeting on Tuesday. The Anglo-Dutch corporation, whose own unsuccessful attempts to drill in the Arctic have become a cautionary tale on the dangers of operating in the far north, is the latest in a growing list of western oil companies including BP, Exxon Mobil, Statoil and ENI, which are seeking to boost their oil reserves by striking deals with Russian state-backed corporate giants Gazprom and Rosneft.
Western companies have been tempted into joint ventures where they provide cash and know-how in exchange for access to new oil fields by the prospect of enormous reserves from the Russian giants’ plans to drill in the Arctic. But the report warns that, with oil majors providing the majority of the capital as well as carrying the bulk of exploration costs, this strategy is exposing investors to enormous risks.
“Shareholders should be seriously concerned about what looks like a collection of open ended risks for their companies,” says Charlie Kronick, a senior climate advisor at Greenpeace. “Drilling in Arctic waters is already a technically difficult and environmentally risky operation, but doing it in partnership with companies notorious for their poor environmental and safety record, as well as their lack of offshore expertise, is nothing short of a Russian roulette.”
Russian Roulette: International oil company risk in the Russian Arctic – published today, identifies five main areas of risks for companies partnering with Gazprom and Rosneft:
a) Lack of offshore experience at the top:
With Shell’s Arctic debacle suggesting that drilling at high latitudes is beyond the capabilities of even the most advanced operators, investors should be alarmed at the total lack of not just Arctic but also more general offshore drilling experience among directors on the boards of both companies. Rosneft has never brought an offshore project to extraction stage and lost most of its experienced offshore staff in the late 1990s, while Gazprom has failed to make clear who among its top directors and managers has been given responsibility for offshore drilling.
b) Appalling environmental records:
Rosneft holds the unenviable record of being the oil major with the highest number of leaks from pipelines in the world thanks to its reliance on an ageing and poorly maintained infrastructure. In 2011 alone Rosneft was responsible for 2,727, or 75%, of all spills in Russia’s largest oil province Yugra while only extracting 25% of the total regional output that same year, according to a report from the Russian environmental regulator.
Although responsible for a lower number of spills, Gazprom, through its subsidiary Gazprom Neft, failed to clean up several oil leaks in its Siberian fields over the last three years, leading to a number of criminal cases.
c) Disregard for safety rules:
Gazprom’s attitude towards safety regulations is epitomised by the accident in which the Kolskaya drilling rig capsized and sank while being towed to port in stormy weather, killing 53 of the 67-strong crew. Before the accident, Gazprom had been taken to court for commencing drilling without the necessary permits, but drilling proceeded anyway despite the imminent onset of the ice season.
d) Lack of transparency:
The information provided by both companies on environmental and safety issues is patchy. Rosneft only reports the overall number of oil spills resulting from pipeline ruptures, but not their total volume, while Gazprom provides total volumes of oil spilled but not the number of incidents. By contrast, Shell and BP report on both these indicators.
Equally worrying is the fact that both companies have refused to publish their oil spill response plans for offshore projects – except for a shortened version of the plan for the Prirazlomnaya platform made available by Gazprom.
e) Political risk:
With most of these joint venture projects not expected to pump out the first barrel of oil before 2030, their success hinges on the oil majors’ ability to maintain good relationships, over several decades, not just with their Russian partners but also with the Kremlin, whose history of high-handed intervention in the energy sector is well known. This is likely to prove an uphill struggle, and not just because of the uncertainty over plans to privatise Gazprom and Rosneft, possible changes to tax breaks, and the risk of losing drilling licences.
Russia’s energy policy is also the battle ground of a power struggle between two political factions: the vice-prime minister for energy, Arkadii Dvorkovich, and Rosneft CEO, Igor Sechin, who’s also secretary to the presidential commission on energy strategy. With Sechin and Dvorkovich having been at loggerheads over a number of key issues, including the possible privatisation of Rosneft and Gazprom and the companies’ exclusive access to offshore drilling concessions, the outcome of this turf war will likely affect the success of Arctic joint ventures.
For the full report click here