Joint Ventures in Arctic Resource Development
Carl H. McMillan
Under its new leadership, the Soviet Union has engaged in a series of important foreign policy initiatives in a wide range of areas-initiatives that pose fresh challenges and opportunities for the rest of the world. The Arctic is one of these areas.
The Soviet Union has recently approached Canada and other northern countries to propose a new basis for co-operation. In the Canadian case, the Soviet government proposed a bilateral treaty for the Arctic in early 1987. The terms of the draft treaty are still under discussion. (See Northern Perspectives, Special Edition, October 1987.) Is Canada on the threshold of arctic economic co-operation with the Soviet Union?
The substance of the new Soviet approach was perhaps most clearly revealed in Soviet leader Mikhail Gorbachev's speech at Murmansk on 1 October 1987. In this important address, Gorbachev outlined a plan for peaceful international co-operation in the development of the North comprising:
Gorbachev made it clear that energy is to be the focus of northern resource development, and he alluded to a "unified energy program for Northern Europe". More specifically, he called for co-operation in the exploitation of oil and gas resources on the Soviet continental shelf and on the Kola Peninsula. The Soviet leader raised the possibility of joint enterprises with foreign companies, explicitly mentioning Canadian and Norwegian firms as likely partners.
Why should the Soviet Union place such emphasis on enlisting foreign co-operation in the exploration and development of its arctic energy potential? In the accompanying article, John Hannigan describes the predominant role of the North in the Soviet Union's oil and gas output. He also notes the difficulties currently faced in maintaining levels of production in established oil fields and the clouded outlook created by the declining ratio of proven reserves to current output. In these circumstances there is tremendous pressure to find and develop new energy supplies. Exploration to date indicates the more geologically promising areas to be offshore, in the Barents Sea to the West and in the Sea of Okhotsk in the Far East.
Although the U.S.S.R. has had decades of experience in offshore oil production in the Caspian Sea, this experience is of limited relevance to the North. Not only are the climatic conditions in the Caspian more favourable, but the extraction of oil until recently has been in shallow waters, from fixed drilling piers. The requirement for specialized equipment, technology, and know-how in the Arctic has forced the U.S.S.R. to turn to foreign partners. Although an indigenous Soviet capability is being developed, the ambitious nature of the program will continue to demand foreign involvement.
In the northern areas of the Far East, the Soviet effort to develop offshore oil has concentrated on the shelf extending north-east from the upper end of the island of Sakhalin, in the Sea of Okhotsk. There, after 1974, exploration and development were carried out in partnership with a consortium of mostly Japanese companies, in which Gulf Oil Corp. (U.S.) was a participant. However, development off Sakhalin has progressed slowly, plagued as much by political as by technical problems: the ongoing territorial dispute between Japan and the U.S.S.R. over the southern Kuril Islands and the U.S. energy equipment and technology embargo. After a long hiatus in the 1980s there are signs that Western participation in the Sakhalin project may be reactivated.
Gorbachev's emphasis on the western Arctic in his October speech was, in part, a function of its being delivered at Murmansk. Nevertheless, there is much to suggest that the U.S.S.R. is giving priority to offshore development in the Barents S ea. The oil explorations in the Barents are more recent than those in the Far East but reportedly reveal greater geological potential. Although farther north, the Barents has ice cover only in the winter months, and the western Barents (in the Murmansk-Kola area) is ice-free all year round. In addition, it is closer to the potential domestic market represented by Russian industry and to the export market in Western Europe.
None the less, there are tremendous technical problems to be overcome in the Barents which, in this sense, is the "frontier" of Soviet offshore exploration and development. There is also the problem of conflicting claims to mineral rights in the western Barents with Norway. To date, the Soviet Union has looked primarily to the Scandinavian countries, especially Norway and Finland, for technical assistance in the Barents operations.
It is not surprising that Canada and Norway should have been singled out as potential Soviet partners in arctic energy development. Apart from the United States, they are the countries with the most direct experience in offshore exploration and development in northern waters. Furthermore, Soviet efforts to foster energy co-operation arrangements with U.S. firms in the 1970s collapsed for political reasons; these cannot easily be revived, so long as the Arctic remains a focus of superpower confrontation.
Canada's offshore arctic program is probably the most relevant to Soviet requirements. Certainly, the Soviet Union has shown interest in it, and a Soviet gas industry mission inspected Canada's offshore Beaufort Sea facilities in the summer of 1984.
However, co-operation between the two countries in the areas of equipment and technology related to arctic energy exploration and development has been limited. It has evolved largely under the aegis of the 1971 Agreement for Co-operation in the Industrial Application of Science and Technology (INDEXAG), and the mixed economic commission and oil and gas working group set up under it (with major Canadian oil companies as members). Although some equipment sales resulted, the most notable activity of the working group was the organization of a joint testing program for deep drilling equipment and techniques.
