Shtokman Gas Project Postponed: Implications for Russia, Europe, the US

by Vladimir Socor
On February 5, the Gazprom-led Shtokman Development Company; operator of the supergiant gas project in the Russian Arctic, announced that investment decisions and field development are being postponed. The investment decision for field work is being rescheduled, from the end of 2010 to the end of 2011. Decisions on future gas exports by pipeline and in liquefied form are being delayed until March and December 2011, respectively. The start of production for pipeline-delivered gas to Europe is postponed from 2013 to 2016. And the start of LNG production for export to the United States is postponed from 2014 to 2017. Given the ongoing trends in the international gas trade, further postponents of Shtokman seem likely.

The joint venture includes Total of France and Norway’s Statoil as minority partners, alongside Gazprom. The board of directors’ announcement alludes in passing to “changing market trends, particularly regarding LNG,” as a reason for delaying the Shtokman project (Interfax, February 5, 6).

From the venture’s inception in 2007, many outside observers had regarded commercial production at Shtokman as unlikely to materialize ful-scale before 2020, considering the physical and financial challenges to this Arctic project. Production costs were expected to raise the price of Shtokman gas exorbitantly. On top of those resilient challenges, the Shtokman project suddenly confronted in 2009 the expansion of globally traded LNG on both sides of the Atlantic, and the development of unconventional gas in the United States.
Thus, a decision to postpone the Shtokman project became unavoidable. If anything, the postponement’s time-frame as declared seems understated. The project may now be regarded as suspended, with a high likelihood of further postponements, given the long-term nature of ongoing market trends. Growing availability of competitively priced Middle Eastern LNG, in parallel with surging US production of unconventional gas, are consigning the Shtokman project to redundancy. Shtokman gas now looks even less attractive commercially to European consumers and is no longer in demand by economic criteria on US markets.

From Moscow’s standpoint, this means lower projections of overall Russian gas output for the coming decade. Shtokman was the declared top priority for gas field development in Russia; the first major, export-oriented new development (apart from Sakhalin in the Pacific) since the Soviet era. Long-proposed investments in other new Russian fields (Bovanenkovo and other fields in Yamal’s north) have yet to materialize. High investment costs render Arctic and Siberian gas fields less attractive to international companies after the advent of LNG and unconventional gas.
With Shtokman suspended, and Bovanenkovo development postponed again, the prospect of a Russian gas shortfall in the years ahead (as anticipated also by Gazprom itself, prior to the 2009 recession) is taking on sharper contours.
Shtokman’s halt carries positive implications for Europe from the standpoints of supply diversity and market competition. Pipeline-delivered gas from Shtokman would have further increased European reliance on Russian-delivered gas; and it would have boosted gas prices through the high-priced Shtokman gas.

One portion of Shtokman’s future output was presumably to be pumped from the Barents Sea, across the Kola Peninsula, into the second line of Gazprom’s Nord Stream pipeline on the Baltic seabed. With the Shtokman project’s halt, the second line of Nord Stream would have to be at least delayed and possibly cancelled, unless Gazprom re-directs gas volumes from other fields or from other consumers to supply Nord Stream’s second line.

Nord Stream was planned to export 55 billion cubic meters (bcm) of gas (at 27.5 bcm through each line), to Germany as prime consumer and the Netherlands and France as lesser consumers. The first stage is planned to become operational by late-2011, made possible by credit guarantees from the German government. While French and Dutch participation can be regarded as a supply-diversification measure on the national level (though not on the European), Germany’s participation increases the country’s already high dependence on Russian gas, with the attendant political ramifications.
German and other companies that staked their strategies on Russian gas are now trying to escape the constraints of long-term, oil-indexed, take-or-pay contracts with Gazprom. Such obligations, meanwhile, complicate those companies’ efforts to take advantage of the fast-growing spot markets and LNG availability in Europe.

Shtokman gas was a hypothetical source for the Nord Stream pipeline’s second stage. Officially, Russia has not earmarked any gas resources for Nord Stream’s second stage thus far. German consumers and industry would benefit by the delay and demise of such projects.

In the United States, unconventional gas extraction (from shale and other “hard gas” formations) is rapidly transforming the international gas trade. The US overtook Russia in 2009 as the world’s leading producer with 624 bcm (Bloomberg, January 13). Unconventional gas has turned the US from a net consumer into a self-sufficient market in 2009, and potentially into a net exporter through LNG.
As recently as mid-2009, Gazprom was advertising its plans to capture a sizeable US market share through LNG from Shtokman. It must now renounce this goal.

