Originally supposed to help push Russia's energy sector into the modern era, development of the giant Shtokman gas field was put in the deep freeze by the Kremlin on August 29, after the project's international partners baulked in the face of rising costs.
After years of wrangling by foreign partners Statoil and Total over costs and terms, Gazprom threw in the towel to announce the "indefinite" postponement of the project, which sits in the icy Barents Sea. "All parties have come to the conclusion that financing is too high to be able to do it for the time being," said Vsevolod Cherepanov, head of Gazprom's production department at a conference in Norway, reports Reuters. "We are collecting new data. We have extensive gas resources. We shouldn't take hasty decisions."
Located 550km off Russia's north west coast, Shtokman is a technically difficult field. Gazprom has been looking for new partners to help develop the project, but as its one of the biggest undeveloped gas fields in the world, doing a deal has also been fraught with politics.
At 3.9tn cubic metres, Shtokman holds more gas than the entire Norwegian continental shelf, a world class deposit Norway has been working for decades. It was supposed to introduce the Russian gas industry to the new global realities of LNG, but the costs of about $15bn or more are high.
Too high, according to Norway's Statoil, which, following the expiry of its shareholder agreement on July 1, wrote off the $336m it has already invested in Shtokman and handed its 24% share back to Gazprom. The third shareholder, France's Total, whose shareholder agreement on its 25% stake also expired on July 1, is still in the game but was due to reconsider its position today, August 30.
The decision to put Shtokman on the backburner brings to an end two frenetic months of talks. Gazprom's CEO Alexei Miller said at the St Petersburg Economic Forum in July that more investors might be brought in. ExxonMobil's CEO Rex Tillerson reportedly said that the company has not ruled out the possibility of joining, while Wintershall and Shell are also said to be interested.
However, the cost of developing the project in such hostile conditions remains, with the rise of shale gas in the US, and perhaps next in Europe, exasperating plans. The announcement to kill off Shtokman comes in the same week as Russia's ministry of economic development and trade ordered Gazprom to improve efficiency or lose European market share to US shale gas when it starts to be exported in 2016.
According to reports, the government is now set to rethink the whole Shtokman deal, including considering a full privatization as one way of raising the billions of dollars and foreign expertise needed.
Looking at the bigger picture, Gazprom is in a slow motion crisis as it faces rising competition in a changing energy world, as well as falling production at its main existing fields. Onshore gas production was 513.2bn cm in 2011, well below its 2006 peak of 556bn. Shtockman was supposed to provide fresh reserves to help stop the rot but now the company is left trying to squeeze more gas out of fields past maturity and with no real growth prospects as far as production is concerned.
At the same time Gazprom is facing stiffer competition in the domestic market from the more nimble and efficient independent gas producers (notably Novatek) that now account for a quarter of Russia's gas production. This week the Kremlin also announced it intends to appoint state officials to the Gazprom board, and could specifically take control of the investment and strategy committees at the company. Clearly the Kremlin is not happy with the direction the company is taking and the way it is spending its money.
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