Russian Oil Behemoth Rosneft Has Unlocked the Arctic

Last year, Russian state-controlled oil conglomerate Rosneft became the largest oil company in the world after acquiring one of its major competitors. The company has had its sights on tapping Russia's vast, treacherous Arctic reserves, and after making a few huge deals, it looks like it now has the resources needed to do so.

Russia's Arctic is estimated to have 25 to 30 billion tons of recoverable oil reserves, which is stunning when you consider there are around 359 billion proven reserves worldwide, including shale oil and oil sands. The only problem is that the Arctic reserves are incredibly hard to exploit, as we saw with Shell's platform disaster earlier this year. Fields in the Kara and Barents Seas are stuck in incredibly cold and rough seas, and the huge reserves in Siberia's Laptev, East Siberian, and Chuckchi Seas are additionally separated from population centers by thousands of miles of tundra.

Those vast oil and gas fields aren't impossible to tap, just expensive. With oil platforms in the farthest reaches estimated to cost somewhere between $5 billion and $8 billion apiece, it should come as no surprise that the Arctic has remained quiet this long. (It's also a reason why Soviet scientists wanted to melt the whole thing.)

Rosneft has been snapping up the majority of drilling licenses, and it's been costly. For example, Rosneft's deal last year to buy TNK-BP, the country's third-largest oil producer, for $55 billion came about a year after TNK-BP blocked a partnership between Rosneft and BP to snatch up rights to the lucrative East-Prinovozemelsky field.

The question then was how Rosneft would fund that acquisition, which allowed it to buy drilling rights in the Kara Sea. The company has found the answer in the form of a $270 billion plan to double exports to China. It's reportedly one of the biggest in the history of global oil deals, and Russian President Vladimir Putin said that total deliveries to China could peak at 900,000 barrels per day during the 25 year deal.

Crucially, it comes with a $30 billion to $70 billion upfront prepayment from the Chinese government, which means Rosneft can now afford to pay off the huge debt it incurred in the TNK-BP deal, along with a host of smaller licensing agreements, and focus on putting funds towards developing its Arctic interests. In plain terms, Rosneft had already won the keys to the Arctic, but now it can finally afford to use them.

The TNK-BP acquisition locked up the East-Prinovozemelsky field in the Kara Sea, but Rosneft hasn't stopped there. It also recently started offshore seismic operations to find reserves in the Barents Sea in a partnership with Italian petroleum conglomerate Eni. Also, as part of its bid to double its natural gas production by 2020, Rosneft also finalized a $2.9 billion agreement to buy the 49 percent of the Itera Oil and Gas Company that it didn't already own.

Rosneft isn't just expanding into the Arctic. Notably, it's made moves in Chechnya and Venezuela in the last month or two. But the quintet of seas in Russia's Arctic remain some of the last largely untouched oil reserves on the planet, and as such are unfathomably valuable.

Rosneft, which has plenty of supporters in the Russian government, now appears to have put together all the pieces of the Arctic puzzle. It owns up to 75 percent of total drilling rights in the Russian shelf, and it's either bought all or parts of much of its competition, including a 10 percent stake in rival behemoth Gazprom. That spending spree didn't mean a thing if it couldn't afford to exploit its newfound fields, a problem solved by its incredible deal with China. It'll be a few years yet before Rosneft can develop the infrastructure it needs, but with its cash flow no longer impeded, it remains only a matter of time.

@derektmead