Category Archives: Shotkman

Shtokman, Gazprom, and Ukraine gas prices

With a decision on Russneft’s future likely a couple months away and part II of my post on RosUkrEnergo still in the works, lets catch up on a bit of news concerning Gazprom. First off, Norwegian oil major StatoilHydro will join the French firm Total in cooperation with Gazprom in developing the giant Shtokman gas field. Sort of. While StatoilHydro has agreed to participate in the currently ongoing planning and exploration phases, it is reserving judgment on a rumored $800 million investment until a more detailed prospectus is released in 2009. From

Market rumours have suggested StatoilHydro could have agreed to pay Gazprom 800 mln usd in return for its 24 pct stake in Shtokman, however the firm this afternoon said no payments have yet been made.

‘When it comes to potential bonus payments, we haven’t paid any bonuses yet, but if there is a positive investment decision in 2009 there will be a cash bonus paid, but I can’t comment on amounts at this stage’, said chief financial officer Eldar Saetre.

Similar to the deal Gazprom made with Total, this agreement offers shares to StatoilHydro in the special-purpose company to manage engineering, financing, construction and exploitation of installations at Phase 1 of Shtokman field development. Gazprom owns a 51% stake in that firm, Total a 25% share, and now StatoilHydro has the remaining 24%. Meanwhile, the license for the reserves as well as “all the rights for marketing of the commodities will be retained by Gazprom.”

Shotkman is still years for development, beyond just the 2009 date for further preliminary research. StatoilHydro, a majority government-owned oil and gas company formed following the recent merger between Norwegian firms Statoil and Hydro, has the experience to work in harsh conditions. But no project of this magnitude and difficulty has ever been attempted — the risk and expense levels will be huge.

In other Gazprom news, CEO Alexei Miller was recently elected chairman of Gazprom Media, which controls the television channels NTV and TNT, as well as press outlets Izvestia and Itogi (among others). Some analysts, citing Miller’s deteriorating health, speculate that this is a type of “golden parachute” for the well-connected chief executive. However, heading Gazprombank (where he is the chairman) seems to be a more fitting position for the technocrat with an economics background. The move also contradicts previous assertions by Gazprom that it is working on spinning off its media arm as a more independent part of the Gazprom Group.

Gazprom Media reported over $100 million in profits last year, which is a stark increase from the losses the division had been suffering from for much of the past. The previous chairman, Alexander Dybal, got bumped up to head of the newly empowered Gazprom Neft, possibly a reward for turning around the debt-ridden media holding company. By inserting Miller, perhaps Gazprom may be attempting to put a further legitimate face on the media group as it seeks to take advantage of this additional revenue stream — particularly as Russia heads into its parliamentary and presidential election seasons.

In another bit of news, Ukraine’s President Yushchenko weighed in on expectations for price negotiations with Russia over next year’s cost of natural gas:

“Given the trends on energy markets, the optimal, rational price for gas at the Russia-Ukraine border, the price which would be viewed with some understanding by most of the market, is about 150-160 dollars per 1,000 cubic metres.”

My own hunch is something closer to $170, but some analysts are going as high as $190. Everyone seems resigned, however, that the price will rise from the current $130. Of course, that’s just one half of the equation — Ukraine will likely attempt to renegotiate its price for transiting Russian gas through its territory. These tariffs are a major source of income for state energy company Naftogaz Ukrainy, and it relies on them for offsetting the market price of gas against the capped residential end-user price. Hopefully the upcoming negotiations will not be as contentious or controversial as those in late 2005 / early 2006, although the recent government shake-up in Ukraine following snap parliamentary elections, as well as renewed calls for completely changing the structure of the Central Asian-Russian-Ukrainian gas trade by removing middleman RosUkrEnergo, will add plenty of uncertainty to the bargaining table.


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.

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.

Russia’s polar quest

From, Vladimir Chistyakov - APRussian ships, including an atomic icebreaker and a research vessel, have reached the North Pole and are in the preparing to drop two mini subs over 13,000 feet to place a capsule holding a Russian flag on the ocean bottom at the pole. The expedition is led by the Russian explorer and politician Artur Chilingarov, and ties in some scientific goals with the larger aim of solidifying Russia’s claim on a vast stretch of undersea territory stretching from the country’s northern borders up to the North Pole. Estimates have placed up to 10 billion tons of oil and gas reserves in the 460,000 square mile area of ocean shelf.

