The board of directors of Shtokman Development AG (SDAG) met in Moscow to make a third attempt at approving the final investment decision (FID) to launch the development of the huge arctic gas field.

While two years ago it was postponed by the downturn in prices for LNG, now the investors are haggling over future revenues. Altogether inopportunely, one of the shareholders, France’s Total, which has a veto on Shtokman technical issues, has suffered a gas leak at its Elgin offshore platform in the North Sea.

The board usually meets in its place of registration, the Swiss city of Zug, but this meeting was being held in Moscow. The outcome of the meeting was to postpone the FID for another three months.

Together? Together!

Not long before SDAG’s second attempt to adopt the investment decision, there were rumors that the foreign shareholders – France’s Total and Norway’s Statoil – might abandon the project because the Russian government is not promising preferences for Shtokman. Russian gas giant Gazprom, meanwhile, had other potential partners in view. Neither rumor was officially confirmed.

At the time, the foreign companies proposed to defer the decision by up to six months, while Gazprom thought everything was ready to adopt the FID.

A source familiar with the implementation of the project said that, depending on who is responsible for severing relations, there is a scenario where the foreign participants might not recover the money they have spent on the project if they withdraw.

If Gazprom begins to implement the project independently, but with the agreement of the foreign participants, the latter will be able to recover the money they spent from the project’s future profits.

However, if the FID is approved with the current participants, they will have to pay Gazprom another $1.5 billion, with Total’s paying $750 million and Statoil’s $720 million.

Right now the question of whether the foreign partners might withdraw from the project is not an issue.

Technology

The purpose of Shtokman Development, in which Gazprom owns 51%, Total 25%, and Statoil 24%, is to finance and build infrastructure for the delivery of Shtokman gas to the shore and liquefying it under the first phase of the project. The license to the field, with reserves of 3.9 trillion cubic meters of gas, belongs to Gazprom’s subsidiary Gazprom Dobycha Shelf.

Gazprom, Total, and Statoil signed the shareholders’ agreement to form a special purpose vehicle Shtokman Development in February 2008.

Gazprom brought in the foreign companies because it lacks the expertise for such projects – the company has not yet produced gas at fields on the continental shelf.

Since Shtokman Development was formed in 2008, two competing FEED (front-end engineering development) proposals have been prepared for the construction of an ice-resistant floating production unit (FPU) by two consortiums: Aker/Technip/SBM and Saipem/Samsung and Sofec as the main subcontractor for the turret and the mooring riser buoy (MRB). After the completion of the tendering phase, the first consortium was reconfigured as Technip/Daewoo with SBM as the main subcontractor for the turret and MRB, while the second consortium remained unchanged.

The plan for offshore facilities calls for the construction of a subsea production system tied back through a system of umbilicals, flowlines and risers (UFR) to the FPU, which is disconnectable in case of icebergs’ approaching.

The FPU, stretching the length of three football fields, will host gas processing and separation of gas and condensate equipment, which will be transported onshore via flexible risers. It is expected that one of the consortiums participating in the tender will also build the FPU.

Onshore, there are plans to build an LNG plant with the capacity of 7.5 million tons per year and pump part of the gas into Russia’s unified gas supply system.

Moderate your appetites

Last fall, then Deputy State Duma Speaker Valery Yazev called on the foreign investors to “moderate their appetites.”

“We’d appreciate it if the shareholders did not formulate their conditions too greedily. The Russian state and the Russian people do not need the development of Shtokman at any price. The country also needs to get something out of the project,” Yazev said.

Capital expenditures for the project are estimated at about $30 billion for the first phase. The parties are negotiating to lower the cost, and are currently close to a consensus. One of the issues is unforeseen costs, which could reach a fairly considerable amount.

Meanwhile, Total’s Elgin offshore platform in the North Sea, located 240 km off the coast of Scotland, suffered a gas leak. The company evacuated all personnel and shut down production. An Interfax source said this could have affected the negotiations.

A high-ranking source at Gazprom said that the Russian company is disappointed with its technical cooperation with the foreign companies. Instead of reducing the cost of the project and increasing its reliability, Gazprom has seen a cost increase of about $1.5 billion (due to the use of two two-phase pipelines instead of one single-phase) and a decline in reliability.

The issue of tax breaks, the source said, is being decided within the context of the new approach to the development of offshore fields. One proposal is to eliminate or reduce all existing taxes for offshore projects in exchange for the introduction of a royalty (as a percent of revenue) and a tax on windfall profits – a completely new tax for Russia.

A little politics

Prime Minister Vladimir Putin said in February: “We will develop Shtokman regardless.”

One of the arguments mentioned for postponing the approval of the FID for another three months is Putin’s inauguration as President of Russia in May and the formation of the new government. “The project is so big that political factors also matter,” the source said.

In February 2010, the approval of the FID for Shtokman was put off for a year due to the steep drop in world prices for LNG. Later it was decided that an investment decision on pipeline gas would be made in March 2011 and a decision on LNG in December 2011. However, in March it was announced that an integrated investment decision would be made after all. Interfax sources said the implementation of Shtokman would be unprofitable without LNG.

Taking into account an analysis of the situation on the LNG market in the next ten years, Gazprom believes it would not be a good idea to drag out the approval of the decision any longer than the end of the first half of 2012. This is so because of the planned launch of a large number of competing projects, which would considerably reduce the possibilities of signing long-term contracts on terms that would ensure acceptable returns on the project.