Russia’s Arctic-Based Oil Mega-Project Struggles to Attract Foreign Investors

Executive Summary:

• Russian officials have played up China’s interest in potentially investing in the Vostok Oil project, though significant challenges remain.
• The mega-project looks to enhance Moscow’s geopolitical ties with Asia, elevate the Northern Sea Route’s competitiveness with the Suez Canal, and promote economic growth.
• Foreign investors have withdrawn from financing the project due to concerns with Rosneft’s incomplete data and Russia’s lack of the necessary Arctic-class ice tankers to transport oil supplies abroad.

On December 19, Alexander Novak, current Russian deputy prime minister and former energy minister, stated that China is looking more into the Vostok Oil project as a possible investment venture. Novak claimed that Chinese investment would make the proposal a “promising project.” Earlier, Igor Sechin, the CEO of Rosneft and a close associate of Russian President Vladimir Putin, had emphasized the importance of this initiative, asking Beijing and Chinese businesses to become investors (Tass.ru, December 19, 2023). Yet, despite the optimistic forecasts from Russian officials, the Vostok Oil project appears to face a number of challenges given the current geopolitical environment and overall regional dynamics. If Beijing should decide not to invest in the initiative, Moscow will have few options for salvaging it.

Russian officials hope to achieve three primary goals with the Vostok Oil mega-project (Vedomosti.ru, November 7, 2023). First, Moscow wants to expand its economic and trade ties with China, India, and Southeast Asia. Second, full realization of the Vostok Oil project would turn the Northern Sea Route into a major international transportation artery and a direct competitor with the Suez Canal. Third, the project could help jump-start the economic and scientific revitalization of Krasnoyarsk Krai and serve as a tool for economic growth (adding 2 percent per year).

The Vostok Oil project is by no means a new initiative. Sechin first advocated for it in 2019 during a meeting with Putin. The main idea was to use the immense natural resources of hydrocarbons on the Taimyr Peninsula in the Russian Far North to create a “hydrocarbon province” in the Arctic. Russian sources have repeatedly stated that there are 6.5 billion tons of liquid hydrocarbons at the base of the deposit (RIA Novosti, October 19, 2023; The Moscow Times, December 25, 2023;  Arctic-russia.ru, accessed January 16). For this purpose, Rosneft, the main stakeholder in the project with an 85-percent stake, engaged foreign players from Hong Kong and the United Arab Emirates in hoping to source the necessary financing. Sechin has stated that, by 2033, Russia plans to export up to 115 million tons of oil annually through the Northern Sea Route. Some Russian outlets already characterize this initiative as a “joint project” between Russia and China (Pronedra.ru, December 20, 2023).

Most recently, Russia openly asked Chinese businesses to invest in the Vostok Oil project during the fifth Russian-Chinese Energy Business Forum in Beijing, organized by Rosneft and the China National Petroleum Corporation. During the event, Sechin delivered a speech personally asking China to become the principal investor in the project. He highlighted the following rationalizations:

• Russia is the only safe, sustainable, and responsible major oil-exporting nation due to the ongoing destabilization in the Middle East. Russia has never jeopardized the uninterrupted supply of its oil to the Chinese market.
• Russia’s other competitive advantage is its pipeline delivery method, which, given the developments around the Suez Canal and the Strait of Hormuz, is far less risky for Chinese consumers.
• Given its abundant natural resources, Russia is strategically committed to exploring and developing new deposits, opening up a new investment avenue for China.
• The realization of the Vostok Oil project would have a lasting positive influence on the global hydrocarbon market, and China would be the primary beneficiary.
• The Northern Sea Route, which represents the shortest trade route between Asia and Europe, could become a new alternative to existing and less secure transportation arteries, opening up a range of new transit opportunities that extend beyond oil and gas. This could create a “qualitatively new transportation configuration on the Eurasian continent” (ru, October 19, 2023).

Sechin also highlighted shipbuilding as another critical aspect for Russian-Chinese cooperation. He mentioned how South Korean Hyundai Heavy Industries, which was a partner in the construction of Russia’s Zvezda Shipbuilding Complex, decided to discontinue its cooperation with Russia. The Rosneft CEO specifically names China State Shipbuilding Corporation as a possible alternative in filling this void. According to Sechin, the Zvezda complex looks to become an integral part (and possible extension) of the Vostok Oil project. Moscow hopes that expanding collaboration with China in shipbuilding would assist Russia’s liquid natural gas (LNG) producers, which are struggling to find carriers to transport LNG supplies from the Arctic to end users in Asia (Neftegaz.ru, October 19, 2023).

On several earlier occasions, Sechin called on Chinese and other foreign investors to invest in the Vostok Oil project. Yet, the number of international partners willing to invest in the project has decreased dramatically since Russia’s full-scale invasion of Ukraine. After February 2022, two major foreign investors, Dutch Vitol and Singaporean Trafigura, sold their shares in the project. In 2022, Russia was unsuccessful in convincing Azerbaijan and India to fund the project (Neftegaz.ru, October 27, 2022).

Mikhail Krutikhin, co-founder and leading analyst of the Moscow-based RusEnergy independent consulting agency, has argued that Russia’s struggles with attracting foreign investors are primarily based on three aspects. First, Moscow will not be able to transport the declared amount of oil, around 30 million tons per year, to end users through the Northern Sea Route anytime soon. Russia does not have enough Arctic-class ice tankers to accomplish this, and other tankers will not be able to operate in the eastern part of the Arctic Ocean for most of the year. Second, a Northern Bay terminal, which would be critical for oil transactions, does not exist, nor are there any new oil pipelines that could transport the declared amount of exports. Third, and perhaps most importantly, Russia may have exaggerated the estimated capacity of the Vostok Oil project. Krutikhin pointed out that the numbers provided by Moscow are largely hypothetical and based on results from research done on one site, the Zapadno-Irkinskoye deposit. The Russian energy analyst concluded that, given the high geological risks of extraction and the incompleteness of Rosneft’s data, the economic sustainability of the Vostok Oil project is “extremely questionable.” Russia’s foreign partners seem to be well aware of this (Moscowtimes.ru, December 21, 2023).

The Kremlin will likely face additional challenges in its struggle to find new partners and adequate financing for its Vostok Oil project. While it is difficult to accurately predict the mega-project’s future, given the current geopolitical environment and risks mentioned here, it is doubtful that China or any other major international actors will commit to this highly questionable Arctic project in the near future.