Shtokman talks start from a blank sheet

by Simon Pirani

Negotiations on a new agreement to develop the Shtokman gas field in the Barents Sea have provoked the western oil majors to reiterate their demands for improved production sharing agreement (PSA) terms, and Gazprom to seek high-level political assurances on marketing the gas in Europe.

The framework agreement under which exploratory work in the field has been carried out expired in September last year. That deal was struck in 1995 between Gazprom, its subsidiary Rosshelf that held the Shtokman licence, and a western consortium comprising Conoco-Phillips, Total Fina Elf, Fortum and Norsk Hydro.

The Russian government took the opportunity provided by the agreement's expiry to reorganise all the licences for hydrocarbons deposits on the Arctic shelf. After overcoming objections from Lukoil, a minority shareholder in Rosshelf, the government in December 2002 transferred the licences for Shtokman, Prirazlomnoe oil field and three smaller deposits to Sevmorneftegaz, a company set up a year earlier and owned 50-50 by Rosshelf and Rosneft-Purneftegaz, a 100% subsidiary of the state-owned oil company Rosneft. 

Rosshelf is controlled by Gazprom (which has a 52.7% shareholding), while other shareholders including Rosneft (which bought a 12.55% stake from Severstal, a steel company, in July last year), Sevmashpredpriyatiye, a platform construction company (12.55%), and Arkhangelskgeologodobycha, a field exploration and development company controlled by Lukoil, with a blocking minority hold by Rosneft.

Ultimate control of the project lies with the Russian government through its control of Rosneft and its large blocking stake in Gazprom. Nevertheless the shift from Rosshelf to Sevmorneftegaz may indicate a stronger role for Rosneft, which remains 100% state-owned. Leonid Mirzoyan, an oil and gas analyst at Deutsche Bank in Moscow, pointed out: "The constitution of Sevmorneftegaz was a signal that the government wants to reinforce its control. This is also the most far-reaching plan so far for collaboration between Rosneft and Gazprom; as a trade-off for putting resources into Shtokman, Rosneft may get access to Gazprom infrastructure to develop its gas fields in Siberia."

Negotiations on a new joint venture agreement under which to develop the field are now underway between the Russian parties and foreign oil companies. Dmitry Panteleev, spokesman for Rosneft, told GBI: "Due to the expiry of the previous agreement, we start with a blank sheet." He said that apart from the open expressions of interest in Shtokman by TotalFinaElf - whose executives have previously stated that the company was interested in being a joint venture partner or even operator - Rosneft has "received unofficial signals of interest from the USA, particularly with respect to possible deliveries of LNG from Shtokman to America." There had been "unofficial but serious" talks on this score between Gazprom, Rosneft and US companies.

The western companies have tried to reinforce their claims to good PSA terms, or even operatorship, with ill-disguised hints in the press that the Russians were dragging their feet. Executives of Conoco-Phillips were widely quoted warning that US investment would never go ahead until PSA legislation was passed, although company press officers later denied this. The message was repeated by the US ambassador in Russia, Alexander Vershbow, who said in an interview with Itar-Tass news agency on 14 January that "the realisation of large-scale investment projects [in the Arctic and Sakhalin] depends on parliament's passage of PSA legislation".

Securing agreement with the western companies on joint venture terms will be difficult enough, but there are also problems of transportation and gas marketing to be resolved before Shtokman can get underway seriously and efforts made to raise the $18.7 billion required in project finance.

Jonathan Stern, associate fellow at the Royal Institute of International Affairs, commented: "Unless Russia is prepared to give foreign shareholders equity gas in proportion to future investment in the field, and some leeway as to where to market that gas, the project will not move forward. Furthermore, the issue of investment in production at Shtokman is related to equity shares and investment in transport routes as far as the North European pipeline, and of that pipeline itself."

A source close to Gazprom said that management now believes that the project can not go forward without it having a clearer picture both of how these pipelines will be financed, and also of its long-term marketing possibilities in western Europe.

These issues that must in part be resolved politically, and Gazprom chief executive Alexei Miller was expected to visit Brussels by the end of January to talk about them with EU officials. A source at the EU's energy and transport directorate said that Brussels "sees a clear link between Shtokman and the gas transport infrastructure going right across to the UK. This infrastructure has been recognised as a project of common interest in the Russia-EU energy dialogue".

Brussels believes that it, as well as Moscow, will have to demonstrate preparedness to give strong political backing before Shtokman goes ahead. Officials are planning to organise a round-table discussion with oil company executives in Moscow in March to discuss financing the project. One idea to be aired there is the provision of joint EU-Russian sovereign guarantees to cover the risk of non-respect of international arbitration courts by joint venture partners.

While the politicians, chief executives and bankers keep talking, work on platform construction is planned to start this year in the Arctic. Panteleev of Rosneft said that, although Shtokman has been put on hold because effort is currently concentrated on starting oil production at Prirazlomnoe, it will move forward this year. "Sevmoreneftegaz will start development work in 2003. Four or five platforms need to be built and equipped." This seems to us to be wildly optimistic given the financial resources of Gazprom and Rosneft. There seems little point in spending additional money upstream until the question of transportation and markets, not to speak of equity participation in the field, is at a much more advanced stage.