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The Business: Battle begins for Russia’s huge Arctic Sea gas field

By Richard Orange
09 April 2006
RUSSIAN gas giant Gazprom will this week begin deciding which of five international oil companies will win the right to take part in the largest single gas project of the next decade – the $25bn (E21bn, £14bn) development of the Shtokman field in the Arctic Sea.
Reports that Gazprom will announce the final consortium members on 12 April are premature, The Business understands. The final proposals – from Chevron, ConocoPhillips, France’s Total and Norwegian oil companies Norsk Hydro and Statoil – must first go to a working group led by Alexander Medvedev, director-general of Gazprom’s export arm, and Vlada Rusakova, head of Gaz-prom’s strategy department, which has been told to make a recommendation to Gazprom’s board within a fortnight.
Bidders have as yet received no commitment from Gazprom about when they will learn the result.
A banker advising one of the bidders said: “It’s an intensely political process. Gazprom is being instructed by the Kremlin so it will take time.”
The prize is huge. Shtokman’s 133 trillion cubic feet make it the third largest gas field yet discovered, with more reserves in one field than the UK and Norway have together. While its reserves make it irresistible to international oil companies, the challenges are immense.
More than 500km into the Russian Arctic Sea where the temperature is below freezing for nine months of the year, Shtokman is in one of the most forbidding environments on earth.
Gazprom has said it is looking for two to three partners, but has left it unclear as to whether any of these could themselves be consortiums. It has forbidden the companies from discussing groupings among themselves.
Of the five, Total and Conoco are seen as the most likely to be dropped, followed by Chevron. The Norwegians, given their expertise in the Arctic, are seen as the most certain. Gazprom chairman Alexey Miller last Thursday met Conoco chief executive Jim Mulva and Total chief executive Thierry Desmarest in what looked to be a final opportunity for the companies to make their cases.
Gazprom is expected to keep a 51% stake in the field, with its partners taking around 10%-20% each. Deutsche Bank argues that the net present value of the field is around $10bn, given that as much as $25bn may need to be spent developing it.
Conoco and Chevron are understandably arguing that Gaz-prom needs a US partner if it wants to export the gas to the US. A source said: “If it is going to be a long-term player in the US, it’s better to have a US partner. If you look at the geopolitics, it’s stacked against Total.”
Conoco is emphasising its dominance of the US gas market, while Chevron will argue that the sophisticated US trading system means all that is necessary is access to a well-positioned terminal. Conoco’s 16% stake in Russian oil giant Lukoil may also count against it.
Russian newspapers say Gazprom favours the idea of a Norwegian consortium and a US consortium.
The deal is set to transform Gazprom. In return for its stake, Statoil has offered Gazprom capacity in the Cove Point LNG terminal on the US north-east coast; Total and Chevron have offered capacity in the Sabine Pass LNG terminal in Louisiana; and Conoco has offered capacity in Texas’s Freeport LNG terminal. Total and Statoil are offering stakes in the Snohvit LNG plant in the Norwegian Barent’s Sea, due to begin exporting to the US and UK in 2007.
The deal could also bring Gazprom to its goal of delivering 10bn cubic metres (bcm) of gas to the UK by 2010, up from 4bcm last year.
Norsk Hydro has offered Gazprom as much as 10% of its Ormen Lange field, which will next year start piping 20% of the UK’s gas supplies. And Gazprom’s gas supplies to the UK could be greater still if Total also offers some of its Alwyn gas field, or Conoco and Chevron offer part of their Britannia field.

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