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Russia's oil drilling plans may be in jeopardy without the West's support

ARI SHAPIRO, HOST:

Russia's government depends heavily on oil and gas revenues to help bankroll its budget and even to potentially help fund its war in Ukraine. For years, Moscow has sought to ensure its place as one of the world's top energy producers by expanding drilling in the Arctic. But the Kremlin's war in Ukraine could jeopardize those plans, as NPR's Jackie Northam reports.

JACKIE NORTHAM, BYLINE: Russia has vast untapped reserves of oil and gas in the Arctic. Despite harsh conditions and exorbitant cost, Western energy companies - among them Shell, Exxon, Total - have flocked to Russia's far north for over a decade, providing critical financing, technology and expertise to Russian companies.

DAVID GOLDWYN: The oil exploration - just the drilling and the operations and the project management - has all been done with Western technology.

NORTHAM: David Goldwyn is president of Goldwyn Global Strategies, an energy advisory firm. He says Western companies have reduced their involvement in the Russian Arctic since Crimea was annexed in 2014.

GOLDWYN: It will be extremely hard for the Russians to develop oil and gas resources without Western technology. They have some conventional drilling technology themselves, but not the special coatings and pipe and artificial intelligence, which they need to develop those oil and gas fields.

NORTHAM: During a televised government meeting earlier this week, President Putin said Russia must press ahead with development of the Arctic region despite the difficulties of Western sanctions. Matt Sagers specializes in Russian energy at S&P Global, a research and analysis company. He says the U.S. and its allies knew where to target their sanctions.

MATT SAGERS: It was about hitting Russia in their future development. It was about sending a shot across the bow of basically cutting off their future.

NORTHAM: Western oil and gas companies, many with significant stakes in Arctic projects, have announced they will begin unwinding their operations in Russia or pull out completely, says Sagers.

SAGERS: This has been headlined by companies like BP that have been there for a long time. It's become very difficult to do business in Russia now. Not only do you have the reputational risk, but you also have the financial issues as well. How do you transfer money in? How do you run payroll? You know, what kind of risks are your people taking - and all that kind of stuff?

NORTHAM: Some Arctic projects will now be delayed or shelved, but a major liquefied natural gas project called Arctic LNG 2 is near completion and expected to come online soon. And work continues on the high-profile Vostok Oil project, which is expected to pump 2 million barrels per day by 2030, says Daria Melnik, a Moscow-based analyst for Rystad Energy, a research group. Vostok is being developed with the state-owned Rosneft energy company and is critical to Russia's overall energy strategy.

DARIA MELNIK: Rosneft continues to develop the project despite these challenges related to the financing of the project. But it still continues to invest in the project, meaning that this project is very, very important for Russia, even though it is quite expensive and risky.

NORTHAM: But Arctic drilling could be profitable, and Melnik says Russia hopes the Western backing will return someday.

MELNIK: The overall intention of the Russian state is to give some time for foreign companies to cool down, and maybe we will see that some companies actually will not leave Russia and will stay there.

NORTHAM: Ariel Cohen, an energy specialist at the Atlantic Council Eurasia Center, says Russia might have to turn to China for help financing the Vostok Oil project.

ARIEL COHEN: And one of the scenarios we saw again and again is when a Russian project goes down, they run to the Chinese, and the Chinese buy it pennies on the dollar, squeezing the Russians really hard.

NORTHAM: Which means that windfall of Arctic oil money for Russia's energy security may not be a sure thing after all.

Jackie Northam, NPR News. Transcript provided by NPR, Copyright NPR.