SHTOKMAN TICKET GETTING MORE EXPENSIVE?


12.10.06
MOSCOW. (Dr. Igor Tomberg for RIA Novosti)

Speaking on Russia Today TV channel on October 9, the head of the Russian gas monopoly Gazprom Alexei Miller said that his company would develop the Shtokman gas deposit without foreign partners, and would remain its sole user and owner.
The company’s priority will be to supply gas via the Nord Stream (the new title for the North European Gas Pipeline) to Europe rather than deliver liquefied natural gas (LNG) to the United States. In the past, Gazprom planned to develop the deposit on the terms of the Production Sharing Agreement (PSA), and give 49% of its shares to foreign companies. The short list, announced in September 2005, included the Norwegian Statoil and Hydro, American ConocoPhillips and Chevron, and the French Total.
The Shtokman deposit is located on the shelf of the Barents Sea. The confirmed gas reserves amount to 3.7 trillion cubic meters, and more than 31 million tons of gas condensate. Previously it had been planned to start the export of LNG (15 million tons a year) during the first stage in 2012. The second stage provided for the export of 22.5 billion cubic meters via the Nord Stream. Subsequently, the output was to be increased to 70 billion cubic meters of gas per year. The first stage envisaged investment between $10 billion and 13 billion. At the third, and probably, the fourth stage the capacities of the LNG plant were to be brought to 30 million or 45 million tons, correspondingly. Now the plan is to build pipelines during the first and second stage, and implement the LNG project at the third stage (closer to 2020).
Inadequate asset swap proposals are the official reason for renouncing foreign participation, as Vladimir Putin confirmed at a news conference in Dresden on October 10. In an interview with Suddeutsche Zeitung, published on October 10, he said: “In order to take part in the project and own part of the resources, a company should offer certain assets to Gazprom in exchange. Not money but assets. Money is not necessary for such fluid assets, because it is easy to get it from the world financial markets. Assets are a must. But nobody was able to offer adequate assets for the enormous deposit of 3.7 trillion cubic meters of gas.”
Experts maintain that Gazprom intends to use the same arrangement as it has in the South Pars deposit in Iran. Gazprom has invested in its development but all gas belongs to the Iranian state gas company. After gas is exported, the foreign participants in the project get their money back with interest. Up to now Gazprom has failed to receive the right to export gas. The Kommersant newspaper quoted a Gazprom representative as saying: “In Russia we can use the same arrangement as in South Pars.”
After the PSA did not produce the desired effect at Sakhalin-2 and Sakhalin-1 deposits, it would make sense to reconsider the role of the state in developing natural resources. Initially, Shtokman was to be developed on PSA terms, but now Gazprom wants to sell all gas at its own price, in which case the project must be subject to national taxation.
Gazprom decided to do it on its own because it does not want to share gas with partners. The Vedomosti newspaper quoted a Gazprom manager as saying: “This is too unprofitable. Today, the Shtokman resources are worth $16 billion, but in seven to eight years the price tag will grow to $50 billion.” Its capitalization will increase accordingly. At any rate, after the news about Shtokman, Gazprom shares went up by two percent.
There may also be political reasons behind the “rejection” of foreign partners. Russia announced energy security to be a major topic at the G8 summit in July. The message was as follows: Europe and the U.S. accept the Russian idea of energy security, primarily, the concept of equal guarantees to both consumers and producers. In this case Russia gives foreigners access to its resources. But the world leaders did not reach an understanding, while the U.S. increased its pressure on Russia as regards WTO negotiations, Iran, and Georgia. It is the U.S. that is now blocking Russia’s WTO entry. European countries, which heavily depend on Russian hydrocarbons, are ready for compromise. Gazprom and European gas companies have made a successful asset swap, as a result of which EON and BASF have acquired a share in the Yuzhno-Russkoye deposit. There is progress in asset exchange with the Italians as well.
Europe obviously benefits from the decision on Shtokman. This is why there was little international response to it. Washington merely mentioned “energy nationalism”, which is understandable – delay with LNG supplies from the Russian deposit (3% of the market) is not likely to threaten U.S. energy security. The news that Shtokman gas will go to Europe instead of America has been welcomed. European energy experts believe that the development of the Shtokman deposit will make a substantial contribution to gas production, and they will avoid competition with Russia, where gas consumption is rapidly on the rise. In other words, there will be enough gas for everyone.
