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Kommersant: Deutschland uber Alles: Gazprom will supply Angela Merkel, not George W. Bush

10 October 2006

Gazprom will develop the Stockman deposit without foreign partners. That sensational announcement was made yesterday by head of the monopoly Alexey Miller. Gazprom had announced its desire to exchange a share in the project for direct access to the domestic markets of Western countries. Under the new concept, Gazprom will develop the deposit independently and supply natural gas through the North European Gas Pipeline to Germany. This represents a change in Russian energy strategy.

No one expected a decision on Stockman to be made so quickly. Gazprom was still planning to attract partners in February of this year. It was considered a commercial project at that time and it was assumed that several partners would be chosen from the shortlist announced in September 2005 to develop the deposit and build a liquefied natural gas plant. That list consisted of the American companies Chevron and ConocoPhillips, the Norwegian Statoil and Hydro and French Total. The total cost of the project was to be $18 billion. The selection of partners was postponed indefinitely on April 25, however, after a disagreement about gas supplies to the European Union and further information on the project was forthcoming only from foreign policy discussions between Russia and the West.

Those discussions were concluded yesterday. Gazprom head Alexey Miller announced a new decision by the Gazprom governance board on Russia Today television, which is broadcast in the United States and EU. Gazprom will have no partners at Stockman. Rather, Russia will develop it itself. Nor will there be a liquefied gas plant. The gas from Stockman will be pumped through the Nord Stream pipeline (formerly known as the North European Pipeline) with Germany receiving priority in supplies.

Thus Russian President Vladimir Putin has brought a surprise gift with him on his two-day visit to Germany, which started today. At the Russian-German-French summit at Compiegne on September 23, Putin told German Chancellor Angela Merkel and French President Jacques Chirac that Gazprom was preparing to decide on redirecting its gas supplies from the Stockman deposit to the EU. At the time, that was taken as a demand that the United States to decide faster what concessions U.S. President George W. Bush would make in exchange for access to the deposit. Otherwise, the gas could be sent through Nord Stream and the Norwegian and French companies could develop the deposit. Yesterday, it was declared that the French and Norwegians won’t be let into the Barents Sea either.

Putin cannot offer Angela Merkel Stockman too. He will make her a proposal on a wider scale – to make Germany Russia’s main energy partner and main representative in the EU.

According to Miller, “Development of Stockman will be carried out independently, without attracting foreign partners, since they could not present assets corresponding in volume or quality to the reserves of the Stockman deposit.” The announcement had the impact of a bomb. All the potential partners were waiting eagerly for a decision, but a decision of a different kind. Yesterday, all those companies were refusing to comment until the situation became clearer. Experts questioned by Kommersant say that Gazprom will miss all deadlines for gas supplies if it develops Stockman on its own. ING Barings analyst Igor Kurennoi commented that “The market may be disappointed by Gazprom’s announcement. Independent development will require more time, and that means that the production project and gas export will be pushed back into the future.” A Gazprom indirectly confirmed the same thing to Kommersant when he said that the Nord Stream pipeline would probably be fed by the reserves of the Yuzhno-Russkoe and Bovanenkov deposits at its first stage and only later would Stockman be connected to the pipeline.

A source close to the Norwegian companies thinks that Russia offended all of international society with its decision, which was “so rude and bear-like” that Russia can now expect international obstruction of its efforts. The source said that the Norwegian companies worked for a long time with the certainty that they would be chosen for the project. And since the announcement was made at the same time as public pressure was being applied to the British-Dutch Shell company, investors will look on Russia as a country that does not meet its conditions. He added that Gazprom has never developed a deposit at sea and will not handle the task successfully by 2011 since “that equipment can’t be bought, it has to be developed.” However, one of the heads of the project at Gazprom half jokingly told the potential partners a year ago that “You have given us all the technology, now we can do it ourselves.” Another source, close to Total, said that the possible technical risks are outweighed by the advantages that Gazprom will receive from preserving its resource base. And the European partners n Stockman can still participate as subcontractors. He noted that Total would be appropriate to build a liquefied natural gas plant and the Norwegian companies to lay pipes and drill underwater. That source thought that the Norwegians would agree to that model. Representatives of the Norwegian companies say that they will not be interested in participation in Stockman without access to its resources, however. Analysts note that Russia is using the same scheme that Iran is using at the Southern Pars deposit. Valery Nesterov from Troika Dialog thinks that dissatisfaction with product sharing in the Sakhalin 1 and 2 projects has led the state to reconsider the development of its resources base. Since it was originally proposed to develop Stockman on a product-sharing basis, and Gazprom wanted to sell the gas at a price that suited it, the project had to be brought onto the level of national taxation.

