Posted on 08/12/2012 9:53:07 PM PDT by bruinbirdman
On August 7, Norways Statoil announced its exit from the super-giant Shtokman gas field development in the Russian Arctic. The Norwegian company, majority state-owned, is writing off its investment into the Shtokman project, booking $335 million (apparently most of that investment) as financial expenses for the second quarter of 2012. Statoils executives have withdrawn from the project companys board of directors. Declaratively at least, Statoil claims to be interested in re-negotiating the terms of the Shtokman project with Gazprom. But the Russian side has long failed to satisfy Statoils concerns (and probably also those of French Total, the other partner in this project) regarding the projects economic and commercial viability. The shareholder agreement has in any case expired legally since July 1 (Interfax, August 7).
That agreement and the joint venture based on it can therefore be regarded as dead and deserving of retrospective examination. Gazprom held 51 percent, Total 25 percent, and Statoil 24 percent of shares in the project company, Shtokman Development. Ranked among the richest gas deposits worldwide, Shtokman holds confirmed reserves of 3.9 trillion cubic meters of natural gas and 53 million tons of condensate. The field is situated in the Barents Sea, high above the Polar Circle, some 600 kilometers offshore from Murmansk (the nearest port usable as a logistical base for project development). Geography and geology in combination presaged inordinately high investment and operation costs: $30 billion for the projects Phase One, by Gazproms estimate in 2007, overtaken by rising costs since then. The Kremlin and Gazprom decided to enlist Western partners with their financing and technology into the project only after several years of failed Russian efforts.
Yet the project agreements signed in 2007 and 2008 were heavily weighted in Gazproms favor. Abandoning the model of production sharing agreements, the Shtokman Development project company introduced an arrangement named special investment vehicle, reducing the two Western partners to a status of service contractors. Gazproms fully-owned subsidiary, Gazprom Shelf Dobycha, holds the license to Shtokman resources. The project companys main task was to finance and build the offshore and onshore infrastructure for Phase One of production. Commercial production was supposed to start by 2013, reaching 24 billion cubic meters (bcm) per year during the 25-year Phase One, 71 bcm annually in Phase Two, and potentially 95 bcm per year in a third phase.
The first phase of production would have involved major transfers of technology and expertise from the Western partners to Gazprom. That would have included drilling platforms and production plants for liquefied natural gas (LNG), which Gazprom lacked. Following the first phase, Total and Statoil were simply supposed to transfer their shares in Shtokman Development and ownership of the infrastructure to Gazprom.
Gazproms unilateral advantages reflected to some extent the circumstances of that past era. Natural gas was regarded as a scarce and increasingly expensive commodity, placing Gazprom in a superior position to negotiate with Western companies. These tended to compete against each other for access to Russian resources, allowing Gazprom to play them off against each other. Statoil and Total were selected from among multiple Western contenders for Shtokman. While Totals position with overall booked reserves looked solid, Statoils own resource base was thought to be shrinking, which increased its motivation to seek access to the Shtokman project even under sub-optimal terms.
This projects main raisons detre were: high demand for LNG in North America, as well as projections of ever-higher demand for Russian pipeline-delivered gas to Germany and other European countries. Shtokman business plans envisaged exporting 50 percent of the production volume in the form of LNG, mainly to the United States; and another 50 percent by pipelines (mainly through the Nord Stream pipelines two stages, at 27.5 bcm annually for each) to Germany and farther afield, capturing more West-European markets. Russia hoped to break into the then-developing LNG global business by obtaining that technology from its Western partners in Shtokman. And Gazprom established a fully owned subsidiary in the United States for marketing Shtokman-sourced LNG there.
Shtokman was due to have started commercial production in 2013. However, the global LNG boom and the US shale gas revolution combined to deprive the Shtokman project of its business rationales. With shale gas over-saturating the US market, and LNG supplying European markets from the Middle East and North Africa in growing volumes, Shtokmans commercial prospects collapsed. Its overpriced gas could hardly have been sold on the Western diversified markets; nor could it be sold on the heavily regulated Russian market, where Gazprom itself incurs massive losses (offset by export revenue from captive markets).
Ultimately, the start of commercial production was postponed to 2018, and Moscow insisted on exporting almost 100 percent of the putative production in the form of LNG. Attempts to reconfigure the terms of the project failed serially. Cost overruns and updated investment-cost estimates exceed initial projections. (Kommersant, August 8).
Statoil is set for a soft landing with its exit from Shtokman. Confirmed discoveries in the North Sea and Norwegian Arctic (Johan Sverdrup, Skrugard, Havis fields) and several fields in the Southern Hemisphere have significantly enlarged Statoils resource base. For its part, Total has joined Russian Novatek for an LNG project on northern Siberias Yamal peninsula, in effect as a substitute for the Shtokman project in Totals portfolio. If implemented, the Yamal project could target East Asian markets. But the offshore Yamal is almost as challenging, and its investment and transportation costs may prove to be of a magnitude comparable with those at the failed Shtokman project. Ultimately, this project has become the relic of a rapidly closing era in the gas business.
Thanks ftp bman.
In the fulness of time.
Raben
51% doesn’t feel like a big deal what used to be Mr Putin.
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