Gazprom issues surprise turn-around, saying it will continue developing Shtokman

ingressimage_gazprom_dusk.jpeg Photo: neftegaz.ru

The announcement comes after the project has twice been declared dead within the past year, most recently at the beginning of this month when the company’s Deputy Chairman Andrei Kruglov said that gas development efforts at the Shtokman field would be left for “future generations.”

Tuesday, however, Gazprom said it would continue to optimize the project for the Shtokman field, located 550 kilometers north of Murmansk in the Barents Sea, with plans to complete design and exloration work for maritime facilities and a seaport with LNG storage capacity by late 2013 or early 2014, ITAR TASS said, citing a company statement.

Gazprom will also submit the Shtokman documents for intra-corporate, state and environmental expert study, and continue designing coastal facilities, the statement saidGazprom will also submit the Shtokman documents for intra-corporate, state and environmental expert study, and continue designing coastal facilities, the statement said. The company is to report back to the board on progress with the Shtokman field at Gazprom’s board meeting in June next year.

Promises for Putin

Many analysts immediately speculated that Gazprom’s backtracking on mothballing the Shtokman project – both in the face of huge shale gas gains in the US, as well as to turn its energies on gas recovery in Russia’s far east – was made to appease President Vladimir Putin, who has made Shtokman a vanity project of his third presidential term.

Bellona advisor Larisa Bronder said continuing with the Shtokman project flies in the face of all technological, economic and environmental logic both for Gazprom and Russia in general.

The new plans announced by Gazprom, according to RIA Novosti, said the company avoided adopting a new investment plan. The inability to reach an investment plan with foreign partners is one of another of the reasons Shtokman has over the past year appeared stillborn. 

But Gazprom’s board on Tuesday evidenced a desire, at least in word, to continue CPR on the project for the sake of the Putin’s pride. 

“The President’s promise to develop Shtokman does not allow Gazprom to officially freeze the project,” Maria Belova, senior analyst at the energy center at Moscow’s Skolkovo Business School, told the Russian daily Kommersant.

“Apparently everything will be the same – Gazprom will continue to make promises and juggle investors and get nothing done,” said Bronder. “They evidently intend to keep working on this idea as long as Putin is in power.” 

Bronder said Gazprom still has not attained technology for drilling in fragile arctic conditions, and, thanks to shale gas, Shtokman is likely to have few customers. 

 

In fact Gazprom’s own Kruglov had cited on June 2 the shale gas revolution in the US – considered a key customer for Shtokman to be profitable – as one of the main reasons the gas deposit would be shelved for decades to come.

Further, LNG from Shtokman will most likely only be needed on the European market after 2020, Tatyana Mitrova from the Institute of Energy Studies of the Russian Academy of Sciences said.

The new reinvigoration of the efforts toward developing the field will mean more environmental struggles and likely more government flip-flops as the company continues to trudge toward its evasive holy grail. 

As such, Shtokman still seems destined, as Kruglov suggested, for future generations, just not in the sense he meant.

What do future generations get?

The Shotkman field is estimated to hold nearly 4 trillion cubic meters of gas, making it one of the world’s largest untapped reserves. But more than two decades of effort and numerous investors have failed to bring the project to fruition.

Kruglov’s early June announcement was therefore hardly surprising in the wake of Gazprom’s shelving of the Shtokman project at last August’s Offshore Northern Shores(ONS) Oil and Gas conference in Stavanger, Norway due to cost overruns and market shifts.

At that time, Vsevolod Cherepanov, head of Gazprom’s production department told the ONS that, “All parties have come to the conclusion that the financing is too high to be able to do [the Shtokman project] for the time being.”

Following Kruglov’s remarks, another Gazprom official was quoted by the Russian daily Kommersant as saying “Shtokman remains too expensive, and there is no progress toward its launch.”

Shtokman investment program falls through

Prior to that, Shtokman Development AG, the three-company consortium headed by Gazprom, and including France’s Total and Norway’s Statoil, ran up against an investment plan deadline without reaching a deal on tax subsidies for the foreign investors.

Statoil withdrew its 24 percent ownership in Shtokman Development AG, leaving Gazprom holding 75 percent, Total with 25 percent, and the hope that Royal Dutch Shell might come on board.

For its part, Statoil spokesman Bård Petersen told Bellona that the Norwegian state oil company was only honoring the deadline for reaching the investment deal, and that relinquishing its stocks at a $336 million loss was only a formality stipulated by that deadline.

Petersen said Statoil was keeping its options open should Shtokman be restructured to become profitable. But many analysts suggested that Statoil was gracefully backing out of a financial and environmental boondoggle. Statoil also signed a lucrative deal with Russian oil giant Rosneft in May 2012 to explore oil deposits in the Barents Sea.

On Tuesday, commenting on the Gazprom board meeting, Statoil’s Petersen told Bellona that, “We do not have anything to add to what we have previously said about Shtokman.”

History of attempts to develop Shtokman

While the past decade has seen the most intense ramping up of efforts to drill the environmentally controversial Shtokman field, the history of efforts to tap its enormous resources date back as far as the Soviet 1980s, when Conoco, Norsk Hydro and the Finnish Barents Group approached the Soviet Government, writes oil and gas analyst Yury Kogtev in his RusEnergy blog.

The Soviet government assented in 1990, investing $15 million in gas exploration and project preparation through Arctic Star, the consortium formed by the Soviet government and the three western oil companies.

In 1991, however, the company Rosshelf, run by Russian academician Yevgeny Velikhov made an appearance with promises that his all-Russian firm could more cheaply and quickly tap the Shtokman reserve. Arctic Star set the beginning of drilling Shtokman for 1995. Rosshelf said it could do it more quickly.

In 1992, former Russian President Boris Yeltsin signed an order awarded the Shtokman and Prirazlomnoye fields to Rosshelf, followed by several announcements from the company that it had raised some $8.5 in investments from the Saudis and the Thais, and that the projects would net 250,000 jobs.

But it soon became evident that the company had neither the personnel, the technology or the experience to do the job. By 1995, Gazprom had acquired controlling shares in Rosshelf and later began hunting for foreign investors for Shtokman and Prirazlomnoye, only to turn them away. Gazprom failed to make any progress on Shtokman at all.

Kogtev dryly suggested in his blog that had Shtokman remained in the hands of the Arctic Star consortium, it might actually have begun to produce gas in 1995.

Charles Digges