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Shtokman and Arctic petroleum: A field too far?

Expert comment: The decision to postpone the development of the natural gas field Shtokman may be interpreted as an indication of reduced interest in Arctic hydrocarbons due to changes in the gas market. Were the assessments of the Arctic petroleum potential exaggerated?

 

By Harald H. Eie, Research Fellow at the Norwegian Institute for Defence Studies and participant in GeoPolitics in the High North programme. (8 February 2010).

 

In a meeting Friday 5 February, the partners of Shtokman Development AG decided to push the development of the giant Shtokman natural gas field, situated in the Barents Sea. From a technical point of view, the three year postponement was not surprising. Previous plans envisaging the field to be operational in 2013-2014 have been deemed unrealistic by most commentators. One of the official reasons, however, was changes in the gas market. These changes could have far-reaching consequences for the prospects of Arctic petroleum developments.

 

The US Geological Survey has estimated the Arctic as very promising,  harbouring approximately 22 per cent of the world’s undiscovered petroleum resources of which the lion's share is natural gas located off shore. Although the survey contains a lot of uncertainties, it has spurred much attention to the Arctic.

 

However, in the US, new production techniques have facilitated the production of shale gas, a source previously considered technically inaccessible and economically unviable to extract from. US shale gas reserves are enormous, potentially allowing the country to be self-supplied with natural gas for decades to come. Furthermore, there are shale gas reserves in Europe as well, which could help compensate for the declining European production of conventional natural gas.

 

This does not bode well for Shtokman’s future, given that about half of the field’s gas has been planned to supply the US market. In the long term, Russia needs to renew its production base, and is currently doing so in part by developing the Yamal Peninsula. But European and Russian demand has shrunk due to the economic downturn, thereby making the need for new field developments less urgent. In sum, there seems to be no persuasive economic grounds for Shtokman in the shorter term.

 

The development of shale gas production could also have an impact on the overall prospects of Arctic natural gas production in the longer term. Overall, the Shtokman has been regarded as one of the more feasible off shore projects in the region. Given the harsh climate conditions, distance from markets and lack of existing transport infrastructure, natural gas production in the Arctic is expensive and technologically challenging. In order to be economically viable, Shtokman depends on a high and stable gas price.

 

The current price level and ongoing development of shale gas production could render the Arctic less appealing. Perhaps our understanding of the Arctic's future energy potential needs to be reassessed.


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