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Arctic Oil

The estimates of Russian oil reserves don't even count Arctic or shale oil deposits, which taken together should easily increase Russia's reserves to over 200 billion barrels—or over 10 percent of the world total.

It's true that there are competing claims on Arctic resources, with Canada, the United States, Norway, and even Denmark (via Greenland) all elbowing for a share of the undersea treasures. But in March 2014, Russia pushed to the head of the pack.

After 13 years of wrangling, the UN's Commission on the Limits of the Continental Shelf awarded Russia jurisdiction over a 20,000-square-mile area in the Sea of Okhotsk. Putin wants as much of the Arctic as he can get. In April 2014, he announced the formation of a "united system of naval bases for ships and next-generation submarines in the Arctic," to defend Russia's interests there. He also suggested "strengthening of the naval component of the FSB."

Exploring for and developing oil in the Arctic are about as heavy as heavy industry gets. But Russia has already proven that it is up to the challenge. In 2014, it began production at the Prirazlomnaya oil field in the Pechora Sea, where 40 wells are being drilled to tap into a 530-million-barrel pool.

The command center for the project, a massive offshore platform, is an engineering marvel—the first platform built in the Arctic. It's designed for extreme conditions and to withstand high winds and ice loads. The special alloys used in its construction are resistant to salt corrosion, low temperatures, and constant wetness. The platform's own weight (500,000 tons, including a stone berm that protects against scouring by drifting ice) anchors the entire structure to the seabed. A high-strength deflector shields the platform from waves and drifting ice.

Prirazlomnaya is also designed to preclude oil spills. All the wellheads are situated inside the platform perimeter, so the platform's foundation stands between the wellheads and the open sea.

Putin is open to cooperating with the West. In 2009 his pet company, Rosneft, signed a deal with Exxon Mobil for joint ventures in Arctic oil exploration. For Exxon, it was a 180-degree turn from five years earlier, when the company fled Russia after Putin's takedown of Mikhail Khodorkovsky (detailed in Chapter 2). The deal was renewed in 2011 and again in 2013, despite the war of words between Putin and Obama over human rights and the extradition of Edward Snowden.

The two companies agreed to develop wells in the Kara Sea (potential reserves of 36 billion barrels) with construction of 15 sea platforms costing $300 billion. They also planned to cooperate in fracking shale fields in Siberia, drilling in the Black Sea (8.6 billion barrels in reserves), and building a terminal in Russia's Far East to export liquefied natural gas.

Under a separate 2009 deal, Rosneft gained a 30 percent stake in Exxon Mobil projects in the United States, the Gulf of Mexico, and Canada.

Nor is Russia put off by political instability. The Mideast division of another Russian company, Lukoil, recently began production at its 75 percent owned West Quma-2 property in Iraq. West Quma-2 hosts 14 billion barrels of oil reserves; Lukoil's production goal is 1.2 million bpd for 20 years.

European Market

Europe is Russia's richest customer. The European Union has a modern, energy-eating economy but very little domestic oil production. There is the North Sea, largely the province of Norway and Great Britain, and that's about it. And North Sea reserves are dwindling.

Today, with so much Russian oil available for export and with the country located next door to Europe (Putin would say "in Europe"), many EU members now rely heavily on Russian oil. Piping it from Russia is more economical than getting it from the Middle East, and doing so sidesteps that region's uncertainties.

Finland and Hungary get almost all their oil from Russia; Poland more than 75 percent; Sweden, the Czech Republic, and Belgium about 50 percent; Germany and the Netherlands upwards of 40 percent.

Between 2002 and 2010, Russia's share of the overall European oil market grew from 29 percent to 34 percent. Exports to Europe from members in Russia's Commonwealth of Independent States rose as well. Kazakhstan's share jumped from 2 percent to 6 percent, and Azerbaijan's increased from 1 percent to 4 percent.

This quasi-dependence gives Putin a strong hand in dealing with the European Union. None of those countries is going to risk its supply by interfering with any of his policies, no matter how irritated the United States gets over Russia's geopolitical maneuvering. And the numbers in Putin's Oil = Power equation are going to keep getting bigger as Russia's control and output of energy continue to grow and as Europe's supply from other sources dwindles. From 2002 to 2010, Norway's share of the European oil market dropped from 19 percent to 14 percent, and Saudi Arabia's shrank from 10 percent to 6 percent.

Sure, most European countries would dearly love to wean themselves off Russian oil. But what are they going to do? The list of alternatives is short:

• Venture outside the continent for oil

• Drill within their own borders

That's it. Concerning the first choice, large oil deposits are harder and more expensive to find than ever, and many regions that may still harbor such elephants—Arctic deposits come to mind—can be so difficult to operate in that they're economically out of reach for most countries. To make things worse, Europe would have to compete with China and India, two nations whose governments have gone all-in in the race to secure deposits that will yield long-term supplies.

That leaves the second choice. The problem is, there is very little in the way of conventional oil deposits in Europe. There may not be much unconventional oil, either, but if there is, no one will get it out of the ground in France, which has banned fracking. The Netherlands may soon follow suit. And Germany's tight environmental regulations preclude fracking for natural gas. So, although conventional drilling in Europe is increasing—from just over 80 rigs in 2009 to nearly 140 today—it's not even close to being enough.

Europe will still have to deal with Putin.

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