Russia has rejected assistance from some of the world’s most experienced offshore players, including U.S. majors ConocoPhillips and Chevron, to help develop its giant $20 billion Shtokman gas project on the Russian side of the Arctic Barents Sea.
More troubling for U.S. energy markets are reported plans that Russia gas monopoly Gazprom now intends to use Shtokman gas exclusively to supply the North European Gas Pipeline to Europe, rather than liquefying it into LNG for export to America, as previously planned.
“The European market is … number one for Gazprom,” Gazprom chief executive Alexei Miller reportedly said in an Oct. 9 interview on the Russia Today television channel.
A Gazprom spokesman later confirmed Miller’s television remarks, telling Reuter’s news service that Gazprom had indeed dropped the U.S. gas market and also decided to go it alone on Shtokman field development.
“It is the final decision,” he said.
In addition to ConocoPhillips and Chevron, Gazprom’s so-called “shortlist” of contenders for the Shtokman project had included Norway’s Statoil and Norsk Hydro and France’s Total.
Russia moving to regain control of resources
The Shtokman decision appears to be Russia’s latest maneuver to establish itself as a global leader in energy and to regain control of the nation’s oil and gas resources, as recently demonstrated by Russia’s obvious attempts to redo contract terms for two mega-projects offshore Sakhalin Island operated by world energy titans ExxonMobil and Royal Dutch Shell.
For months, Gazprom had led the Shtokman bidders and the world press to believe it would select a partner or partners to help it develop the field and its mouth-watering 110 trillion cubic feet of estimated natural gas reserves.
In September 2005, Gazprom even issued a press release saying it was “resolute to select two or three companies that will form a consortium for the Shtokman project implementation.”
However, Gazprom kept postponing its self-imposed deadline, but did say in September 2006, a year after the initial pledge, that it was still analyzing proposals from all five international majors.
And just two weeks ago Gazprom said it would not amend the shortlist of contenders for Shtokman and definitely planned to announce the winners by the end of this year.
U.S. had been targeted for LNG from Shtokman
Gazprom targeted LNG-hungry America early on as the primary recipient of Shtokman gas. But that was before U.S.-Russia relations began to sour earlier this year over several hot political issues, including Russia’s bid to become a member of the World Trade Organization. There were even allegations that Russia was using Shtokman as a bargaining chip to gain U.S. support for its efforts to join the WTO.
“In general, if you discriminate against us in the World Trade Organization, you can’t expect us to welcome you with open arms,” Kremlin spokesman Dmitry Peskov warned, according to Dow Jones Newswires.
Then, in early May, U.S. Vice President Dick Cheney touched off another ruckus when he told Baltic and Black Sea leaders that Russia was using its massive oil and gas reserves to blackmail neighboring countries. Russia was widely criticized earlier when it briefly halted gas exports to Ukraine in a price dispute that also disrupted supplies to Europe. Moscow also warned Europe that Gazprom might divert supplies to Asia, if it was barred from the European market.
Russia and the United States also have been at odds over Iran’s nuclear plans, the war in Iraq, and competition for allies in the former Soviet Union.
Gazprom insisted that Cheney’s harsh remarks about Russia would not influence its decision in choosing partners for the Shtokman project. However, just three weeks ago, Russia President Vladimir Putin said that Russia was thinking of diverting up to half the gas from Shtokman to Europe and away from the United States. Analysts said later that was bad news for U.S. bidders Chevron and ConocoPhillips. In fact, it turned out to be bad news for all the Shtokman bidders.
Gazprom comes to the world energy stage with a lot of clout, already claiming to be the world’s largest gas company focusing on geological exploration, production, transmission, storage, processing and marketing of gas and other hydrocarbons.
Gazprom, 50.002 percent owned by the Russian government, also claims to have the world’s largest natural gas reserves. Its share in the global and Russian gas stocks makes up 17 percent and 60 percent, respectively, with overall reserves estimated at 29.1 trillion cubic meters and currently priced at US$138.6 billion. In 2005, the growth of Gazprom’s explored gas resources substantially outpaced the amount of gas extraction and accounted for 583.4 billion cubic meters.
