Russia Seeks Venture Capital in Pursuit of Arctic Oil and Gas

As I move into the main meetings here in Moscow, something unexpected has paralleled the conversations on oil prices, European pipeline prospects, liquefied natural gas (LNG) trading scenarios, and the prospects of unconventional shale.

That something is venture capital funding.

The Kremlin developed several venture capital funds with potential state-supported investments amounting to at least $12 billion. Some of those funds have been on the table for a while now. But only recently have officials provided any indication of what they have in mind.

It seems there is a rising acceptance that diversification from a budget dependent upon oil and gas exports may require some rather unorthodox approaches. With at least 50% of the central coffers accounted for by hydrocarbon trade-and at least another 10-15% indirectly based upon those sales-Moscow understands the potential problem.

So long as a country as large as this one must extract raw materials and sell them on the international market as it primary means of securing revenue, overall national financial stability remains at the mercy of end users… somewhere else. With European concerns increasing that the continent remains overly dependent on Russian natural gas, and China continuing to demand significant discounts for both oil and gas imports from its northern neighbor, the financial picture is far from clear.

All of this has led to the novel venture capital wrinkle. It has already become apparent in the sidebar conversations of my meetings, those in power have decided it is time to diversify.

The new venture capital funds are positioned to combine Russian capital and Western technology in a broad range of applications. There is talk of developing new generations of medical equipment and heavy machinery. There is also discussion about harnessing a Russian base for international mobile telephone applications and even web shopping.

This last idea is gaining steam. The venture funds have already invested in several Russian-based consumer product sites that are poised to expand significantly in the next few years.

There is no possibility, however, that Moscow will be able to shed its oil and gas emphasis in the near term. In fact, there will never be a Russian economy in our lifetimes without a main component remaining the oil and gas sector. If this transition is to be successful, it must comprise a concerted commitment from the Kremlin administration to coordinate ongoing investments in fields, pipelines, refineries, and terminals with major injections into those ventures having immediate prospects for success in other international market sectors.

In other words, the first major initiatives are likely to be in projects related to drilling but extending into other prospects.

It may be early yet, but I see signs of where this primary emphasis may be directed.

You should watch out for two aspects with this story.

The first must happen in Russia.

But the second is likely to take shape in an unexpected place: Boston, Mass.

A Naval Transformation Takes Shape

Russia has been grappling with how best to transform its outdated and bloated naval shipbuilding, maintenance, and overhaul assets. These sea bases were the staple of the Soviet and then Russian navy. They were later used to develop a commercial tanker and shipping fleet.

But it is in another area that these facilities will be instrumental in the Russian venture moves to begin diversifying the economy. And this is going to be at the intersection of the oil/gas business and global needs for heavy fabrication.

Several years ago, then Prime Minister Vladimir Putin declared that the under used and under equipped shipbuilding sector would be transformed into a global-leader in the design and construction of offshore platforms and drilling rigs.

Of even greater interest was the initial challenge given at the time – to develop a whole new generation of ice-resistant platforms for Arctic drilling. Moscow had already recognized it could arrest a serious decline in its mature Western Siberian fields only by moving out in three directions. They are:

  • Into highly promising but infrastructure-poor Eastern Siberian;
  • Onto the continental shelf; or,
  • North of the Arctic Circle.

The U.S. Geological Survey (USGS) then issued its long-awaited Circum-Arctic Resource Appraisal (CARA). This major multi-year effort evaluated petroleum resource potential for all areas north of the Arctic Circle (66.56° north latitude) having at least a 10% chance of one or more significant oil or gas accumulation (50 million barrels of oil equivalent or above).

CARA concluded that 84% of the total undiscovered oil and gas left in the world is sitting offshore, the bulk of it in three huge Arctic basins. Russia, the survey concluded, controlled the largest single chunk of it.

But the remainder of what was extractable would also require new equipment to exploit, regardless of who controlled the fields. Russia would be the first in, with several projects already moving to production. It would also need the equipment first.

That has already taken place. The country completed the world’s first ice-resistant drilling platform at one of those former Russian naval shipbuilding bases and successfully towed it out above the Arctic Circle. It will be set up for production next year.

The Boston Connection to Russian Exploration

Moscow has demonstrated it can do the job. What it now needs is infusion of Western technology and expertise, along with a major injection of investment. The Russian venture funds will provide some of that “private sector” stimulus (forgetting for a moment that the funds may be categorized as private but actually are comprised primarily of state funds).

But the country needs to parlay these billions into much larger commitments by private venture funds in other parts of the world, especially those providing access to markets where the needed technology is located.

That introduces the Boston connection.

Established in 2006, but becoming an element of broader interest only recently, RVC-USA is an American arm of the state-supported Russian Venture Co and is headquartered not too far from the Charles River Basin. To date, it has funded several of the larger ventures.

From all Russian initiatives, there have been 45 deals in the past five years having an aggregate value of less than $700 million and comprising a widely divergent market penetration.

It’s a start. But it’s not what the Kremlin or the venture initiatives have in mind. With the transition to Arctic exploration, the country will require significantly more investment.

Which leads me to suggest that we are about to see a larger venture initiative advancing, with some interesting action coming through Boston.

There are other indications emerging. For the first time, the number of financial representatives invited to these annual meetings almost equal the number of representatives from Russian oil companies.

And also for the first time, all seven Russian state-sponsored venture funds are present, as is RVC-USA.

I think we may be on to something interesting shaking out before the next of these sessions takes place at the end of 2013. I’ll keep you in the loop on how these conversations turn out.

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