Ruminations on Russia

For those who care - a politer version of my own analysis from Ben's bne.  It looks as though I have some of the details of the contract wrong - but then as there really is not one to talk of we are all guessing.

Furthermore, Jonathan Stern of the Oxford Institute of Energy Studies and the writer of "The Future of Russian Gas and Gazprom", one of the most informed commentators on GAZP, and trusted by them, says that Total thinks that it has signed up for is a study based on some principals.  As I wrote earlier, a political not a professional deal. 

The final comment with which I agree entirely is from the author's final paragraph:

"And it could be an expensive model for the Russian company -- and ultimately the state."

In short, Shtockman will push the developers of it to the limit, what is needed is a coalition of the willing, not a cobbled together political deal which will come to pass for political, not business reasons.

BUSINESS NEW EUROPE - bne Page:
Total finds itself in the deep end with Shtokman deal

Derek Brower in London
2007-07-16


Oil major Total signed an agreement with Russian gas monopoly Gazprom on Thursday, July 12 to take a stake in the Shtokman gas field, in the Barents Sea. But the deal, which will should see the French company take 25% of the company that will develop the field, one of the world's largest, leaves many questions unanswered.

According to Gazprom, the two companies will establish a special-purpose company to manage engineering, financing, construction and exploitation of installations at the first phase of Shtokman field development. The company will be the owner of this infrastructure for 25 years, starting from the moment the field comes on stream.



When the first phase of the field's exploitation phase is complete, Total will return the stake in Sevmorneftegaz, the development company, to Gazprom. The Russian company says that in the meantime other firms will be able to take up to 24% of that company, leaving 51% in Gazprom's hands. 100% of the licence, as well as all the rights for marketing of the commodities, will be retained by Gazprom.

The company says the field will produce 23.7bn cubic metres a year (cm/y) of gas, with piped deliveries -- probably to the Nord Stream pipeline that will run under the Baltic Sea from Russia to Germany -- coming on stream in 2013 and liquefied natural gas (LNG) deliveries beginning a year later.

So much for the initial details. The rest remains hazy. The first question is why Total, and not as expected the Norwegian companies Hydro and Statoil (which are in the process of merging), was Gazprom's choice to partner it on Shtokman. Unlike the Norwegian firms, Total has no experience of bringing on stream an LNG project in the harsh Arctic environment. Furthermore, its recent record in Iran, where an LNG plant that Total is developing is running into severe cost overruns, is not good.

Sarkozy suffers Shtokman syndrome?

The likeliest explanation is political. Presidents Nicolas Sarkozy of France and Vladimir Putin of Russia are understood to have agreed the deal by telephone last week. Sarkozy has promised his European partners that he will take a tougher line with Russia than that of his predecessor, Jacques Chirac. The Shtokman deal, suggest analysts, is a pre-emptive strike by the Kremlin to stop that happening. Sarkozy could find his rhetoric on Russia mysteriously softening in the wake of Total's deal.

The next question is what, exactly, Total will get from the deal. The company's chief executive, Christophe de Margerie, told journalists after the signing ceremony that Total would be able to book reserves from the field. But given that the asset will remain entirely in Gazprom's hands, Total's shareholders will wonder about the legality of that. Gazprom's statement clearly states that Total's stake relates to infrastructure, not gas.

More likely is that Total will act as a glorified service contractor, providing capital and investment for a fee. Gazprom has indicated that it considers such a model to be the preferred mode of partnership with Western oil majors. But sources told bne that the French company has resisted such a notion up to now.

Meanwhile, given Total's inexperience in the Arctic, the likeliest contenders for the remaining 24% of Sevmorneftegaz remain the Norwegian firms. They will watch with interest as the details of Total's contract emerge. Jonathan Stern, of Oxford's Institute for Energy Studies, told bne that all Total had signed up for at present was a study into a potential partnership -- a far cry from the deal that much of the media presented last week.

The other question is the destination of Shtokman's gas. Gazprom's decision last year was that the field would not, as planned, be used for LNG, but to fill Nord Stream. That suggested that the company was worried about finding the gas to fill its prized export project to Europe. The re-commitment to LNG fits with the company's eagerness to develop a position in that market, but it still leaves the issue of filling Nord Stream, which has planned total capacity of some 55bn cm/y.

Then there are the questions of cost and timing. Stern suggests the 2013-14 targets will be difficult to meet. And Gazprom's cost estimate of $15bn could be conservative. And who will pay? With a share of the asset, Gazprom's international partners would be expected to cough up their proportion of the investment. Whether they can be expected to do so if they don't own any of the gas is another detail that remains to be revealed.

Gazprom seems to be inching to a new model of partnership with the majors: a form of service contract that nakedly shows the balance of power between Gazprom and the once-mighty oil majors. Shtokman will test the new model's viability. It isn't the kind of arrangement oil majors like. And it could be an expensive model for the Russian company -- and ultimately the state.


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