Kovykta delay

As I was wrote, it looks like the development of Shtokman — despite reaching a deal with Total — will remain a ways off into the future and will not be promoted to a top priority for Gazprom’s investment plan. Indeed, funds for the project in this year’s investment budget were cut, making room for other moves.

Earlier this year, Gazprom managed to take over control over the operation of the giant Siberian gas field Kovykta. It appears that a similar lack of urgency has overtaken the company with regard to this field, which had been under development by BP’s Russian joint venture, TNK-BP. In MinPromEnergo’s latest report on the development of Eastern energy projects, Kovykta has been pushed back to 2017.

While it was unlikely any significant gas exports would have been flowing until at least 2013 (despite past hopes that Gazprom would be exporting to China by 2011 or 2012), pushing the date back to 2017 is a significant delay. Even more so given the industry’s propensity for time overruns.

Kovykta’s position — near Lake Baikal in Eastern Siberia — suggests slating the field for export to the east, rather than connection the UGSS for export to Europe or LNG. However, Gazprom was not getting very good cooperation from the Chinese side of the bargaining table, and they have been unable to come up with a firm pipeline route. The Chinese shot down the most obvious path — straight south, through Mongolia — and were instead aiming for a longer pipe that would drop down into eastern China nearer to Korea.

However, it is unclear that the Chinese market is prepared for the kind of large scale imports from Russia that the expensive pipeline would necessitate. Chinese infrastructure is not geared towards gas consumption, with China currently relaying on oil and coal for a majority of their energy needs (coal: 69%; oil: 22%; natural gas: 3%). The country produces about 40 bcm per year and has about 1.5 Tcm of gas reserves. The Kovykta pipeline would likely have to transport around 10 bcm per year to be viable, so there just wouldn’t be a market for it in China alone without including Korean or LNG export routes.

Perhaps in 10 years, Chinese demand will change, leading to a more viable situation. But until then, Gazprom will be content to sit on the 1.5 Tcm Kovykta field.

Shtokman is more suited to pipeline export westward, as suggested by Gazprom’s goal of eventually routing the field’s gas production towards the Nordstream pipeline. Gazprom also envisages extending the undersea route further, eventually reaching Britain, which has recently switched from becoming a net gas exporter to a net importer due to declining North Sea production. This ambitious aim would need much more of a resource base than the 300 bcm Yuzhno-Russkoye field currently slated as a source. Shtokman has a much more solid predicted demand than Kovykta, thus bumping the Siberian field down the time line.

Gazprom may be now attempting to shore up production numbers by concentrating on some smaller developments before tackling either of the major super-giant fields, accounting for the shifting demand. At least, that could be a possibility, but in reality, the company spent much of the increased investment budget on capital, rather than infrastructure, pursuits — stakes in Sakhalin-II, Belarus’ Beltransgaz, and Mosenergo. It remains to be seen how these investments effect Gazprom’s future medium term production levels.

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Environmental audit at Kovykta

Update (May 22): The font page of the US paper edition of today’s Financial Times is led by the headline, “Moscow ready to claw back BP licence,” followed by the article written by Catherine Belton found online under the title “Moscow ready to revoke licence for BP Russian venture ‘in days.'” Just a bit of an interesting juxtaposition.

Oleg Mitvol, a key figure in the Sakhalin-II / Shell environmental accusations, is now turning his attention to Kovykta. This 2 Tcm field is being developed by TNK-BP, but efforts to capitalize on the reserves by building an export route to China have been stymied due to problems in getting Gazprom and the Chinese side on board for the massive export pipeline project. The lack of a market has been a key reason for the low production levels–the local demand cannot cover the 9 Bcm per year stipulated. And until a new market is opened (i.e. the Far East), that figure is unlikely to be reached. From the St. Petersburg Times:

MOSCOW — BP’s Russian unit will be audited by the most-senior environmental regulator this week and stands to lose its license to operate Eastern Siberia’s largest known natural-gas field if it fails.

TNK-BP, a venture between BP and private Russian investors, will be audited May 23 on its production at the Kovytka field, where it has a contractual target, Russia’s Natural Resources Inspectorate said. Rusia Petroleum, a unit 62 percent owned by TNK-BP, produced 1.5 billion cubic meters from the field last year, compared with a target of 9 billion cubic meters.

Russia is certainly interested in building a gas export line to China, and the Kovykta field plays a key role in its far-east strategy. But it seems that Putin has no desire to let TNK-BP take the lead in this direction.

Instead, it seems like Putin will convince the private Russian sharholders to sell their 50% stake in the company to Gazprom (or possibly Rosneft, but less likely) in December 2007, once the regulations on TNK-BP’s stock sales permit such in action. Putin has allegedly already offered the Russian-British joint-venture to Gazprom in late April as part of an arrangement between the gas giant and Rosneft on the divvying out of Yukos assets.

It has long been accepted that Gazprom would have to play some sort of role in the development of the Kovykta field, due to Russia’s single-export operator (that is, Gazprom) strategy. Arranging the exact level of involvement, however, was difficult. Now it appears Gazprom is content to wait until next year to begin a pipeline to China project, which will likely push out their goal of delivering exports there by 2011 out a couple years. Of course, this may suit Russia fine, given that it is already committed to developing the challenging Nordstream pipeline under the Baltic Sea, and is seeking development for the Shtokman field too, which will both serve the dominant European market. China’s market, despite dramatic growth, is still much smaller. Of course, by the time the gas actually gets flowing to China, the demand there–and price–will likely be higher than it is now, potentially dropping bigger returns into Gazprom’s pockets.