On August 7, Norway's 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
US$335 million (apparently most of that
investment) as financial expenses for the second
quarter of 2012. Statoil's executives have
withdrawn from the project company's board of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
Statoil's concerns (and
probably also those of French
Total, the other partner in this project)
regarding the project's economic and commercial
viability. The shareholder agreement has in any
case expired legally since July 1.
That
agreement and the joint venture based on it can
therefore be regarded as dead and deserving of
retrospective examination. Gazprom held 51%, Total
25%, and Statoil 24% 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 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 project's
Phase One, by Gazprom's 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
Gazprom's 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. Gazprom's fully owned
subsidiary, Gazprom Shelf Dobycha, holds the
license to Shtokman resources.
The project
company's 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.
Gazprom's
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 Total's position
with overall "booked reserves" looked solid,
Statoil's 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 project's main
raisons d'etre 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% of the
production volume in the form of LNG, mainly to
the United States; and another 50% by pipelines
(mainly through the Nord Stream pipeline's 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, Shtokman's 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%
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.
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 Statoil's resource base.
For its part, Total has joined Russian
Novatek for an LNG project on northern Siberia's
Yamal peninsula, in effect as a substitute for the
Shtokman project in Total's 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.
Vladimir Socor is a Senior
Fellow of the Washington-based Jamestown
Foundation and its flagship publication, Eurasia
Daily Monitor, and is an internationally
recognized expert on the former Soviet-ruled
countries in Eastern Europe, the South Caucasus
and Central Asia. Socor is a regular guest
lecturer at the NATO Defense College and at
Harvard University’s National Security Program’s
Black Sea Program. He is a Romanian-born citizen
of the United States based in Munich, Germany.
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