July 21 (Bloomberg) -- Russia may sell licenses to explore for oil in the Arctic Sea before the end of 2013 as the world's second biggest producer seeks to boost flagging output, according to Sanford C. Bernstein & Co.

``We will see a Russian Arctic offshore lease sale within five years, mainly as a way of raising money, but also in a nervous reaction to the plateau, or even decline of Russian oil production,'' Bernstein analyst Neil McMahon said in a note today.

Rising prices, increasing demand and declining production are encouraging countries to open up their Arctic waters to oil and gas drilling. Last week, the U.S. government said it will make a portion of a 23 million-acre reserve in Alaska available for exploration and President George W. Bush lifted a presidential ban on drilling along some parts of the U.S. coast.

Russian oil production fell 1 percent in June from a year earlier, according to the Energy Ministry, bringing the world's largest producer after Saudi Arabia closer to its first annual drop since 1998. Domestic oil companies such as OAO Rosneft and OAO Lukoil are struggling with aging fields, rising costs and increasingly challenging new deposits.

An acceleration in the melting of Arctic ice is making it easier to carry out seismic surveys of previously covered areas, the Bernstein report said. This will provide information about potential reserves and may encourage international oil companies to seek licenses to drill, it said.

``We would not be surprised if the majors would be interested in bidding for Arctic licenses should Russia plan a lease sale,'' Bernstein's McMahon said. The first winners are likely to be seismic companies such as TGS-Nopec Geophysical Co., Russia producers OAO Gazprom and Rosneft, and potentially BP Plc, according to the report.

Russia's Chukchi Sea is one area where gas deposits may be found. Russian President Dmitri Medvedev this month signed a law allowing the government to pick companies to explore the country's Arctic waters without tenders or auctions.

To contact the reporter on this story: Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net

Last Updated: July 21, 2008 13:01 EDT