April 7, 2012 / 3:17 PM / 7 years ago

Gazprom flags Shtokman gas shift; Europe wary

URENGOI, Russia (Reuters) - Gazprom (GAZP.MM) may ditch plans to pipe Arctic gas from its Shtokman project, a top executive said, potentially giving Russia’s top energy firm more leeway to sell supplies from the huge field to customers outside Europe.

Gazprom may instead focus on producing more easily transportable liquefied natural gas at the Barents Sea deposit, deputy chief executive Alexander Medvedev said on Saturday - the first time the company has mentioned that option.

The comment is likely to stoke concerns in Europe about whether Russia can be relied on as a major long-term gas supplier, given rising demand for the fuel in Asian markets.

European companies have complained that Gazprom - which supplies a quarter of the continent’s gas needs - has not met their requests for extra deliveries during the current cold snap. Gazprom said it has been unable to meet all the additional demand.

Prime Minister Vladimir Putin, who will serve a third term as president from May, said last month that Russia should wean itself off its dependency on European pipeline gas deliveries and expand into super-cooled LNG, which can be delivered to the markets of Europe, the Middle East and Asia by tanker without infrastructure constraints.

Speaking to reporters on Saturday at the launch of a new gas well in Urengoi in the Arctic region, Medvedev admitted the company’s exports to Europe might be less than the 154 billion cubic meters it has projected.

“We said that exports will total 154 (bcm this year) but even if it is 150 bcm, revenues won’t be lower,” he said.

Earlier this week a Gazprom’s official said the company will increase its gas production next winter.


Shtokman’s gas reserves are estimated at 3.9 trillion cubic meters, enough to meet a year’s global consumption and making it potentially the world’s tenth largest field.

In theory, gas from the field is due to be piped to Europe via the Nord Stream pipeline - launched last November - from 2016 and shipped as more costly liquefied natural gas from 2017.

But its development has been fraught with problems and last month its operating consortium deferred for the third time since March 2011 a final decision on whether to press ahead with initial investments of around $30 billion, according to some estimates.

The consortium - Gazprom (GAZP.MM) with a 51 percent stake, France’s Total (TOTF.PA) (25 percent) and Norway’s Statoil STL.OL (24 percent) - has been mired in debate over the project’s future for several years, with tax breaks being the key issue.

Statoil declined to comment on Medvedev’s remarks and no one at Total was immediately available.

Under current tax rules, the economics of LNG are seen as superior to those of the pipeline option, with Russia having exempted all LNG projects from export duty.

At present, Russia’s only LNG plant - at Sakhalin-2 project of Gazprom and Shell (RDSa.L) - produces 10 million metric tonnes of frozen gas a year.

Analysts from energy consultancy Wood MacKenzie have said they see Shtokman supplementing this as primarily an LNG project.

Russia is considering up to 60 million tonnes in new annual LNG capacity by 2020 to feed Asian markets, especially China and Japan, where demand for the fuel has risen after last spring’s Fukushima nuclear plant disaster.

Medvedev, who is also the head of Gazprom’s exporting arm, said gas from Shtokman will be sent to southeast Asia as well as Europe.

“Preparations for a business model of cooperation with foreign partners are under way... The key thing is that, despite prolonged discussions, faith in LNG has returned to them, and we never lost it,” he said.

Gazprom has been unable to strike an agreement with China on proposed pipeline gas exports due to a dispute over pricing, and analysts say that deal is off the agenda for the foreseeable future.


As regards Europe, Gazprom had already lowered its initial estimate of 164 bcm of pipeline gas exports this year as it faced stiff competition from alternative fuel there, such as LNG as well as a cheaper spot market.

The company has also made pricing concessions to several customers, including Italian’s ENI ENI.M [ID:nL5E8E18G4] [ID:nL5E8E20NY]

But Medvedev said revenues from sales to Europe would not fall as gas prices - pegged in Gazprom’s long-term contracts to the price of oil and oil products that have traded at multi-month highs - will be higher.

The price of Russian gas for European clients is expected rise to $415 per 1,000 cubic meters this year on average from around $384 in 2011.

“There is a possibility to sell two apples instead of five with the same effect... And the revenues won’t be lower than if it had been 164 bcm,” the deputy CEO said.

Gazprom’s sales to the European Union account for around a half of the company’s total revenues.

Reporting by Denis Pinchuk, writing by Vladimir Soldatkin; Editing by John Stonestreet

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