NEW YORK/LONDON — Gazprom and its partners may be only delaying the inevitable by postponing the Shtokman LNG project by three years: The Arctic development, more costly and challenging than most other gas export projects worldwide, now may never be built at all.
In a sign that the rise of U.S. unconventional gas production has changed global gas markets, Gazprom and partners on Friday said first Shtokman liquefied natural gas output had been pushed back from 2014 to 2017, citing "changes in the market situation and particularly in the LNG market."
Shtokman LNG, whose main target market is the United States, has had to adjust to a new reality in which the United States — once considered to be a big growth LNG market — does not need incremental LNG supplies for the foreseeable future.
"The LNG side of the project was always predicated on the growth of the North American market. Now if long-term shale is a game changer and the U.S. doesn't need large amounts of LNG, it doesn't make a huge amount of sense to develop a large LNG project," said Frank Harris, an LNG analyst at consultants Wood Mackenzie.
U.S. natural gas reserves are up by a third since 2006, thanks to unconventional gas development including shale gas, with estimated reserves sufficient to supply the U.S. market for nearly 100 years at current rates.
The change has sent ripples across the LNG world, with producers reassessing strategies to varying degrees. BP's chief economist said earlier this month that unconventional gas plays will change the way that gas producers worldwide do business.
But while rebounding demand in Asia is set to tighten the Pacific market in the coming years, U.S. demand for imported gas is not set to grow long term.
"The Shtokman project is a bit unique in that the LNG was in part earmarked for the United States," said Steve Johnson, president of Waterborne Energy analysts in Houston.
Analysts said that while plans to liquefy some of the Shtokman gas for shipping may be scrapped, the plan to export gas from the stormy Barents Sea via pipeline to Europe, while also delayed, will likely still go ahead, with European gas demand expected to rebound from the recession over the next decade.
All partners in the project — Gazprom, Total and Statoil — have reiterated their commitment to both plans.
Shtokman, one of the world's largest gas fields, is expected to require $15 billion of investment in its first phase alone. The returns from sending some LNG to the United States, which produces its own gas for relatively cheap, may not be worth it.
U.S. gas prices, pressured by ample supply and recession-dented demand, provided one of the weakest netbacks for LNG shippers last year. While the cost of production is low for producers like Qatar, the higher cost of production in the hostile Barents Sea may make delivery to the United States uneconomical.
"The reason the whole LNG thing may never happen is that I think Shtokman LNG is too expensive for the U.S. market and I don't see any point in doing it for the European market," said Jonathan Stern, a Russian gas expert at the Oxford Institute for Energy Studies.
One reason why Shtokman LNG could still go ahead is the flexibility it provides Gazprom beyond its traditional pipeline customers in Europe, despite the dangers of low returns.
Export outlets in the Atlantic Basin would provide a flexibility that Gazprom would have benefited from last year when gas demand in Europe tumbled because of the recession.
"You should not underestimate the extent to which Gazprom got burned in 2009 because of its reliance on Europe. LNG may not make sense in terms of tapping the North American market, but it does make sense in terms of flexibility. That is what they are chasing," said Nikos Tsafos, senior analyst at PFC Energy in Washington.
Emerging LNG markets in South America — now including Brazil, Argentina and Chile — have shown eagerness to import LNG over the past couple of years, picking up some slack from flagging demand seen in more traditional importers.