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Shtokman Gas Field Delayed by 3 Years

Gazprom has delayed the start of its giant Arctic Shtokman gas field by three years to 2016 after a dip in European demand and a surge in North American shale gas output dampened its export prospects.

The gas export monopoly said in a statement Friday that it had agreed with partners Total and Statoil to delay pipeline gas production from Shtokman from 2013 to 2016.

OWNERSHIP

  • Gazprom controls 51 percent of the Shtokman project. France's Total controls 25 percent, and Norway's Statoil — 24 percent.

THE FIELD

  • Discovered in 1988, Shtokman contains more than enough gas to supply the whole world for a year.
  • It is located under the Barents Sea, about 600 kilometers northeast of the city of Murmansk, at local sea depths varying from 320 to 340 meters. The region's hostile conditions include icebergs, stormy seas, freezing winds and six months of darkness every year.
  • The field's C1 and C2 reserves — its proven and probable reserves by Russian standards, which tend to provide a higher estimate than Western measurements — account for 3.8 trillion cubic meters of gas and about 53 million metric tons of gas condensate.
  • The project envisages annual production of about 70 billion cubic meters of natural gas and 0.6 million metric tons of gas condensate, comparable to Norway's entire gas output. * Shtokman's first phase envisages annual production of 23.7 billion cubic meters of natural gas and investment of at least $15 billion.
  • Gazprom originally planned to supply the U.S. market with liquefied natural gas from Shtokman. It later changed its mind and said it would split production equally between pipeline exports to Europe and LNG to the United States.

THE SCHEDULE

  • Gazprom and its partners have agreed to delay pipeline gas production until 2016 from an earlier plan of 2013, and to delay the start of LNG production to 2017 from 2014. It cited "changes in the market situation and particularly in the LNG market."
  • A final investment decision on pipeline gas is now planned before March 2011, and on LNG before the end of 2011, a year later than planned.
  • Friday's delay is not the first encountered by Shtokman. If the field is put on stream in 2016, this will be 16 years later than initially planned.

THE CHALLENGE

  • Gazprom plans to pump the gas from about 1.5 kilometers beneath the sea bed, pipe it 550 kilometers to shore and then pipe it on to Europe or turn it into LNG at a plant near Murmansk, the largest city inside the Arctic Circle.
  • The size of the Shtokman field means that it is likely to need up to four production platforms, which will take at least four years to build. Each will have to withstand 25-meter waves and the impact of drifting ice.
  • The project will also require a number of icebreakers, meaning a revival of an industry that has been virtually nonexistent since the collapse of the Soviet Union.

?­—?­ Reuters

Liquefied natural gas output will begin in 2017 instead of the earlier planned 2014. The decision was made because of "changes in the market situation and particularly in the LNG market."

“It’s a very challenging project technologically,” Ola Morten Aanestad, a spokesman for Statoil, said Friday. “We have a positive view on the gas market and the competitiveness of gas in the long term, but that the gas market is weak at the moment is a well-known fact.”

“What’s most important for us is to bring this project to the stage where we can make an investment decision and have a project that is profitable,” Aanestad said. “For the time being we haven’t made an investment decision on the natural-gas part of the project, nor the LNG part.”

Shtokman, one of the world's largest gas fields, in the stormy Barents Sea, is expected to require $15 billion of investment in its first phase.

Gazprom saw a slump in exports last year amid a global economic slowdown and because of a surge in unconventional gas supplies, such as gas extracted from shale, in the United States.

Increased LNG supply and less voracious demand for imported gas in the United States than previously expected caused many LNG tankers to head to Europe in 2009.

The extra supply drove spot European gas market prices below oil-indexed Russian prices, leading Gazprom's customers to consume as little Russian gas as their long-term contracts allow so that they could lap up the cheaper LNG.

Gazprom, which supplies Europe with a quarter of its gas needs, has said consumption would return to normal over time and that Shtokman gas would then be needed.

"The Shtokman delay must have been dictated by Total and Statoil because they are driven mainly by profits, while Gazprom is often being driven by politics," said Mikhail Korchemkin, of East European Gas Analysis, a think-tank.

"Gazprom simply could not resist because it cannot carry this project alone," he added.

Frank Harris, an LNG analyst at consultants Wood Mackenzie, and Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, both said they had not expected any LNG to come from the long-delayed project until 2018, even before Gazprom admitted that the schedule had slipped to 2017.

Stern said the delay to the pipeline part of the project could mean the second Nord Stream pipeline from Russia to Europe, which is scheduled to be completed in 2012, will be delayed or have to get gas elsewhere.

"If they are not going to do the [Shtokman] pipeline until 2016, it means that Nord Stream 2 logically wouldn't be going until 2016," he said.

"If they want to do Nord Stream 2 before hand, that means they have got to create an alternative source of supply from Siberia, but, of course, once they have done that then the value of Shtokman is much less."

The first of two parallel Nord Stream pipelines planned under the Baltic to Germany is due to open in 2011.

A senior BP official said this week that the growth of a global LNG market and unconventional gas reserves will force major energy exporters, such as Russia, to rethink their gas strategies.

Gazprom had initially planned to liquefy and ship most of the Shtokman gas to the United States, but these plans changed after political relations between Moscow and Washington chilled and Gazprom chose European instead of U.S. firms as partners.

The latest plan foresees an equal split between pipeline gas and LNG. On Friday, Gazprom said the final investment decision on pipeline gas was planned before March 2011, and on LNG before the end of 2011, a year later than in the latest plan.

Korchemkin said there was no guarantee that the project would be launched at that time.

"It will depend on whether Europe finds shale gas and on the progress of rival LNG projects in Qatar and Australia. The United States won't need this LNG either by 2017, nor by 2025, so the competition will focus on Europe and Asia," he said.

Statoil and Total both said they were still committed to the project despite the delay.

Gazprom closed 2.3 percent down on Friday in line with the broader market. Total and Statoil were down 2.4 percent and 1.7 percent, together with a weaker oil price, but underperformed peers BP and Royal Dutch Shell.

The Shtokman field was discovered in 1988, and its startup has been repeatedly delayed because of problems with financing. If the field is put on stream in 2016, it will come 16 years later than initially planned.

(Reuters, Bloomberg)

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