20-10-06 Gazprom has presented technical grounds for refusing foreign participation in the development of the Shtokman natural gas deposit -- its biggest political conflict of late. Sources at the monopoly say that new data show the geological risks to be low.
The recoverable reserves at the deposit are significantly larger than had been thought. Gazprom can bear the risks itself and does not need Western companies' participation. Therefore, Gazprom is willing to bring them in only as contractors, and only on terms that are unprofitable to them.

Russian President Vladimir Putin mentioned the growth in Shtokman reserves during his visit to Germany on October 10. But his modest note was not linked to Gazprom's sensational refusal of its potential Western partners. But that is the explanation of that radical step.
A source at Gazprom said that the drilling of confirmation well No. 7 at the deposit, begun in June, had been completed and results were “unexpectedly positive.”
Prognoses by the All-Russia Natural Gas and Gas Technology Research Institute show that that well is at the centre of the deposit,” the source said. “Therefore, data from it are the most indicative and important.”

Gazflot, which drilled the well, confirmed that it completed its work on October 13 and received conformational data. Gazprom confirmed that information.
It is clear, however, that Gazprom first found out about the information a day earlier, since it had presented the first bonuses to the research institute, Gazflot and Sevmorneftegaz (the license-holder at Shtokman) on October 12 for development of “technologies for preparing industrial categories of hydrocarbon reserves based on the example of Shtokman.”

The Gazprom source said that the main conclusion of geologists was that the risks at the deposit are significantly lower than had been predicted.
“We suggest that Gazprom will be able to develop the deposit by other means than planned,” the source said. Previously, Gazprom had wanted work at the deposit with partners from among five foreign companies: the Norwegian companies Statoil and Norsk Hydro, American ConocoPhillips and ChevronTexaco and the French Total. They were to share the risks in the project.

The foreigner stressed in negotiations in the spring and fall that the deposit should not be assessed too highly because many questions remained about its exploration. Total senior vice president Menno Grouvel stated that “it is a very complex project and it is possible that its budget may grow seriously during production.”
Gazprom sources say that the seventh well answered many of the remaining questions and allowed the company to turn its back on the foreigners' offers. Gazprom head Alexei Miller did just that on October 9, announcing that Gazprom would develop Shtokman by itself.

A source close to the All-Russia Natural Gas and Gas Technology Research Institute's general director said that “the geologists were in a great mood after the completion of the drilling.” That source explainedthat the reserves at Shtokman had grown from 3.4 tcm at the beginning of the year to “a minimum of 4 tn.”
Industry experts confirm that every well drilled gives a more accurate picture of a deposit. BrokerCreditService analyst Maxim Shein explained that “if the pressure in a layer is very high, it is understood from the drilling that that means the growth of reserves and an increase in the productivity of the layer.”
The amount of gas points to lowered risks from geological exploration.
“All of those indicators have a significant influence on the cost of the project,” Shein commented. The cost of the project had previously been estimated at $ 8-14 bn.

Russian President Vladimir Putin hinted at the future of relations between Gazprom and its potential foreign partners when he said that foreigners would be brought in as development partners without rights to the resource base.
“We had always considered an alternative to product-sharing agreements for the development of Shtokman and our foreign partners were prepared to discuss it,” said a Gazprom source involved in the project. He added that the deposit will most likely be developed under the same buy-back procedure that is in use at Southern Pars in Iran. There, all technological risks are assumed by the contractors -- if they do not create a profitable project, they bear the losses.
“That procedure is better for Russia than the product-sharing going on in Sakhalin, where the state pays for everything,” the source said.

That buy-back procedure is used only by Iran.
“It is a cabal agreement for the developers, since it offers minimal profit for foreigners,” a source close to Statoil commented. “That procedure is not used anywhere else in the world, because they would be afraid that they would not find any investors.”
Grouvel also said recently that using as producers as service companies will not create interest among the large production concerns. An employee of one of the Norwegian companies observed that it had already been assumed that Shtokman contained reliable reserves from the point of view of geological exploration and that the producers would bear the greatest risks in production. Hydro proposed to develop Phase 1 of the project without a platform.

In the opinion of Tatyana Mitrova, head of the Institute for Energy Research, which studies world energy markets, the technological risks that remain at Shtokman are still high.
The deposit is located 550 km off shore and icebergs could complicate production, as well as changing temperatures on the seafloor, polar nights and large waves. But it was learned that the foreigners will nonetheless soon renew negotiations with Gazprom on Shtokman.