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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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This Giant Gas Field Is Rising From The Dead

Russia has really warmed up to the idea of becoming a competitive player on the LNG market, as we have established several times, largely thanks to the Yamal LNG project. On the waves of success, the Russian Energy Ministry is now putting forward its own agenda – during the latest session of Gas Exporting Countries Forum the new deputy minister I. Sorokin stated the Ministry counts on the Shtokman gas field to be put onstream by 2035, to reinforce Russia’s LNG ambitions of becoming a top-5 exporter. That is quite a revolutionary idea for a project that has largely evaporated from the agenda over the past five years; a project that was so replete with inconsistencies and bad timing that it makes one wonder whether Gazprom can break through the rough patch.

Shtokman was one of the last truly impressive discoveries of Soviet geology, after seven years of appraisal in depths of roughly 340-350 meters four Jurassic reservoirs were found in 1988 adding up to reserves of 3.9 TCm (135 TCf) of gas and 56 million tons of condensate. Throughout the 1990s, the field was left untouched and it only after the Russian economy started solidifying in early 2000s, led by an energy export boom, that Gazprom started to consider commissioning it in earnest. First, however, it had to sort out what sort of a project does it want to have out of Shtokman – whether to join the promising LNG race or opt for the traditional pipeline gas transportation business? In fact, it never really cleared this stage, reshaping the project every time external conditions turned unfavorable.

The first choice, taken largely around the year 2007, was to make Shtokman the Russian LNG flagship. For this, Gazprom invited Total into the project, later to be joined by Norsk Hydro (the former was given 25 percent, the latter a 24 percent stake). Total was to design the first phase, as well as to build all the relevant facilities, whilst the production license and marketing rights remained in Gazprom’s control. Expenses loomed large from square one, as Phase One of development, stipulating a 24 BCm per year production (840 BCf) of gas, was estimated to cost around $15 billion.

The high cost was a confluence of many factors – remoteness from continent (the field is some 300 miles north of Murmansk in the middle of the Barents Sea), heavy Arctic conditions (any production unit would have to cope with icebergs and waves that can be as high as 30 meters) and needlessly complex logistics solutions. Initially it was thought that the liquefaction facilities should not be built on-site but the shareholders should lay instead several hundred kilometers of subsea pipelines to Teriberka, the supposed site of the LNG plant. Why, you might ask. Well, the thing is that Gazprom always kept feeding Shtokman gas into its trunk pipeline system to Europe as a Plan B – even though LNG was the first option, some part of the gas would have gone to Europe via pipelines anyway were the project to move ahead.

Related: “Profit Secrets of the World’s Most Successful Energy Investors”

Thus, even though Gazprom might have scrambled together the required sum over the years, it never really managed to find out where to would the LNG volumes primarily go and how. The shareholders’ initial plans were premised on the potential of LNG exports to the United States, whose shale gas revolution was still regarded with grave skepticism. As time went on and shareholders still struggled to find an ideal business model that would not end up in evident cost overruns, America no longer seemed to need Shtokman LNG to satisfy its needs and European gas demand started to stagnate. Then came 2-3 years of experimenting with Shtokman, in an attempt to rebrand it as a purely pipeline-destined project, with most of its output feeding into Nord Stream.

Several years of negotiations with palpable political backing notwithstanding, nothing came of it all. Of course, the magnitude of Shtokman’s importance necessitate constant solution-seeking. Shtokman’s resource bounty is immense – if the project were to attain Phase Three, its output plateau would be a mind-boggling 71 Bcm (2.5 Tcf) per year. However, five years after Shtokman LNG was put on hold in 2013 – Norsk Hydro has already left the shareholding structure by that time and only Total and Gazprom remained, at odds over almost every segment of project development – almost no valid answer was generated to project-relevant challenges. For instance, what liquefaction technology would the project use? Yamal LNG uses US Air Liquids technology, whilst Arctic LNG-2 will be based on technology provided by the German Linde, whilst both NOVATEK and Gazprom are concurrently working on their proprietary technological solutions. Considering that sanctions are here to stay, it is a truly difficult choice.

Yet even if we are to acknowledge that under current circumstances Shtokman LNG should be a purely LNG project (taxation is much more beneficial), even if we are to assume that Gazprom would receive some sort of government help, either in the form of infrastructure construction or further tax exemptions, even if we are to presume that the shareholders strike a cooperative tune (even though it allegedly remains in the project, Total gave Gazprom back its 25% stake), the most important questions remains unanswered. Gazprom could export Shtokman LNG volumes to Asia Pacific, however due to the field being far away from continent (unlike Yamal LNG which is onshore, similarly to fields that are to supply Arctic LNG-2) both the shipping and transportation costs would surpass those of its Russian competitors. Related: China Blinks First In LNG Face-Off With U.S.

Moreover, Gazprom has other means to increase its LNG foothold in the Asia Pacific region, namely the Yuzhno-Kirinskoye field (attesting to its significance the US levied sanctions on it on quite dubious grounds just four years after its discovery in 2010). Despite being at least five times smaller in terms of reserves (622 BCm), total costs to bring Yuzhno-Kirinskoye gas to China or Korea would hover around $4/MMBtu, surpassing the $6-7/MMBtu of Yamal LNG. Moreover, by tapping into it offshore Sakhalin, the company avoids the usage of the Northern Sea Route. Yet even if it were to orient Shtokman LNG towards Europe, Gazprom has a direct competitor within its own portfolio – Baltic LNG. By liquefying W-Siberian gas that is now supplied via pipelines to Europe, Gazprom could send gas to countries now beyond its pipeline reach with an average total cost of $5/MMBtu.

Thus, it seems highly likely that Shtokman will remain the world’s biggest “trapped” field in the next years ahead, at least until a suitable market outlet is found where Gazprom and Total can play to the project’s strengths. It might make sense to wait for Norwegian gas to enter into terminal decline and then supplant it in markets traditionally supplied by Norway – for this one or two European majors apart from Total should join the shareholders’ structure. Aiming Shtokman at markets in Asia Pacific is not unfeasible, however, the risks involved might be too much for a state-owned entity. Hence, the Energy Ministry’s drive to reach its 83 mtpa LNG target for 2035 will largely omit Shtokman.

By Viktor Katona for Oilprice.com

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