Gazprom and U.S. Await Critical Decision on $20 Billion Shtokman Gas Project

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Researched by Industrial Info Resources (Sugar Land, Texas). Estimates of the gas resource contained in the Shtokman field northwest of Murmansk in the Barents Sea have been revised upwards. Already set to become the largest offshore gas field in the world, Shtokman has had a 15% upgrade from 3.2 trillion cubic meters to 3.7 trillion meters. This was announced by Alexander Ryazanov, CEO of Russia’s Gazprom (Moscow, Russia) (51% owned by the state). The vertically integrated gas company controls 74% of Russia’s gas reserves, 94% of gas production and 100% of the domestic gas pipeline network.

In making the announcement, Gazprom upped the bidding price for the companies bidding for a stake in the project to build a facility to liquefy the gas, which will be fed to a plant near Vidyayevo in the Murmansk region by a 650-kilometer pipeline from the field, which will make landfall on the Kola Peninsula south of Murmansk. The field covers an area of 1,400 square kilometers off the Kola Peninsula. The gas reservoirs are two kilometers below the seabed, which is 350 meters below the surface. The LNG plant and the pipeline will be built simultaneously.

The bidding companies that were announced last September are France’s Total (NYSE:TOT) , Norway’s Statoil, Norsk Hydro (NYSE:NHY), ConocoPhillips (NYSE:COP) (Houston, Texas) and Chevron (NYSE:CVX)(San Ramon, California). Gazprom had earlier set the date for the announcement of the succesful bidding consortium for the project in early April. This has now been postponed for two weeks, or more, and could now come at the end of April or early May.

Various combinations of the bidding companies are being aired and it may be that each one of them may get a slice, or a part thereof, from the Gazprom table. Each slice may require a $10 billion investment in the project, which has been tagged at $20 billion, but is rising with the cost of engineering and the increase in the estimated size of the field.

Observers feel that the two Norwegian companies can offer vast experience in working on fields in hostile environments and the U.S. bidding companies would assist with the U.S. marketing of the product. Total offers balance between the Norwegian and U.S. factions and makes political and economic sense.

Gazprom has said that all project design work will be complete in 2007 and construction on the coastal terminal will begin in 2008, with a possible start-up of operations in 2010. Ryazanov said that the first stage of the project, which will include producing gas, building pipelines and constructing the liquefaction plant, will require an investment of up to $13 billion.

The key market for the project’s output is the U.S., which will receive LNG and oil carried by tankers nine days after leaving Murmansk, which is a faster transfer than shipping LNG from the Middle East. Murmansk, on Russia’s northern Arctic coast, and Primorsk, in the Russian Gulf of Finland, have been competing for the U.S. and European oil, gas and LNG feeds. Primorsk will be a terminal for the new 1,200-kilometer European gas pipeline, which will travel under the Baltic Sea for a direct landfall in the west. Although Murmansk appears to have won the battle for the transatlantic trade with its positioning for the fast northern arc shipping route, a link with Baltic gas pipeline feeds will be available with a pipeline running southeast of Murmansk to connect with the Baltic network.

Gazprom is reported to be prepared to offer the successful Shtokman bidders investment opportunities in other energy assets thus allowing Gazprom, by association, to grow into a global energy company. Attracting foreign investors will assist the company in reaching its targeted $250 billion to $300 billion market capitalization in the next five to seven years.

Shtokman will be developed under a production sharing agreement. Although the government has scrapped export duties on LNG in order to provide a long-term development tax base for the project, the details of the Western companies participation has not yet been detailed. The Western consortium/s will receive equity stakes in the project of up to 50% of the total.

At the same time, Gazprom says that it is in a learning curve with LNG and two spot deals made in the U.S. for LNG shipments are part of that process. In the burgeoning joint venture field Gazprom is hoping to gain direct, long-term access to the U.S. pipeline network. It is estimated that Shtokman could supply 10% of U.S.’s LNG requirements for over half a century.

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