In any case, Stockman will not supply gas to Europe for quite a while. Nonetheless, Kommersant has learned, Putin will confirm today at a meeting with Merkel that Russia is guaranteeing Germany an additional annual delivery of 25-45 billion cubic meters of gas for 50-75 years. In return, Russia will suggest that Germany speed up the establishment of “a common energy territory,” that is, synchronize the German and Russian energy systems.

Kommersant has learned that Putin will propose attracting the Germany concerns Siemens, RWE and E.ON to develop the fuel and energy sector and implement (through large-scale German investment) the integration of Russia into the energy systems of the EU. Kommersant has learned that Siemens has already expressed its willingness to participate in the Russian project. In connection with German plans to stop coal production by 2018 and shut down a number of atomic generators, Russia is prepared to increase supplies if Russian coal to the German market significantly in exchange for supplying Russia with modern German mining equipment.

The energy alliance requires joint action, and Putin has things to ask of Merkel. Moscow is very annoyed by Polish support of a pan-European cooperation agreement on energy policy. The new Polish government is concerned with the sharp fall in income from transit that will take place if gas supplies to Europe through Poland are reduced. Therefore, Warsaw has politicized the issue, lobbying (with the backing of the U.S.) for an “energy NATO” for Eastern Europe. One of the main Russian proposals that will be made at the meeting is joint opposition to Poland’s idea. Last week, Russian Foreign Ministry Sergey Lavrov tried to convince Polish President Lech Kaczynski and his twin brother Polish Prime Minister Jaroslaw Kaczynski to join instead of fight. However, Polish Foreign Minister Anna Fotyga repeated that she saw “no possibility to join Nord Stream” and considered the project “a threat to Poland’s energy security.” Polish media reported that the RosUkrEnergo company would cut off supplies to Poland of gas that it had contracted for. RosUkrEnergo denies those reports.

It is still not known how Merkel will react to Putin’s proposal to form a Moscow-Berlin energy axis. While it means guaranteed supplies of Russian gas to Germany for decades to come, it is also an alliance with a country that literally yesterday tore up all agreements on energy security made at the recent G8 summit and practically withdrew into energy isolationism. Putin has nowhere else to go. As of today, Merkel is the last major world politician that Russia and Gazprom have not had a falling out with. Alliances with the U.S., China, France, Norway or Italy seem unlikely.

The History of Stockman

The Stockman gas condensate deposit, discovered in 1988, is located in the Barents Sea 600 km. northeast of Murmansk. The sea is 320-340 m. deep in that area.

In 2002, Gazprom and Rosneft founded ZAO Sevmorneftegaz to develop the deposit and simultaneously began negotiations with foreign companies on participating in the project. In 2004 and 2005, nine memoranda were signed with the world’s largest energy companies on joint development of the deposit. In December 2004, Rosneft sold its share in Sevmorneftegaz to Gazprom and used the $1.7 billion it received for it in the deal to acquire Yuganskneftegaz. On September 16, 2005, Gazprom unveiled its “shortlist” of partners for more detailed negotiations. That list consisted of the American companies Chevron and ConocoPhillips, the Norwegian Statoil and Hydro and French Total. Gazprom promised to form a final list of two or three companies within six months.

Reserves at the Stockman deposit are estimated at 3.7 trillion cu. m. of gas and more than 31 million tons of gas condensate. The first phase of the project is to be the construction of a liquefied gas plant with a capacity of 15 million tons per year in Leningrad Region and a pipeline from the deposit to the plant. During that period, annual production is expected to be 22.5 billion cu. m. of gas and 205,000 tons of condensate. Then production is to rise to 70 billion cu. m. of gas and 600,000 tons of condensate per year. Investment in the first phase is planned at $10-13 billion.

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