SHTOKMAN PROJECT REMAINS FULLY RUSSIAN


19.10.06
MOSCOW. (Dr. Sergei Kolchin for RIA Novosti)

Russian President Vladimir Putin confirmed during his recent visit to Germany that Gazprom would remain the only user of the Shtokman gas condensate field. Gazprom CEO Alexei Miller made a similar statement shortly before that.
Like the Sakhalin projects, Shtokman is one of Russia’s last trump cards in the fight for a place on the global energy market, and the Kremlin will try to use it to maximum benefit.
Western reaction to the news was quick but mixed. The media wrote that Russia’s actions show that it is not ready to implement the project, which may be put on ice.
Some experts and officials from the International Energy Agency and the U.S. administration say the decision was anti-foreign and may hinder foreign investment in Russia. U.S. experts even claim Russia has pushed its energy sector into self-imposed isolation.
The official reaction of claimants to participation in the Shtokman project (Norway’s Statoil and Norsk Hydro, US ConocoPhillips and Chevron, and French Total) was more reserved. They do not want to terminate relations with the Russian gas monopoly, especially because Putin said foreign participation was not ruled out, although its format would be changed. The principle of mineral use will mostly likely remain unchanged, although Gazprom and the Kremlin may revise their positions.
However, the Norwegian companies, which were the preferred candidates for the project, are disappointed and have unofficially expressed their annoyance with Russia’s unpredictability. Their top management’s official stand is restrained. They have expressed regret over the decision but will maintain partner relations with Russia in the development of resources of the Barents Sea, and do not share the idea of Russia’s self-isolation.
International rating agency Standard & Poor’s said Gazprom can easily develop the Shtokman field independently.
What has happened in Shtokman?
Firstly, the project is unique in terms of its scale and reserves, and no undertaking of comparable magnitude exists anywhere in the world. Russia and potential gas consumers are equally interested in it, because the demand and prices of gas are unlikely to change radically in the near future. Therefore, the importance of Shtokman has not been undermined.
Secondly, Russia’s views on foreign participation in its energy projects have changed. It no longer needs direct investment in its fuel and energy sectors, since the state and Gazprom have enough money for development. At the same time, Russia needs new technologies in at least two spheres.
It needs technologies for gas production on the northern shelf, where Russia has little experience (but has done considerable research and held trials) and would be glad to use Norway’s experience. It will be difficult for Russia to develop its shelf fields without foreign technology. It also needs major facilities for the liquefaction of natural gas (LNG) built in direct proximity to gas fields.
Russia may make compromises with Western partners in both cases, but it is difficult to determine how far it would go at the preparation stage.
Thirdly, asset swaps with Western partners remain a possibility, although the recent swap contract has not been coordinated. Western partners accepted Gazprom’s idea of swapping assets, but Russia did not think they offered an adequate exchange for a share in Shtokman. They do have the assets for a swap and the issue should be further negotiated.
So, the struggle for Shtokman has only started, and its outcome will depend on a number of decisions.
One potential area of negotiations is the geographical structure of deliveries. Putin said in September that Russia might redirect Shtokman gas from the United States to Europe through the ‘Nord Stream’ North European Gas Pipeline.
It was a sign to the partners that the direction of deliveries depended on the development of the LNG industry and the progress of Nord Stream. The U.S. will stand to gain if LNG technologies develop at a priority rate, and Europe will come out on top if Nord Stream progresses at a fast pace.
The same applies to asset swaps. Russia does not need investment but a chance to strengthen its standing on the global energy market. The assets it wants, primarily in gas distribution networks, belong to one group of companies, while the technologies of gas production and liquefaction – to other companies.
At the same time, Russia should not drag out its negotiations with foreign partners, repeating the mistake it made during preparations for the development of Yamal resources. As a result, the deadlines of many gas production and transportation projects on the peninsula had to be extended.
Many experts say gas production from major old fields (Urengoi, Nadym and Yamal in the Yamal-Nenets autonomous area in the Urals just below the Polar Circle) will plummet by 2010. The development of new fields will only make up for the depletion of old deposits, whereas the goal is to increase production considerably.
It is true that Gazprom has substantial equity, but this does not guarantee quick prepayment of investment, which is why Russia wants to recruit the cooperation of major foreign energy companies.
Therefore, the decisions so far taken on the Shtokman project should be regarded as preliminary and as an element in lengthy negotiations between interested parties, which are using political, financial, propaganda and other arguments to get their point across. We can also expect them to make new compromises and sign new agreements.

Sergei Kolchin, Ph.D. (Economics), is a senior fellow at the Institute of Economics of the Russian Academy of Sciences.
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