Chilingarov emphasized the expedition’s role in securing Russia’s territorial claim to this region, an assertion based on the idea that the Lomonosov Ridge–a thousand mile underwater mountain range that crosses the polar region–is an extension of Russia’s continental shelf:

“The Arctic is Russian…We must prove the North Pole is an extension of the Russian coastal shelf.”

Some of the scientific activities of the trip are focused on finding evidence to back that claim up. However, the dropping of the capsule-encased flag is more of a symbolic gesture. Sergei Balyasnikov, the spokesman for the Russian scientific institute coordinating the expedition, beamed about the accomplishments:

“For the first time in history people will go down to the sea bed under the North Pole,” Balyasnikov told The Associated Press. “It’s like putting [a] flag on the moon.”

Such a statement emphasizes the third motivation (besides scientific research and securing mineral rights) behind this expedition–renewed nationalism, particularly in the face of potential competition for the rights from the West. Denmark asserts that the shelf is an extension from Greenland, and as such should be considered Danish territory. Canada is in the process of beefing up its arctic presence with aims at acquiring extended territorial rights. The US is also considering adding to its icebreaker fleet, increasing its ability to project into the Arctic Ocean.

All of this is becoming more of an issue now, given that global warming (or natural temperature fluctuations, if global warming isn’t your thing) has caused ice floes to recede, increasing access to the region–and the region’s natural resources.

Russia already controls the rights to the giant Shtokman gas field in the Barents Sea, and has recently reached an agreement with the French firm Total to assist in extracting the natural gas from the difficult arctic environment. However, recent Gazprom statements have suggested that even this partnership will not be enough, and the company may soon add another international investor to the project.

Despite the difficulties involved in running an arctic, off-shore project, Gazprom is excited about the expedition and the promise of “major new discoveries,” according to company spokesman Sergei Kupriyanov. Gazprom lacks the technology or capital necessary to develop any of these potential oil or gas deposits it expects to find, but that isn’t the point. Having control of the reserves is much more important at this point than actually extracting them, because access to large deposits is the one thing the international energy firms lack, and the single largest bargaining chip Russia can play when negotiating over foreign investment.

That has already played out to a certain extent with the negotiations over access to the Shtokman field, with Total agreeing to a shared ownership in the subsidiary that will run the extraction, which does not grant them assurances on the reserves themselves. This is a departure from deals in the past, where the international firms typically banked on control over a portion of the deposit in order to guarantee a return on the investment being undertaken. This is a symptom of the global shift in power away from the established international oil companies (IOCs) and towards those firms–typically government-run–that have control over the resources. The expertise needed to extract the resources is a much more elastic good at this point than the resources themselves, especially as the IOCs begin falling over themselves to secure involvement with the next round of (challenging) oil and gas projects.

Given all that, any sort of resource extraction from the polar region now being explored is still decades away, and may in fact never become fully viable. This would especially be the case if no one lines up to partner with Gazprom (assuming it is granted the rights to the future off-shore projects–the other option would be Rosneft, but that is a story for another post) to develop these risky, expensive projects.

Total gets Shtokman

Update (7/17): Vladimir Socor’s overview at Eurasia Daily Monitor gets into a few more of the specifics and possible future implications, including Total’s expectation to spend $15 billion on the first stage (of four) alone.  That stage calls for 23 Bcm of gas per year by 2013, with the eventual total reaching 94 Bcm per year by the fourth stage.

Total will form a consortium with Gazprom to develop the giant 3.7 Tcm Shtokman gas field. From the New York Times:

In the agreement announced Thursday, Total will be a junior partner while the Kremlin will retain control. The deal gives Total no claim to the underlying reserves of natural gas. Instead, the French company will own 25 percent of the operating company that will develop the area, the Shtokman field, about 340 miles north of Russia’s Arctic coast.

The project is expected to be online by 2013, but that seems optimistic according to many outside observers. This probably is the most challenging gas field ever to be attempted to be developed, with its Arctic location outside of typical helicopter travel range. Some Western companies competing for the project had pulled out, likely due to the expected difficulties, along with the unsettled history of IOCs involved in major Russian energy projects. (See Sakhalin-II, Kovykta)