Race for the Arctic: Russia Offers Billions to Energy Companies to Boost Exploration and Extraction

The Russian government is offering billions of dollars worth of tax cuts to energy companies pursuing natural resource extraction in the Arctic, as Moscow seeks to maintain its edge in the world's next great geopolitical arena.

RBC reported Thursday that the Russian government has agreed to cut a wide range of taxes on Arctic exploration and extraction. The decision was made after negotiations between government officials and energy executives.

Though the government did not specify how much the tax cuts would be worth, KPMG has previously said the breaks could be worth 2.6 trillion rubles (around $41 billion) over 30 years for just one project—Rosneft's Vostok Oil program in northern Siberia. The proposal will now be passed to the state Duma for full approval.

If it passes, the program will cut taxes on new Arctic oil and gas projects either entirely or to 5 percent of its normal rate until annual production from a field reaches 1 percent of the estimated reserves there. The government will also offer Russian firms a fast-track, non-competitive procurement process to make new projects easier.

Local land and property taxes will be waived, while the government may also consider a 50 percent tax cut for investments into infrastructure around new production sites. Firms will also no longer have to adhere to caps on the number of foreign workers they can employ.

The Russian government has not said how much the scheme will cost, The Moscow Times noted. Rosneft CEO Igor Sechin—who has been sanctioned by the U.S. government over Moscow's support for separatists in eastern Ukraine—was reportedly key in securing the new preferential tax rules.

The Moscow Times noted the decision was made under pressure from a consortium of foreign investors—possibly from India and China—who warned they would not invest in Vostok Oil without the new tax breaks.

Russia is at the forefront of exploration and extraction in the Arctic, where melting sea ice is rapidly opening up new sea lanes and natural resource deposits. Russia boasts some 15,000 miles of Arctic coastline—almost half of the total—putting it in pole position to exploit and control the region.

The U.S. Geological Survey has estimated there are some 412 billion barrels of oil under the Arctic, with some 22 percent of the world's total oil and gas supplies located there. Valuable mineral resources also abound, including phosphate, bauxite, diamonds, iron ore, silver, copper, zinc and gold.

Russia faces competition from fellow Arctic nations Canada, Denmark, Finland, Iceland, Norway, Sweden and the U.S. There are also environmental concerns that extraction activity could irreparably damage the Arctic environment.

China is also keen to get in on the action, recently declaring itself a "near Arctic" nation. Last year, Beijing revealed plans for a "Polar Silk Road" route running through the region, as well as associated infrastructure and shipping lanes through the warming waters.

Russia is also remilitarizing the region, reviving abandoned Soviet-era bases and investing huge sums to Arctic-proof its armed forces. U.S. military officials have warned that the Pentagon is badly lagging behind, exemplified by the gulf in the strength of the two countries' ice-breaker fleets.

Moscow currently has at least five operational icebreakers, compared to America's two. And by 2035, Putin wants Russia to be operating at least 13 heavy-duty icebreakers of which nine will be nuclear-powered.

Russia, Arctic, tax breaks, oil and gas
This file photo shows pipelines leading to the Bovanenkovo gas field on the Yamal peninsula, Russia, in the Arctic circle on May 21, 2019. ALEXANDER NEMENOV/AFP/Getty Images/Getty