Arctic territory today is the most perspective territory for oil and gas companies. It is not only resource based or in other words, Arctic boarding countries that should engage in arctic exploration as it requires completely new technological advancement, calling for intense attention to its field development. Following the USGC research developed in 2008 year, more than 80% of perspective Arctic territories are located in offshore. This fact inevitably conveys technical and legislative risks which are not experienced onshore or conventional offshore fields. Technical risks are associated with severe climate conditions, sensitive ecological situation and a lack of field development experience on these territories. Legislative risks depend on the arctic country in question. Legislative also include taxation system that directly affects the efficiency of field development. All this makes it actual to study technical and legislative risks associated with arctic offshore field development. Practically, the work consists of two parts: analysis of influence of technical risks and legislative risks (including taxation system) on field development in different Arctic Seas and two cases in Russian Barents Sea and Norwegian Barents Sea were studied. Analysis of technical and legislative risks in these countries are determined by similar conditions of state participation and strategic meaning of Arctic territories for both countries. In the frame of technical analysis risk classification system according to different Arctic Sea conditions was worked out. Probability for each technical risk was assessed in expert way and included in the field development project evaluation, which in turn was made using real option valuation and stochastic modeling approaches. In order to receive synergetic effect, valuation model of filed development with technical risks were then incorporated into economic model, which includes legislative restriction and taxation. These conditions differ according to territory in Russia which is the opposite in Norway, allowing us to create territories with similar climatic conditions and geological perspective, analyzing technical and legislative risks.
One of the primary energy sources, natural gas is widely used for power generation, industrial production, transportation, commercial buildings, and households. The industry is a capital intensive one for all stages from exploration to delivery. Two types of supplies: pipeline and Liquefied Natural Gas (LNG), recently have faced a direct intra-industrial competition. Physical nature of methane and associated transportation costs lead to domination of so-called "natural monopolies" or "national champions" and strict government regulation, which postponed the development of free trade and competition. After decades of technical innovations and cost curve improvement in LNG sector, shale boom in the USA, increasing global consumption, and demand for supply diversification reformulated the role of gas in the global energy balance. While the pipeline sector remains to be in the hands of large corporations and a subject of strategic interstate and international agreements, or LNG provides more diversity and flexibility of trade. However, even after a long history of LNG shipment since the late 1950s, LNG market is still regional with high spreads between countries and terms of delivery.
The paper presents the evolution of business models in the natural gas industry, focusing on the primary drivers as government regulation, production technologies, and regional markets trends on the way to liberalization and cointegration. Thus, our primary objective is to show relative influence power of these drivers. This analysis also defines the competitiveness of corporate business model under conditions of asymmetric information, regional gas markets, deregulation trends, fast-growing production technologies and downstream infrastructure (specifically in LNG sector). We also enclose the analysis of the most globally competitive gas projects. We analyze changes in value chain change and trading contracts. Our methodological approach poses model-based principles, including option and contract models, jointly with game theory elements.
Risk Management approach is an essential part of the project. Large industries and particular companies incorporate RM Culture. Statistics shows, that companies with Project Management (PM) Structure reduce cost ineffectiveness up to 20%. In oil and gas industry PM Risk Analysis (PRMA) has been widely used for the last years. Various models and procedures have been developed to manage projects of different scale. Nonetheless, Offshore Projects (OP) complexity, high uncertainty of technical, financial, market and government factors, as well as different sea conditions, still makes sense to improve general PRMA models according to the oil and gas OP features. Traditional RM tools and techniques are not appropriate to cope with complex projects in the Arctic. Companies will have to modify risk assessment process or look for new methods. The paper suggests OPRMM, where the attempt to implement PM tools and techniques together with mathematical modeling and expert assessment is made and institutional factors are included. Practically, it is founded on the comparison between offshore field development in the Barents Sea and the Kara Sea. The reason for research is debates around future Arctic oil and gas projects and their commercial potential. Several large projects with participation of major international companies in the Barents Sea and the prospectivity of the Kara Sea Projects in conditions of technology difficulties are under discussion and have not reached the investment project phase yet. OPRMM starts with identifying the key factors, which could affect offshore field development. Inside the investment regime modified real option value (ROV) model for OP is developed: stop option and scale transformation option. Basing on the binominal trees and Monte Carlo Simulation it is possible to see the perspectives of the OP at an early stage in the conditions of high uncertainty. Incorporating the ROV model into investment regime allows operator to choose the territory to explore. The research shows, that offshore projects in the Arctic offshore is not only under the pressure of internal corporative factors, but also under influence of external institutional factors. New tools and approaches will be required in Arctic projects where no one wants to be looking in the wrong place.
