The Gazprom-led Shtokman Development Co, operator of a super-giant gas project
in the Russian Arctic intended eventually to deliver fuel to Europe and the
United States, announced on February 5 that investment decisions and field
development were being postponed.
The investment decision for field work is being rescheduled from the end of
2010 to late 2011. Decisions on future gas exports by pipeline and in liquefied
form (LNG) are being delayed until March and December 2011, respectively. The
start of production for pipeline-delivered gas to Europe will be postponed from
2013 to 2016. The start of LNG production for export to the US is postponed
from 2014 to 2017.
The joint venture includes Total of France and Norway's Statoil as minority
partners, alongside Gazprom, the Russian gas monopoly. The board of directors'
announcement alludes in
passing to "changing market trends, particularly regarding LNG" as a reason for
delaying the Shtokman project.
From the joint venture's inception in 2007, many outside observers had regarded
the start of commercial production at Shtokman as unlikely to materialize
before 2020, considering the physical and financial challenges to the project.
Production costs were expected to raise the price of Shtokman gas exorbitantly.
On top of those resilient challenges, the Shtokman project suddenly confronted
in 2009 the expansion of globally traded LNG on both sides of the Atlantic, and
the development of unconventional gas in the United States.
Thus, a decision to postpone the Shtokman project became unavoidable. If
anything, the postponement's timeframe as declared seems understated. The
project may now be regarded as suspended, with a high likelihood of further
postponements, given the long-term nature of ongoing market trends.
Growing availability of competitively priced Middle Eastern LNG, in parallel
with surging US production of unconventional gas, are consigning the Shtokman
project to redundancy. Shtokman gas now looks even less attractive commercially
to European consumers and is no longer in demand by economic criteria on US
markets.
From Moscow's standpoint, this means lower projections of the overall gas
output for the coming decade. Shtokman was the declared top priority for gas
field development in Russia; it was the first major, export-oriented new
development (apart from Sakhalin in the Pacific) since the Soviet era.
Long-proposed investments in other new Russian fields (Bovanenkovo and other
fields in Yamal's north) have yet to materialize. High investment costs render
those Arctic fields even less attractive to international companies after the
advent of LNG and unconventional gas.
With Shtokman suspended, and Bovanenkovo development postponed again, the
prospect of a Russian gas shortfall in the years ahead (as anticipated also by
Gazprom itself, prior to the 2009 recession) is taking on sharper contours.
Shtokman's halt carries positive implications for Europe from the standpoints
of supply diversity and market competition. Pipeline-delivered gas from
Shtokman would have further increased European reliance on Russian-delivered
gas, and it would boost gas prices through the high-priced Shtokman gas.
One portion of Shtokman's future output was presumably to be pumped from the
Barents Sea, across the Kola Peninsula, into the second line of Gazprom's Nord
Stream pipeline on the Baltic seabed. With the Shtokman project's halt, the
second line of Nord Stream would have to be at least delayed and possibly
canceled. This would depend on Shtokman's ultimate fate, unless Gazprom
re-directs gas volumes from other fields or other consumers to supply Nord
Stream's second line.
Nord Stream was planned to export 55 billion cubic meters (bcm) of gas (at 27.5
bcm through each line), to Germany as prime consumer and the Netherlands and
France as lesser consumers. The first stage is planned to become operational by
2015, made possible by multi-billion euro credit guarantees from the German
government. While French and Dutch participation can be regarded as a
supply-diversification measure on the national level (though not on the
European), Germany's participation increases the country's already high
dependence on Russian gas, with the attendant political ramifications.
German and other companies that staked their strategies on Russian gas are now
trying to escape the constraints of long-term, oil-indexed, take-or-pay
contracts with Gazprom. Such obligations, meanwhile, complicate those
companies' efforts to take advantage of the fast-growing spot markets and LNG
availability in Europe.
Shtokman gas was a hypothetical source for the Nord Stream pipeline's second
stage. Officially, Russia has not earmarked any gas resources for Nord Stream's
second stage thus far. German consumers and industry would benefit by its
demise.
Unconventional gas extraction (from shale and other "hard gas" formations) in
the United States is rapidly transforming the international gas trade. The US
overtook Russia in 2009 as the world's leading producer with 624 bcm, according
to Bloomberg on January 13. Unconventional gas has turned the US from a net
consumer into a self-sufficient market in 2009, and potentially into a net
exporter through LNG.
As recently as mid-2009, Gazprom was advertising its plans to capture a
sizeable US market share through LNG from Shtokman. It must now renounce this
goal.
Along with LNG development, the globalized gas trade is challenging Gazprom's
business model in Europe. That model was predicated upon continental pipelines,
market compartmentalization, long-term dependent partners, captive consumers,
and (in recent years) the anticipation of gas becoming a scarce commodity in
Europe, to be administered by gas-rich Russia for Europeans.
Thus, exorbitant production costs or purchase prices were to be paid to Russia
for "access" to its gas. The Shtokman project can now be seen as a relic of
that period and its disproved assumptions.
Vladimir Socor is a senior fellow and long-time senior analyst with the
Jamestown Foundation. He was formerly a senior research analyst with Radio Free
Europe/Radio Liberty in Munich and is a specialist in the non-Russian former
republics of the USSR, Commonwealth of Independent States affairs and ethnic
conflicts.
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