The companies from Gazprom’s short list still hope to continue cooperation. In a special press release, the Norwegian Hydro reported that it had ample experience and could offer new technologies for the implementation of the project.
Statoil called itself a “good partner for Russia” in putting to use the oil and gas reserves of the Barents Sea. Chevron announced that it respects Gazprom and appreciates its potentialities. It admitted that regardless of the decision on Shtokman, it “hopes to continue cooperation with Gazprom in energy projects.”
To sum up, the prospect of going over from the owner to contractor status has not compelled Western corporations to curtail their plans in Russia. The development of a giant maritime deposit is too tempting to ignore. But, regrettably, some possible gains have been lost. The sound idea of a global energy market has been relegated to the background. Suspension of the first-stage LNG project means lack of new routes and markets (which the LNG technology could open). Russia has traditionally had a stake in pipelines. But today LNG accounts for about a quarter of all gas sold on world markets, and this share keeps growing. The gas market increases by 2%-3% a year, and the LNG market, by 7%-8%. In the estimate of the International Energy Agency (IEA), the LNG share will surpass 50% in the next 20 to 25 years.
With the growth of the LNG share in the energy balance the European gas market will be losing what benefits Russia – its status of the “seller’s market” owing to diversification of supplies and a switchover to short-term contracts. For this reason, it is difficult to explain such a cardinal change in Gazprom’s strategy. Many analysts believe that its decision is part of the game to compel Western companies make more beneficial proposals, which would become an entry ticket to the Shtokman project. In principle, Gazprom can involve foreign firms in its project at any stage. This could be the reason why Western companies are cautious about criticizing the Russian monopoly.
In addition, Gazprom has to consider the incredible technical complexity of the Shtokman project. The deposit is located in the Barents Sea, 600 km to the north-west of Murmansk. The depth of the sea in this area is between 320 meters to 340 meters. For this reason, the Russian holding simply has no choice but to use the world experience and technologies, and involve foreigners as contactors in developing the deposit. Keeping to timetable and costs will be a major term for contracts. Miller justifies it by the need to honor commitments on gas supplies to Europe via the Nord Stream. It is unlikely, therefore, that foreigners will be barred from the project. If they wanted access to it, they would have had to agree to Gazprom’s control over gas distribution networks in Europe. The Shtokman question is not yet closed.
Technologies are upgraded, and the cost of resources is growing with every year. What prevents Gazprom from adding new reserves to it, and starting talks with a new pool of partners on better conditions? It could reduce the foreigners’ share to 10%-15%. The list of partners may also change. A new short list could again include American companies, if Washington takes some reciprocal steps. It is clear that the Kremlin is not going to give out free tickets for the participation in the Shtokman project.
There are other suppositions about the reasons for Gazprom’s decision. Maybe, it has realized what technical risks the project involves, and decided not to go for it for the time being, all the more so since the shortage of gas can be made up for from other sources. Last week, Gazprom announced its intention to develop the Bovanenkovsky deposit. By October 2011, it is expected to replenish the monopoly’s energy balance with no less than 15 billion cubic meters of gas. In addition, a system of Bovanenkovo-Ukhta gas mains should have been built by that time. So, Gazprom will have a backing resource, to say the least.
Apparently, after lengthy negotiations, studies and estimates, the Russian government has come to the conclusion that PSA options for the development of the Shtokman deposit do not look too promising. Enjoying excess money and excellent trade opportunities, Russia can well avoid the prospects of foreign PSA involvement. If Gazprom develops it single-handed, it will start paying off by the beginning of the next decade. Considering the growing signs of the “2008 problem”, Russia may decide to suspend it until then.

Igor Tomberg, Ph.D. (Economics), leading research associate at the Center for Energy Studies, the Institute of World Economy and International Relations, Russian Academy of Sciences.-0-