WORLD BUSINESS: Energy on Ice; Rising Oil and Gas Prices Revive Interest in Russia's Arctic Fields

By JOHN VAROLI

The far north of Russia is an inhospitable sheet of ice and snow more than half the size of the the 48 contiguous United States. But to Russian and foreign 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 Russia's needs and for export.

Russia's energy resources have, in fact, enhanced the country's economic power in just the last few months, as fuel prices have soared in the West and raised the prospect of shortages this winter. OPEC asked Russia to consider becoming a member at its meeting last week -- the Russians declined -- and the European Union began talks with Russia over the weekend on sharply increasing its imports of Russian natural gas and oil.

Russian oil companies in particular are hoping the Arctic becomes their next Siberia, the main source of Russia's combustible fuel 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, Russia's largest petroleum company.

Lukoil has aligned with Gazprom, the Russian natural gas monopoly, and Conoco, an American oil company, to tap the Russian Arctic. It is estimated that these companies, along with others, will invest more than $20 billion the next decade to extract the region's oil and gas.

Lukoil says it plans to spend at least $5 billion to develop the Timan Pechora region in the Komi Republic 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 today's prices of roughly $32 a barrel, that oil is worth $4.032 trillion.

Some early efforts to exploit the region's resources failed, and energy companies have only recently re-evaluated the area.

A major reason is that oil prices have tripled the last 18 months, and natural gas prices have doubled in less than a year.

Developing the Russian Arctic's energy resources, however, will require many more billions of dollars than have 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 bet, 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 nearly a decade, has one modest operation, a joint venture with Lukoil in Timan Pechora known as the Polar Lights Company, 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.''

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

Mindful of such risks, Conoco and Lukoil have agreed to develop another oil field -- known as the Northern Territory -- in Timan Pechora that holds about a 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 may be the top 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 the gas was a theme sounded by President Vladimir V. 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.

In June at the World Gas Congress in France, the German oil and gas company, Wintershall, announced plans for a $1 billion joint venture with Gazprom to develop the Prirazlomnoye oil field on the Arctic shelf. And Rosshelf, a Gazprom subsidiary, hopes to sign a production sharing agreement with the Russian government by year-end to develop one of the world's largest natural gas deposits, the Shtokmanovskoye field in the Barents Sea.

Organizations mentioned in this article: Organization of Petroleum Exporting Countries (OPEC); European Union; Lukoil; Gazprom (Russia); Conoco Inc Related Terms: Oil (Petroleum) and Gasoline; Prices (Fares, Fees and Rates); International Trade and World Market; Economic Conditions and Trends; Shortages; Capital Investment; Production Top of Form 1