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Shtokman - what is happening?

Expert comment: According to the Russian gas company Gazprom the development of the gigantic Russian gas field Shtokman will probably be delayed, with reference  to gas market conditions. The field is regarded as the central element of Russian-Norwegian petroleum cooperation in the High North. But how will the world economical crisis affect Shtokman? 

by Arild Moe, Deputy Director at the Fridtjof Nansen Institute and participant in the GeoPolitics in the High North programme.

According to plan, the final decision on the gigantic Shtokman development will be taken in early 2010. Until then, continued surveys, development of technical solutions, tender invitations and finalisation of the contract negotiations within the operating company Shtokman Development AG will be on the agenda. Shtokman Development AG is owned by the Russian state dominated energy giant Gazprom (51 per cent), French Total (25 per cent) and Norwegian StatoilHydro (24 per cent). These companies will altogether have spent close to a billion dollars on the preparations before finally deciding whether to go ahead.  

A changed world
The companies would of course not have started their work – and spent so much money – if they did not believe in the project. But as we know, the world has changed significantly since the beginning of last year. How does the world economy affect Shtokman? The price of oil is important because the price of gas is linked to it. Currently the oil price is less than half of last year’s peak. Nevertheless, today’s oil price of about USD 60 is not significantly lower than it was when StatoilHydro decided to join the project in autumn 2007.

And it is not today’s price that is decisive, but what price that can be expected the day the field is in production. There is considerable uncertainty, but most analysts believe the price will increase over the coming years. 

Demand for gas from different suppliers is not solely determined by price. The reputation of Russian gas – being the cornerstone of European gas supplies – has suffered in recent years due to the gas conflicts between Ukraine and Russia, which significantly affected countries in Western Europe. The EU countries are now working intensely to reduce the dependence on Russian gas.

This may have consequences for the Shtokman gas. From a Russian point of view it will contribute to European energy security as the gas will be delivered either through a pipeline under the Baltic Sea or by ship. Both export options avoid problems with Ukraine. But from a European perspective the main problem is dependence on Russian gas itself. The political insecurity combined with the economic crisis, which decreases estimated gas demand, makes Russian gas harder to sell.

Consumption is plummeting
In the short term the most striking development is in the domestic Russian gas market. The crisis in the economy has made Russian gas consumption plummet. In order to meet reduced demand, Gazprom has signalled production cuts of close to 100 billion cubic metres this year, a volume equal to the total production on the Norwegian shelf. Shtokman’s first phase, where the foreign companies are participating, will according to plan be producing 23 billion cubic metres per year.

The insecurity in the export markets and the dramatic fall in domestic demand could make it reasonable to assume that the development of new fields will not be prioritised. The Shtokman, however, should be viewed in a more long term perspective. Even though Russia will have a surplus of gas over the next few years, this will change in not so many years. Three of the four giant fields, presently the core of Russian gas production, are declining and in need of replacement.

But Shtokman is not the only field that can be used to maintain Russian gas production in the future. The development of the fields on the Yamal peninsula is more important. And despite the efforts of importing countries to find alternative gas providers, Russia will be the most important source of gas in the foreseeable future.

The development in the world economy and the energy market has not made Shtokman irrelevant, but less urgent than it was a year ago. How much less urgent is impossible to say without access to Gazprom’s internal calculations. But reduced urgency allows the project more time, something signals from Gazprom indicate.  

The final decision on investment will depend on a number of technical and commercial considerations made by the participating companies. But the project must also be perceived as attractive for Russia more broadly, both in the long and short term, in order to receive the broad political support necessary for the development. This means that the level of local content in the development of the field may be decisive if the project is to maintain the level of political support it need for smooth implementation. The big challenge is to reconcile such considerations with the technical and economic requirements of the project. 

This is an English version prepared by IFS of an article that was first printed in Nordlys 24 July 2009.

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Norwegian Institute for defence Studies CSIS Fritjof Nansen Institute Stiftung Wissenschaft und Politik University of Tromsø Moscow State Institute of International Relations (University) of the MFA of Russia University of Oslo Institute of general history Norwegian Defence Research Establishment Econ Pöyry
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