April 25, 2012 / 12:25 PM / 5 years ago

Eni and Rosneft team up in Russian Arctic

Paolo Scaroni, CEO of ENI delivers the keynote address at the annual CERAWeek energy conference in Houston March 6, 2012. REUTERS/Richard Carson

MOSCOW (Reuters) - Rosneft (ROSN.MM) and Eni (ENI.MI) signed an agreement on Wednesday in the presence of Russian Prime Minister Vladimir Putin to jointly tap fields in Russia’s Barents and Black Sea zones, in Rosneft’s second Arctic deal in two weeks.

The deal may not yield commercial oil production for years, but for Eni it secures a foothold in an untapped and strategically important new province, and for Russia, it brings in the capital needed for long-term projects to keep its oil flowing.

Russia, the world’s largest oil producer, is facing declining output at Soviet-era oilfields and, dependent on energy for over half its revenue, Putin’s government has redoubled efforts to bring in foreign investment in his final days as prime minister before he returns to the presidency.

In the six weeks since he won the presidential election, Putin has approved sweeping tax breaks to attract foreign investors to develop new offshore fields, and presided over a landmark Arctic drilling deal between Rosneft and U.S. ExxonMobil (XOM.N).

Eni, which had a commercial relationship with the Soviet energy industry and started producing gas here last week in a joint venture with two Russian companies, has said “giant projects” in Russia are key to plans to boost overall output.

“Today Eni is moving on to work in Russia in a new quality. We are talking about work on the continental shelf. This is a large-scale and long-term operation,” Putin told a signing ceremony.

“I am sure these offshore projects will be successful, and the Russian government will do everything it can to support these kinds of projects.”

The deal is modeled on the Exxon-Rosneft pact, with Eni taking a minority stake of 33 percent in the exploration venture and shouldering up-front investment costs to develop combined recoverable resources estimated at 36 billion barrels, equal to about 14 months of total global oil consumption.

Rosneft will gain access to Eni projects outside Russia - part of a Kremlin strategy to expand the country’s oil industry abroad and gain know-how to apply to projects at home.

“We have started discussion over possible destinations, which could be of an interest to both parties,” Eni Chief Operating Officer Claudio Descalzi told a briefing after the signing.

“Particularly, we are talking about North Africa, Alaska, the U.S. and Northern Europe. In the next few months we will start discussions over concrete destinations of the cooperation and projects.”

The prize for foreign producers is access to reserves. At 18 billion barrels, Rosneft’s proven reserves are the largest of any listed oil company and enough to sustain its current rate of oil output for 21 years.

But it estimates its hydrocarbon ‘resources’ - which have yet to be explored and appraised - at more than 10 times higher at 206 billion barrels.

That would make Rosneft’s offshore resources larger than the 100 billion barrels held in Brazil’s ‘pre-salt’ province in the Atlantic basin, which is yielding a production bonanza for state-controlled oil firm Petrobras (PBR.N).

About two-thirds of Rosneft’s resources are in the Arctic offshore, much of it icebound with no infrastructure - a daunting prospect for investors who face tens of billions of dollars in costs to develop the province from scratch.

A QUESTION OF TAX

Putin’s announcement that Russia would lighten the offshore tax burden - by scrapping duties and cutting mineral extraction tax - has triggered a “snowball effect” among foreign majors rushing to seek deals, one industry source said.

The proposed tax regime, which has yet to be made into law, is designed to guarantee investors an economic rate of return on their investment and predictable taxes for 15 years.

“None of this could have happened had you not taken action on the Russian tax system,” Eni Chief Executive Paolo Scaroni told Putin in Russian translation.

Foreign players have long been deterred from investing in Russia by onerous energy taxes that capture 90 cents on the dollar at the margin for each barrel of crude exported.

Only BP (BP.L) has a big onshore presence through its 50 percent stake in Russia’s No.3 oil firm TNK-BP TNBP.MM - a troubled but profitable venture that ended up getting in the way of the British major’s own offshore deal with Rosneft last year.

Industry and political sources say Putin’s returning to the Kremlin on May 7 has opened the way for the furious dealmaking by state energy companies.

Deputy Prime Minister Igor Sechin, a Putin confidant, has been behind a push to fix the tax regime and secure deals for Rosneft before Putin names a new team, which may trigger the loss of his formal brief as Russia’s top energy official.

A QUESTION OF TIMING

Arctic oil, however, will be a long time in coming for the Eni-Rosneft venture. While exploration drilling in the Black Sea’s Western Chernomorsky block is due to start in 2015-16, drilling in the Barents Sea will begin in earnest only in 2026.

Eni has had operations in the Norwegian sector of the Barents Sea since 1965, and Scaroni has named the region as a key area for the group’s strategic development.

Eni announced in January that oil and gas had been found at the Havis project, around 200 km off the Norwegian coast, in which it has a 30 percent stake. Norway’s Statoil (STL.OL), with a 50 percent stake, is operator of the project.

Rosneft earlier this year won the right to develop the two Arctic blocks covered by the agreement, called Tsentralno-Barentsevsky and Fedynsky. A third block received at the same time - Perseevsky - was not covered in the deal.

Additional reporting by Stephen Jewkes in Milan, Writing by Melissa Akin and Douglas Busvine; Editing by Elizabeth Piper and Will Waterman

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