Total, Gazprom and Shtokman — a new investment rubrik?

In July, the French oil firm Total reached an agreement with Gazprom on the development of the giant Shtokman gas field in the Barents Sea. In an op-ed in the Financial Times last week, Pierre Noël labeled the agreement a herald of things to come, as reserve-strapped international oil companies (IOCs) are forced to reach agreements with the national oil companies (NOCs) who now control the majority of the world’s remaining recoverable hydrocarbon resources.

Shtokman also illustrates the new environment in which global oil companies compete for resources. In a world of empowered resource-holder governments and high oil prices, contractual arrangements have to accommodate governments’ economic, political and increasingly symbolic demands.

The emphasis on stability and investors’ rights protection, typical of the 1980s and 1990s, has to give way to a new equilibrium between the economics of the project and the government’s demand for retaining “full control”. In the Shtokman deal, the licence is fully owned by Gazprom but Total has 25 per cent of a distinct company that owns and operates the infrastructure (itself under contract with the licence owner).

Paul Domjan of the Stockholm Network responded in a letter to the FT yesterday, railing on those terms and what it means for the future of IOCs and the global market:

These terms are perhaps the worst a foreign oil company has ever accepted in Russia. Gazprom will retain both full ownership of the gas field and the production licence, and gain access to Total’s liquefied natural gas expertise – an emerging global market Gazprom is desperate to compete in.

Total, by contrast, own only 25 per cent of the special purpose vehicle (Gazprom retain 75 per cent) set up to manage the extraction operation.

Such terms, which may not allow Total to book the reserves – a key market indicator of long-term economic health – effectively relegate Total to the role of oil service provider, competing with companies such as Halliburton and Schlumberger.

In the meantime, Gazprom has suggested that it may bring on additional foreign partners for help in the challenging project. Gazprom’s latest investment plan for the next year, which was recently adjusted, saw funds allocated for the development of Shtokman slashed from 17.1 billion rubles to 8.6 billion rubles ($34 million). Gazprom already committed to other capital-intensive pursuits such as entering into the Sakhalin and Kovykta projects, as well as investing into Mosenergo, thus necessitating the drop in the far afield Shtokman project. Total costs for the project will likely run to $15 billion.

So yes, Total will own a stake in the company that will run the extraction of Shtokman gas, which is seen as a center piece for the French firm’s future portfolio. To Gazprom, however, it’s on the back burner.

Congratulations, Total, you are the proud partner in a company that will only be able to specialize in dodging icebergs for the next decade — it doesn’t look like you’ll be doing much else in the Barents Sea anytime soon.

Quips aside, this suits Gazprom fine. They can concentrate on continuing its buying spree, or perhaps developing the more accessible Yuzhno-Russkoye to eventually feed the Nordstream pipeline — another high priority (and high visibility) investment. Not to say that project isn’t facing its own problems now, including a 50% projected cost increase (up to $6 billion now), a year-long hold-up due to delays in securing infrastructure tenders, and conflict with neighboring countries on the undersea route.

The $30 billion figure approved for investment by Gazprom’s board is nonetheless impressive, at least superficially. In a January 2007 interview with the Wall Street Journal, Gazpromexport head Alexander Medvedev assured that the company would invest at least $20 billion, attempting to silence critics who claimed that the company lacked a viable (or even an existing) investment plan.

The problem, of course, is in the distribution of that money and the range that “investment” can cover. The company has to prioritize, and that is where the critics come in. With the declining super-giant fields in West Siberia looming, Gazprom has opened only one new substantial field in the past 5 years (Beregovoe), and the next round of “replacement” giants–Shtokman, Kovykta, Yamal–remain 10 to 20 years out in the future. Meanwhile, in-place infrastructure is getting older and in more and more need of replacement, but those repairs take a back seat to dumping more money into the prestigious projects (Nordstream, Sakhalin-II and LNG export, Monsenergo, etc.).

More later with some figures, and how Total and the Shotkman deal fit into all this.

2 responses to “Total, Gazprom and Shtokman — a new investment rubrik?

  1. Pingback: Kremlin, Inc » Kovykta delay

  2. Pingback: Kremlin, Inc » South Stream reflections

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