Russia may break Gazprom and Rosneft‘s Arctic monopoly

In early March, Aide to the Russian President Andrei Belousov reported to Russian President Vladimir Putin about requests from Lukoil for "non-state companies" to be granted access to the Arctic shelf, Russian newspaper Kommersant writes, with reference to a source familiar with the matter.

The CEO and main owner of LUKOIL Vahid Alekperov met with Putin in early February. Presidential press secretary Dmitriy Peskov said then that "a decision has not been made yet, and we do not disclose the course of discussions."

The government and LUKOIL refused to comment.

However, Russia’s lower house of parliament, the State Duma, is to consider making amendments to the law on mineral resources, allowing offshore oil drilling by private companies. Market participants believe that this is primarily about protecting the interests of LUKOIL, which has been trying for a long time, but unsuccessfully, to access the Arctic shelf, which was assigned to the state-owned Rosneft and Gazprom.

Until now, the Russian authorities have been reluctant to change the law, but currently private oil companies are more upbeat about their chances. Due to Western sanctions, state-owned companies have been somewhat discouraged with regard to developing the shelf.

According to Belousov, on January 1, there were 137 licenses for the development of the shelf, of which 49 were held by private companies. These licenses had been issued prior to adoption in 2008 of amendments to the Law "On Subsoil", according to which work on the shelf can only be performed by two state-owned companies. A chief lobbyist for the changes was the then deputy prime minister and now president of Rosneft, Igor Sechin. Rosneft has been sharing the shelf with Gazprom, owning the rights to develop 48 offshore sites, with 40 sites owned by Gazprom. Together they control about 80% of the area with the oil and gas resources.

At the same time, according to Belousov, the pace and scale of exploration work by state companies "cannot be considered satisfactory, posing significant risks to the task of supporting oil and gas production in the long term perspective."

Solving this problem by attracting private investors has been actively discussed in various circles over the past seven years. Rosneft however is not ready to yield easily. According to the company: "in 2014 alone the company performed exploration work in 24 license areas in volumes significantly exceeding its obligations. But the prospects of these projects are unclear. Sources close to the company have acknowledged that it would be hardly possible to start production without the foreign partners who have been lost as a result of Western sanctions.

Belousov’s initiative to abolish the monopoly of state-owned companies on the shelf and criticism of their work also look threatening to Rosneft because the official is viewed as the most likely candidates for the post of Chairman of the Board of Directors of the oil company (a decision is to be made in June).

"His behavior in the interests of Rosneft’s competitors raises questions", a person speaking to Kommersant said.

Another major lobbyist of liberalization of shelf sources has been named as Alexander Khloponin, who is "not satisfied with the policy of Rosneft.

A final decision on this matter is yet to be made.