Along with LNG development, the globalized gas trade is challenging Gazprom’s business model in Europe. That model was predicated upon continental pipelines, market compartmentalization, long-term dependent partners, captive consumers, and (in recent years) the anticipation of gas becoming a scarce commodity in Europe, to be administered by gas-rich Russia for Europeans. Thus, exorbitant production costs or purchase prices were to be paid to Russia for “access” to its gas. The Shtokman project can now be seen as a relic of that period and its disproved assumptions.
--Vladimir Socor

(Part II of two)
by Vladimir Socor
Shtokman is, or was, the most ambitious energy project in Russia since the end of the Soviet era. A joint venture of Gazprom with Total of France and Norway’s Statoil, the Shtokman project is entirely export-oriented toward Europe and the United States. The February 5 decision to delay this project by several years, and its bleak outlook beyond the declared postponement (EDM, February 9), marks a turning point in the Russia-West energy trade.

This field, one of the world’s richest, is estimated by Russian authorities to contain 3.8 trillion cubic meters of gas (how much of it would be commercially viable on cost calculation remains uncertain). The field is situated within the Arctic Circle in the Russian sector of the Barents Sea, in water depths of 320 to 340 meters, some 500 to 600 kilometers offshore, northward from the Kola Peninsula (

The Shtokman Development Company is in charge of this project, with a 25-year lifetime from the time of commissioning field work, now substantially postponed (EDM, February 9). This project is dubbed First Phase, although no specific planning has been reported for a second phase.

The project company includes Gazprom’s fully-owned subsidiary Sevmorneftegaz with a 51 percent stake, Total of France with 25 percent, and Norway’s Statoil with 24 percent. Investment costs are roughly estimated at $15 billion to $20 billion by most Western observers; and at $12 billion by Gazprom.

Phase One was expected to produce some 23 billion cubic meters (bcm) of gas annually from 2013 onward, for export through pipelines. It was additionally expected to produce gas volumes for processing into liquefied gas, at a rate of 7.5 million tons of LNG annually, from 2014 onward, at an LNG plant to be built onshore on the Kola Peninsula. Gazprom claimed that Shtokman’s overall production could peak at 70 bcm and even up to 95 bcm annually (Dow Jones, July 21, 2009).

Exports by pipeline were presumed (though without official confirmation) to be destined at least in part for supplying the second stage of Gazprom’s Nord Stream pipeline on the Baltic seabed, bound for Germany. LNG exports from Shtokman were clearly earmarked for delivery to the United States by Gazprom.

The structure of the Shtokman Development Company differs markedly from the standard form of an owners’ consortium. Sevmorneftegaz is sole holder of the exploration and production license for the Shtokman field and of marketing rights for the hydrocarbons extracted there. The Development Company would own and operate the field infrastructure during the 25-year lifetime (from the field work’s commissioning) of Phase One. After that term, the entire infrastructure (platforms and other production installations, pipelines, LNG plant) would be transferred to Sevmorneftegaz; while Total and Statoil would transfer their shares in the Shtokman Development Company to Gazprom.
The Russian government awarded the Shtokman license to Gazprom’s Sevmorneftegaz in 2002. Plans changed several times before Gazprom signed bilateral agreements in 2007 with Total and Statoil, respectively. The Shtokman Development Company was established in February 2008, under Gazprom’s board member Yuri Komarov as the chief executive of this project. Nominally headquartered in Zug, Switzerland, the venture is supervised from Gazprom’s Moscow office. Decisions are taken jointly, but are announced by Gazprom on the partners’ collective behalf.

A number of leading Western companies had competed to be short-listed by Moscow for Shtokman. Consequently, Russia imposed its conditions, despite lacking itself the necessary capital and technology for this project. It relegated Western investors, in essence, to a role of service providers, rather than joint owners or stakeholders; and required transfers of advanced Western technology, including that for LNG (lacking in Russia), as the entrance ticket to Shtokman.

Moscow had expected Western consumers ultimately to bear the exorbitant costs of gas production and transportation from this Arctic project. That in turn presupposed that gas would become a scarce commodity for the Western economies during this decade. This assumption prompted many European and some US companies to scramble for access to Russian gas reserves, with Shtokman seen as the grand prize.

Those expectations and assumptions have now been invalidated by market trends (global LNG, unconventional gas) and the suspension of the Shtokman project itself, now finally seen as uneconomic. The Shtokman case--along with chronic delays at other projects--reflects the limits on Russia’s capacity to supply Western economies with natural gas on competitive terms from its Siberian and Arctic projects.
The Jamestown Foundation