Over the past two years, the Federal Antimonopoly Service of the Russian Federation (from now on referred to as FAS) raised the issue of the internal gas market's efficiency, as well as possible scenarios for its partial or complete deregulation. Previously several times settled task has been discussed in the context of the transition to market pricing of wholesale gas volumes and the preservation of state regulation regarding tariffs for the transportation of gas through the Unified Gas Supply System (from now referred to as UGSS). However, to date, the regulation of the domestic gas market, pricing rules and tariffs for transportation have not changed significantly, except for somehow development of the gas exchange trading (SPIMEX), which nevertheless also has some problems and constraints to the development of open market trade.
The main criticism in this issue is the currently applied pricing regime, which consists in the presence on the over-the-counter (OTC) market of monopolistically regulated prices and the so-called open pricing mechanism, and exchange prices on the Saint Petersburg International Mercantile Exchange (SPIMEX) gas exchange, respectively. Experts agree that such a system leads to an asymmetry of the market, and, as a consequence, its inefficiency, unequal position of players in the market, as well as risks of a serious shift of the balance towards one player in case of a significant change in gas market regulation. In this regard, each separate proposal of the FAS on reforming the domestic gas market, whether it relates to the division of the dominant seller into production and transportation or the abolition of price regulation, faces severe contradictions on the each player's side. Thus, the pilot project in three subjects of the Russian Federation (Tyumen Region, Yamal-Nenets, and Khanty-Mansiysk Regions) was discussed to be settled in 2016 on the abolition of the lower boundary of the monopolistic regulated gas price for industrial consumers. The project, however, has not been implemented due to the reason mentioned above for the disagreements of all interested parties.
Such aspects further exacerbate this problem as the share of the gas industry in exports, and, in particular, the export of liquefied natural gas (from now on LNG). The role of LNG in the transformation of global, regional gas markets has been noted over the past decade by the IEA and Russia, as one of the players in this industry, is also setting strengthening rules the positions of Russian gas companies in LNG markets as one of the country's developments priorities.
The paper briefly examines the proposed reforms on the abolition of the gas price lower limit for industrial consumers in the context of the impact on independent gas producers, their market position, market value, and credit rating. Also, the work considers the development of exchange trade in natural gas, as an indicator of open pricing and related problems.
Current processes of globalization and integration of the companies into the world economy necessitated the unification of financial reporting to the third parties and external users, its transparency and uniformity of financial calculations and calculation procedures. International Financial Reporting Standards (IFRS) today play the role of a certain standard or an example of how international companies have to generate financial reports. This imposes certain obligations on the reporting procedure. Thus, on the one hand companies operate under strict rules of how and that they can be reported. On the other hand, oil and gas companies implement large risky projects, which feasibility evaluation is often difficult in the conditions of high risk and lack of the information. This situation is typical for offshore fields, particularly in the Arctic offshore, where the degree of exploration is extremely low. The present article is concerned with the real options valuation of offshore fields in the Arctic. The main point of the article is an example of the subsequent correlation of the price value of the real options and possible costs for exploration and evaluation of the field resource potential in accordance with the principles of IFRS 6 – «Exploration for and Evaluation of Mineral Resources», an accounting standard that is core to the understanding of accounting in the mining and oil and gas industries. IFRS 6 includes modified impairment testing of exploration and evaluation assets and replaced several others international standards as IFRS 8, IFRS 16 and IFRS 36. This approach allows us to demonstrate the applicabilityof ROV (Real Options Valuation) method and its application to offshore projects with a high degree of uncertainty, carried out at an early stage and, in particular, for the Arctic offshore projects. For illustrative purposes two possible deposits were taken on the shelf of the Barents Sea and the Kara Sea. For these two illustrative examples of the fields in the above sea waters in accordance with the climatic conditions, taking into account the current tax and investment regimes three types of option were designed: to stop the project, to delay the project and to expand the project. The main purpose of this work is to show the applicability of various models of real options for offshore development projects through the examples in the Arctic seas at the stage of prospecting and exploration. There is also the objective to show how the techniques of project management can be agreed under the rules of reporting standards reporting for companies operating according to IFRS 6 standard.