On the Canadian side, the Canadian Drilling Research Association (CDRA), a consortium of 16 oil and gas exploration companies, was established in 1974 to implement the program. The Soviet Union was interested in Canadian expertise in drilling in the arctic permafrost; Canada focused on the Soviet turbo-drill technology which had been used on the Kola Peninsula to drill to unprecedented depths. This technology was tested in Alberta in 1975-76, to determine both its technical and economic feasibility.
The second phase of the joint program was the testing of Canadian technology in 1977-78 at the Vosei oil field in the U.S.S.R. Although the field is onshore, the basin extends offshore, into the Pechora Sea. A well, equipped with Canadian drilling and related equipment, was drilled to a depth of nearly 15 000 feet.
Despite initial successes, time soon ran out on this testing program, and the follow-up that might have been anticipated was not achieved. The Soviet invasion of Afghanistan in 1979 and the subsequent Canadian sanctions resulted in the suspension of activities under INDEXAG. Meanwhile, the reorganization of the ministries of Industry, Trade and Commerce, and External Affairs, on the Canadian side, led to a dispersal of the officials involved in many of the bilateral programs under INDEXAG.
The hiatus in bilateral relations that the Afghanistan sanctions ushered in continued until 1983, when the first meeting of the mixed economic commission since 1978 was convened. The Alberta government (Ministry of Economic Development, International Trade Branch) has meanwhile been active in encouraging its oil and gas equipment suppliers to examine the Soviet market. In the fall of 1981, it organized the first provincial participation in an industry trade show in Moscow. Several Alberta firms have since sold oil and gas equipment and technology to the U.S.S.R.
In the mid-1980s, the most important instances of Canadian participation in Soviet resource development have involved Lavalin Inc., the Quebec-based engineering-construction company, through its Alberta subsidiary in the oil and gas sector, and Canadian Foremost Ltd. of Calgary, manufacturers of all-terrain vehicles. Lavalin has won three separate bids for the development of oil and gas fields and related treatment facilities in the Volga-Urals region of the U.S.S.R. The collective value of these contracts is reported to be in excess of $300 million. Foremost, which has sold special-purpose vehicles of various kinds to the Soviets since 1961, has recently entered into what may become the first Canadian-Soviet joint venture in the U.S.S.R. Its purpose is to jointly develop and manufacture a giant (70-ton), all-terrain, tracked vehicle, the YAMAL, to be used in pipeline construction. "Yamal", it should be noted, is the name of the Soviet peninsula that extends into the Kara Sea in the western Soviet Arctic, and which is to be the site of the next phase of the Soviet gas development program in northern Siberia.
In 1984, after some 10 years of on-again, off-again negotiation, Canada and the U.S.S.R. concluded the Protocol on Scientific and Technical Co-operation in the Arctic and the North, which was extended in 1987. (See W. Slipchenko, "Co-operation in Arctic Science", Northern Perspectives, May-June 1987). Although the protocol covers programs that range far beyond the economic, several have important economic implications. The Canada-U.S.S.R. protocol was explicitly cited by Gorbachev in his Murmansk speech as an example of the international co-operation in arctic science and technology he would like to see enlarged.
With the programs under the protocol well initiated and the machinery for trade and economic co-operation established in the 1970s reactivated, the intergovernmental framework for bilateral co-operation in arctic resource development is in place. Joint activities, such as the Polar Bridge ski expedition help create a favourable climate of public opinion. The political conditions will be further improved if the proposed arctic treaty is concluded. All of this sets the stage for action at the business-enterprise level. The lifting of the U.S. embargo on oil and gas equipment sales to the U.S.S.R. in 1987 relaxes the system of allied export controls which has in the past inhibited the activities of some Canadian firms.
The opportunities for Canadian firms may be present, but they will not be easy to exploit. The Soviet Union is in the throes of a major economic reform which holds the long-term promise of improving the conditions for co-operation, but in the near term has disrupted the administration of Soviet foreign economic relations. The deterioration in the Soviet Union's external financial position, largely as the result of declining oil export revenues, has served to spur its interest in arctic energy development, but it places important payments constraints on foreign participation. In these circumstances, Canadian firms will have to be prepared to deal with a Soviet foreign trade system in transition and with the practical difficulties and uncertainties this creates for doing business with the U.S.S.R. They will also have to be willing to face countertrade demands and pressures to enter into product-payback arrangements, joint ventures, and other payment-offset schemes if they respond to Gorbachev's call.
Carl McMillan is Professor of Economics at Carleton University in Ottawa.