The question now arises: do Russian companies have sufficient resources for extensive offshore exploration? In order to maintain the production level at 500 million tons in 2035, the output of new exploration projects must be at least 160 million tons a year. Investments in exploration should effectively triple to achieve this. But exploration is a high-risk investment, affording only limited opportunities to use the project financing model. This important argument in favor of foreign investments also means that national enterprises should generally retain a 30%-40% share in each project (depending on the company’s actual ability to finance the project), while giving the rest to an international consortium. Foreign investments should be roughly USD 1 billion to USD 1.5 billion a year.
It would seem reasonable to bring in two or three partners, since even if exploration is successful, subsequent development will require diverting significant financial resources. One can also expect longer periods from the start of exploration to first production. As a result, exploration will have to begin at the time in as many projects as possible, meaning that Russian companies will have a smaller share. This will undoubtedly come into conflict with the principle that national companies must retain a controlling interest (over 50 percent). Importantly, there is great potential for an approach where initial costs are carried by a foreign investor and subsequently compensated for from the positive cash flow. Russia’s largest companies follow this strategy in their deals with international oil and gas majors. This is a common approach worldwide, as it helps national oil companies (NOCs) with large portfolios of new projects to reduce risk – that is, to obtain a higher – return project, provided that exploration is successful, because the NOC will begin to finance negative cash flows only after four to six years. However, there is risk that returns may be insufficient if an extremely attractive oilfield is discovered, dampening the project’s ultimate economic performance for the NOC due to its smaller share. Furthermore, in such a scenario, the NOC will receive no front-end participation fee from the foreign partner, whose risks increase many-fold and require compensation. However, this approach is subject to a number of conditions. Currently, it is common practice for the size of the premium per unit of discovered reserves payable upon the final investment decision to be stipulated in advance. But it is very difficult to set such a premium, as reserve estimates may significantly differ even after exploration and appraisal drilling. In order to avoid disagreements, independent advisors should be engaged who can propose alternatives for effective deal structuring. In the event of a negative (or positive) outcome, such solutions must ensure that the company has no reason for returning to the table to revise the initial terms of cooperation. Such an approach may be asking too much, because it is almost impossible to provide for every scenario, but it is also obvious that a lack of clear rules of the game retards development.
Since investments in exploration must triple so that the level of oil production can be maintained at 500 million tons after 2030, it appears that Russian oil producers cannot do without foreign investments. Exploration-phase financing deals have enormous potential, although they may limit profitability in the longer term.