OAO Gazprom (GAZP), Russia’s gas export monopoly, and its partners Total SA (FP) and Statoil ASA (STL) postponed a final investment decision on the Shtokman natural-gas project, adding to previous delays amid waning demand and high costs.
The partners in Shtokman Development AG, operator of the Arctic offshore field, extended their shareholder accord until July 1, they said today in a statement. The partners held off on an investment agreement, saying they’re “confident the project can be improved further, both technically and economically.”
Shtokman Development initially targeted the U.S. as the key market for the field’s production, converted to liquefied natural gas for shipment by tanker. The recent boom of shale-gas output in that country has cut its need for imports, and the Shtokman venture now faces the challenges of rising global LNG capacity and fading demand in Europe, Russia’s biggest market.
“With Total and Statoil in the venture, getting a consensus will always be difficult,” said Keith Bainbridge, a partner at RS Platou LLP in London. Total also has a stake in OAO Novatek’s Yamal LNG project, creating a conflict of interest, and may be stretched after committing to the $34 billion Ichthys LNG project off Australia, he said.
Seeking Tax Incentives
The Shtokman shareholders “agreed that their efforts should continue to be focused on optimizing the project and strengthening the dialogue with the Russian authorities,” according to today’s statement.
Gazprom, Total and Statoil already delayed the decision from December while seeking incentives to develop the field. The venture hasn’t yet provided enough information to secure tax breaks, Interfax reported on March 23, citing Deputy Finance Minister Sergei Shatalov.
The project bears political importance for Russia, where President-elect Vladimir Putin has urged state-controlled Gazprom, the world’s biggest gas producer, to diversify sales beyond piped gas to the European Union.
In 2010, the Shtokman partners set a target of 2016 to start output at the Arctic offshore field with shipments by pipeline, adding LNG exports by tanker in 2017.
Total and Statoil plan to book some of the field’s 3.9 trillion cubic meters of gas reserves, enough to supply the world for more than a year.
‘Me Too’ Project
Dubbed a “super-giant” by one of the scientists who found it, Shtokman challenges development. It’s almost 600 kilometers (370 miles) offshore in the Barents Sea, where icebergs as heavy as 4 million metric tons make the waters treacherous and temperatures can sink to minus 50 degrees Celsius (minus 58 Fahrenheit).
The partners haven’t disclosed current project cost estimates, previously given as $20 billion to $40 billion.
“I fail to see viable economic reasons to accelerate gas shelf production, other than making this a showcase ‘me too’ project,” Artem Konchin, director for oil and gas research at UniCredit Securities in Moscow, said by e-mail. Russia has more than 70 years of so-called conventional gas supplies, and Gazprom has expanded its pipelines to Europe, he said.
“Russia should continue to carefully weigh its plans to accelerate such complex and costly investments against the outlook of the natural-gas market,” Konchin said.
LNG consumption is set to rise after last year’s Japanese tsunami and earthquake shut down nuclear energy in that country, Sanford C. Bernstein & Co. said in a report this month. Demand for the fuel globally will increase by 6.9 percent this year to 252 million tons, with China and India among the fastest-growing markets, according to the report.
Gazprom supplies about a quarter of Europe’s gas needs, while seeking access to China and India. LNG exporters from Qatar and Australia already vie for Asian buyers, while the potential for exports from the U.S. may intensify competition.
Russia shouldn’t rush to start development of Shtokman until technology improves and a “vital need” arises because of declines in output or onshore reserves, said Vasily Bogoyavlensky, deputy director of Arctic and World Ocean studies at the Oil and Gas Research Institute of the Russian Academy of Sciences.
Gazprom plans to produce 529 billion cubic meters of gas this year, Chief Executive Officer Alexey Miller said on March 23, after raising output 0.9 percent to 513.2 billion cubic meters last year.
“Shtokman, it seems, is going to take a back seat to Yamal LNG so there is plenty of time to decide on whether and how to proceed with the project,” said Alexei Kokin, an analyst at UralSib Capital.
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