Gazprom says it also provides about 20 percent and 90 percent of the global and Russian gas production, respectively. In 2005, the Gazprom Group of companies extracted 547.9 billion cubic meters, which was 2.8 billion cubic meters above 2004 production.
Thus far, Gazprom has provided little explanation regarding its decision to dump the U.S. LNG market, or why it decided to pursue Shtokman development on its own. Despite the company’s enormous size, a project on the order of Shtokman typically would require at least several deep-pocket companies to share development costs. Moreover, Gazprom does not appear to have the experience or expertise to tackle such a risky project on its own. A logical choice for a Shtokman partner would have been Statoil, which operates the huge Snohvit gas development in the Norwegian sector of the Barents Sea.
Statoil: decision ‘not expected’
Gazprom’s decision to go it alone on Shtokman development “was not expected,” Statoil said in a prepared statement.
“We will now discuss the implications of the announcement with Gazprom,” Statoil said. “We are confident that Statoil is a good partner for Russia in realizing the Barents Sea potential. Statoil is still committed to a long-term presence in Russia and will continue to pursue business opportunities there.”
However, Statoil made it clear May 23 in comments before the UBS Global Oil & Gas Conference in Texas that the company was in no rush to join the Shtokman project.
“I would say that Shtokman is not something we have to do, but it’s very interesting because of the size,” Geir Bjonstad, Statoil’s vice president of investor relations, said at the UBS conference.
Shtokman bidders and U.S. hopefuls Chevron and ConocoPhillips had not responded to Gazprom’s go-it-alone decision as of Oct. 13.
Earlier this year, Jeff Lowe, vice president in charge of ConocoPhillips’ commercial division, said, “We think we provide a lot of technical expertise both on the upstream and the liquefaction side” of the Shtokman project. ConocoPhillips holds a stake in Lukoil, Russia’s largest oil producer.
Under Gazprom’s original plan, which required major LNG facilities on both sides of the ocean and tankers to transport the product to U.S. markets, Gazprom was looking at a 2011-2015 project startup, with some analysts forecasting startup as late as 2020.
The Shtokman project already has been on the table for more than a decade. Gazprom’s numerous delays in selecting partners for the project have only added to speculation that Gazprom is neither financially nor technically prepared to get involved in a $20 billion project, at least until natural gas prices reach much higher thresholds.
Russia at odds with Exxon, Shell over Sakhalin
On other fronts, Russia’s resources ministry reportedly told Exxon in September that it would not agree to enlarge the license territory of its Sakhalin-1 block despite discovery of new reserves close to or at existing deposits. The ministry said its representatives had told the U.S.-based major they would auction the newly discovered deposits.
Russia’s sudden change of heart on Sakhalin-1 came just weeks after first oil from the Exxon-operated project began flowing on time with peak rates of 250,000 barrels per day expected by year-end. An outraged Exxon warned Russia to honor its decade-old production-sharing agreement to develop the oil and gas block, or risk spooking other foreign investors in the country.
The Russian government, citing damage to salmon-bearing rivers on Sakhalin Island, also withdrew environmental approval for the Shell-operated Sakhalin-II liquefied natural gas project. The decision came amid a tense business dispute between Shell and Russia’s Gazprom, which was trying to join the consortium that Shell controls.
Industry analysts said the environmental ruling looked like an attempt by the Russian government to renegotiate terms or force Shell to concede to Gazprom’s demands in the $20 billion production sharing deal, rather than close it down on environmental grounds.
The complex development straddles the coastline on the northern rim of the island, with offshore platforms, a liquefied natural gas plant and hundreds of miles of pipeline snaking toward an ice-free port in the south. Russian authorities cited damage to salmon-bearing rivers and excessive logging along a pipeline route. Shell denied that it had violated any Russian environmental laws.
“Although there have been various environmental challenges on this project, these have been tackled and largely overcome,” Shell said in a statement released in Moscow. “All concerns are being addressed expeditiously in cooperation with the relevant authorities and do not constitute any legal grounds for nullification.”
However, an annulment of the approval “could be damaging for the project and for Russia,” the Shell statement warned. Shell owns 55 percent of the Sakhalin-II project, followed by Japan’s Mitsui with 25 percent and Japan’s Mitsubishi with 20 percent.
