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The Moscow Times: President Supports Shift on Shtokman

Wednesday, October 11, 2006. Issue 3516. Page 1.

By Catherine Belton
Staff Writer

President Vladimir Putin on Tuesday threw his backing behind Gazprom’s sudden decision to go it alone in developing the vast Shtokman gas field, saying foreign oil majors could still participate — as long as Gazprom was the sole owner.

“Russia has decided to develop this field independently,” Putin said after meeting with German Chancellor Angela Merkel in Dresden, Interfax reported. “We will be the sole subsoil user and owner of the field, but we do not rule out inviting foreign companies for joint work on development or doing part of the gas liquefaction process and marketing it in third countries.”

He hailed the decision to redirect most of Shtokman’s gas from U.S. to European markets, through the North European Gas Pipeline to Germany, as a “serious and weighty contribution to European energy security.”

But Gazprom’s bombshell decision to reject foreign equity partnerships appears more likely to lead to major delays and gas shortages, as Gazprom, notorious for its inefficiency, could lack the drive to develop the project, its first offshore exploration, alone.

Gazprom shocked investors Monday by announcing — after years of negotiations — that it was tearing up plans to develop the vast Shtokman gas field in the Barents Sea jointly with foreign oil majors and would go it alone. Last year it announced a shortlist of five companies — the United States’ ConocoPhillips and Chevron, Norway’s Statoil and Norsk Hydro and France’s Total — in the running to take a combined 49 percent in the project. But a decision on the final equity structure was repeatedly delayed.

Monday’s decision came as the government appeared to be intent on redrawing the nation’s energy map in the state’s favor, piling the pressure on Shell and ExxonMobil over purported environmental violations in Sakhalin.

Analysts said Tuesday that rejecting all the five short-listed foreign companies was a drastic acceleration of the state’s bid to take control.

“Before, the model was that state companies would take a controlling stake, while foreign partners would be brought in for minority stakes to bring in technical expertise and capital,” said Chris Weafer, chief strategist at Alfa Bank.

“The idea of bringing in foreign partners was to bring technology, greater transparency and greater overall efficiency,” he said. “If that model is now going to change, that is a huge shift in the investment parameters for Russia going forward.”

“This is not just Gazprom changing its mind, this is potentially a huge shift,” Weafer said. “Even if Gazprom brings in contractors to help develop the field, if it runs the project alone, that would put a question mark over the whole pace of the project.”

Gazprom said Monday that none of the companies on the shortlist had offered to swap assets equivalent to the stakes up for grabs at Shtokman.

In an interview with German newspaper SЯddeutsche Zeitung, Putin said none of the companies had made “adequate” proposals, Interfax reported Tuesday. “Money is not necessary for such a highly liquid project, that’s easily taken on international markets. Assets are needed. But with such huge reserves — 3.7 trillion cubic meters — no one could offer assets of equal value. Gazprom said that because there are no adequate offers we will change our course.”

Putin said the way was still open for part of the gas produced at the field to be transformed into liquefied natural gas and sent to other markets outside Europe. “We changed our minds. Now part of the gas will be sent by pipe to Germany, and part of it will be transformed into liquefied gas and sent to world markets. But which part we don’t know,” he said, Interfax reported.

On Tuesday, U.S. energy giant Chevron still appeared to be reeling from Monday’s snap decision, noting in a statement that it had yet to be officially informed. “Chevron has great respect for Gazprom,” the company said in an e-mailed statement Tuesday. “Chevron has not been formally notified of any decision on this project, but whatever the decision on Shtokman, Chevron looks forward to continuing to work on energy projects with Gazprom.”

Norway’s foreign minister, meanwhile, held out hope that Statoil and Norsk Hydro could still find a way to participate. “It’s up to Gazprom how they decide to do the job, we have to respect that, but based on the fact that, over the last 30 years, Norway has developed the capacity for working in these waters, I believe [Norwegian firms] still have valid experience,” Norweigian Foreign Minister Jonas Gahr Stoere said, Reuters reported.

The president of the American Chamber of Commerce in Russia, Andrew Somers, said he hoped Russia would change its mind.

“Any country with such reserves and potential for exploration cannot long ignore the largest economy and the biggest market in the world,” Somers said. “Maybe there’s still room for some kind of accommodation down the line.

“I think this will complicate the project’s efficiency,” he said.

Russia already faces shortfalls of gas on the domestic market this winter due to a lack of investment by Gazprom in developing new fields, as output at existing fields drops. Gazprom had been due to begin production at the vast Yamal peninsula in 1997, but nearly 10 years later, the company has only just decided to start investing in the project.

Gazprom looks likely to now begin development of the Yamal peninsula before Shtokman, said Valery Nesterov, oil and gas analyst at Troika Dialog. But questions remain over how Gazprom will finance the development of both fields. Developing Yamal at an estimated cost of $57 billion is even more capital intensive than Shtokman, the first stage of development of which is estimated to cost $20 billion. “We may not see these projects come on line until the middle of the next decade,” Nesterov said.

Gazprom has said Yamal and Shtokman are scheduled to begin producing gas by 2011.

Gazprom spokesman Sergei Kupriyanov said Tuesday that the company had yet to secure financing for developing Shtokman.

The International Energy Agency has criticized Gazprom for squandering its financial resources in buying up assets outside of the gas sector, such as its $13 billion purchase of Sibneft last year, rather than on developing its own fields. IEA chief Claude Mandil has warned that Russia could face shortfalls as soon as 2010.

Gazprom is going to have to give away a greater share of the domestic market to independent gas producers such as Novatek to make up for the shortfall at home, while Gazprom struggles to meet rising demand in European markets, analysts said.

The choice of partners for Shtokman has appeared to be further complicated by Russia’s stalled negotiations with the United States over its World Trade Organization bid. Kremlin spokesman Dmitry Peskov on Tuesday denied that Gazprom’s latest decision on Shtokman had anything to do with the talks, which hit a roadblock at the St. Petersburg Group of Eight summit in July.

“This is not connected,” Peskov said. “The company thought about the decision for a long time before making it. There were certain conditions for cooperation and Gazprom, like any other international company, was acting in the interests of its shareholders in choosing the optimal option.”

http://www.themoscowtimes.com/stories/2006/10/11/003.html

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