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The Magadan Roulette: Rosneft Wants Foreigners to Assume Risks in the Sea of Okhotsk

This is an abridged version. The full text is avaiable to subscribers to The Russian Energy weekly.

Rosneft invites international companies to participate in exploring a few offshore blocks in the Sea of Okhotsk even though it has not yet obtained the licenses. Negotiations go on but actual agreements are still far away. The blocks are risky affairs and the terms do not appear too exciting.

Itchy Partners

The Russians have been attempting to attract foreign companies to exploration of potential reserves off the coast of Magadan for two decades already. In April 2011, Minister of Natural Resources and Ecology Yuri Trutnev promised to award the licenses to three blocks in the area to Rosneft before yearend, bypassing the regular tenders and auctions. The state-controlled company applied for the licenses in 2008 and it took the Federal Subsoil Use Agency (Rosnedra) two years to draft a governmental ordinance to make it possible.

Rosneft President Eduard Khudainatov is optimistic. ‘We expect some decisions to be made this year,’ he says. ‘Chinese and Japanese companies are greatly interested. Their hands are itching for work but we do not let them in without first obtaining the licenses.’ According to Khudainatov, exploration may begin shortly. Potential resources of three Magadan blocks are tentatively estimated at over 2 bln t of oil and 1.5 tcm of gas.

Industry experts do not share this optimism. ‘It would certainly be fine for Rosneft to transfer all geological risks of Magadan exploration to a partner with a minority stake, but no such miracles are going to happen. The probability of failures is too high and searching will absorb hundreds of millions dollars,’ a Russian official who was involved in preparation of Magadan tenders in 2005-2006 said to RusEnergy. ‘Foreigners will think more than twice before making the investment decision.’

In other parts of the world, exploration of unknown offshore acreages in hard climatic conditions is done by large international consortia. Partners minimize risks this way. In Russia, the standard scheme is domination of state companies who expect foreign partners to pay for the risk. It explains why offshore projects have been on the back burner for years in this country.

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