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Gulf Times (Qatar): Shtokman move not all bad for oil majors

Publish Date: Tuesday,10 October, 2006, at 09:29 AM Doha Time 
 
LONDON: Western oil companies who spent the past year haggling with Gazprom for a stake in its Shtokman gas field will be disappointed by the Russian group’s decision to develop the field alone, but analysts say it’s not all bad news for the oil and gas majors.

Gazprom had previously shortlisted five companies – France’s Total, Norway’s Statoil and Norsk Hydro and US oil companies ConocoPhillips and Chevron – as possible partners to develop Shtokman, one of the largest gas fields in the world.

Yesterday, Gazprom chief executive Alexei Miller said his company would not require the help of foreign oil firms.

With access to resources the biggest problem facing international oil companies, the decision was a blow to those shortlisted.
Yet analysts said they may have made a lucky escape.

“Even if they (Gazprom) did go with Western partners, they wouldn’t leave any money on the table for the Westerners,” said Irene Himona, oil analyst at Exane BNP in London.

Analysts had previously warned of the risk that Western firms might give away too much to participate in the risky project and that costs could swell to make the project unprofitable.

The field will be difficult to develop because of its location under the stormy and iceberg-strewn Barents Sea, 550km (340 miles) from the Russian mainland.

“The precedent of similar world-scale projects is one of cost over-runs and delays. We expect most of the value to be extracted by Gazprom,” analysts at Lehman Brothers warned in a research note earlier this year.

“We think that the announcement of the chosen companies may be the high point in terms of near-term news flow.”

Last year, Shell doubled the costs of its Sakhalin 2 project off Russia’s east coast to $20bn, while Statoil has encountered cost overruns at its Snoehvit field, also within the Arctic circle. Both projects were delayed as well.

Analysts had expected Gazprom to select two or three companies to share up to 49% in the project. With 3.7tn cu m of gas reserves at stake, this would have given a big boost to the shortlisted companies’ reserves bases.

However, the positive impact would have been limited because state-controlled Gazprom wanted prospective partners to offer stakes in oil or gas production projects they had elsewhere in the world, in return for their participation in Shtokman.

The fear was that, in their eagerness to participate in such a prestige project, the Western companies would overpay.

Nonetheless, analysts agreed yesterday that, in showing how Russia’s hydrocarbons industry was increasingly unwelcoming to Western investment, Gazprom’s decision was a clear negative for foreign oil companies.

Shares in all the shortlisted companies rose yesterday in line with the sector, which was higher on the back of a jump in oil prices.
Gazprom turned to Western majors because it lacked experience in exploiting offshore fields and building liquefied natural gas (LNG) projects.

Gazprom had hoped to export the gas to the US as LNG, gas cooled to liquid and transported in pressurised ships. Miller said on Monday that Shtokman gas would now be exported to Europe via pipeline. – Reuters

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