Oil Prices Fuel Interest in Arctic

ST. PETERSBURG Ч The Far North is an inhospitable sheet of ice and snow. But to energy companies hungry for new supplies, the lure of profits has started to make the region inviting.

With huge reserves of oil and natural gas beneath frigid seas, the Russian Arctic is one of the last untapped treasure-troves of fuel. And the rising price of fuel has made the industry more confident that the risk and expense of getting it are justified, for domestic needs and for export.

The country's energy resources have, in fact, enhanced its economic power in just the last few months, as fuel prices have soared in the West and raised the prospect of shortages this winter. The Organization of Petroleum Exporting Countries recently asked Russia to consider becoming a member Ч the Russians declined Ч and the European Union began talks on sharply increasing its imports of Russian natural gas and oil.

Domestic oil companies in particular are hoping the Arctic becomes their next Siberia, the main source of the country's combustible fuel for the last 30 years. By some measures, nearly half of Siberia's oil reserves have been exhausted.

"The Russian North has great potential to compensate for the drop in production in older wells in Siberia," said Vagit Alekperov, president of Lukoil Holdings, the nation's largest petroleum company.

Lukoil has aligned with Gazprom, the natural gas monopoly, and Conoco, a U.S. oil company, to tap the Russian Arctic. It is estimated that these companies, along with others, will invest more than $20 billion in the next decade to extract its oil and gas.

Lukoil says it plans to spend at least $5 billion to develop the Timan-Pechora region in the Komi Republic Ч and the neighboring Nenets autonomous region. But that is not a lot of money considering Timan-Pechora has one of the largest known reserves of oil, estimated at about 126 billion barrels, enough to supply the world for more than four years. At the price of $32 a barrel, that oil would be worth $4.032 trillion.

Some early efforts to exploit the region's resources failed and energy companies have only recently reevaluated the economics of returning.

A major reason is that oil prices have tripled in the last 18 months to their highest level since the Persian Gulf War, and natural gas prices have doubled in less than a year to record highs.

Developing the Russian Arctic's energy resources, however, will require many more billions of dollars than has been committed.

"The whole Arctic shelf is a vast province of giant oil and gas fields, but there is not enough money to develop all of it," said Igor Gramberg, director of the Institute of Oceanology and Mineral Resources in St. Petersburg.

Foreigners have been reluctant to invest, largely because of Russia's unstable history, shifting tax laws and reputation for violating contracts and reneging on debts.

Conoco, which has operated in Russia for nearly a decade, has one modest operation, a joint venture with Lukoil in Timan-Pechora known as the Polar Lights Co., which produces about 13 million barrels of oil a year.

"We've managed to eke out a small profit," said John Capps, president of Conoco Russia, "but it has consumed more management and legal time just trying to protect our rights than it should."

The Timan-Pechora region is already known for a notable failure Ч a consortium that included Texaco, Exxon, Amoco and a state-owned oil producer, Rosneft. Licensed in 1991, it collapsed after failing to convince investors it was offering a profitable opportunity.

Mindful of such risks, Conoco and Lukoil have agreed to develop another oil field Ч known as the Northern Territory Ч in Timan-Pechora that holds about 1 billion barrels. But Conoco is insisting on a production sharing arrangement that will give it 40 percent of the field's output.

Aside from the cost of drilling in the Arctic, delivering gas and oil to market is perhaps the greatest challenge in a region that is almost always frozen.

Lukoil has just completed a $40 million oil terminal on the Pechora Sea, which will handle about 18 million barrels a year, with plans to triple that soon. The company has also spent the last two years creating an Arctic tanker fleet. Lukoil and other Russian companies are also planning a pipeline that will send oil south to the Gulf of Finland near St. Petersburg.

Moscow seems to be placing at least equal emphasis on developing the Arctic's deposits of gas. The importance of gas was a theme sounded by President Vladimir Putin during a visit last spring to the port of Murmansk on the Barents Sea. "Nearly all our future supplies of natural gas lie under the seabed," he said.