costs force Gazprom to quit vast Arctic gasfield

Russia has been humiliated after it was forced to abandon one of the world's largest gasfields.

Gazprom, the state-controlled gas group, has spent the past 20 years trying to develop the giant Shtokman field. But soaring costs and a glut of cheap shale gas from the United States have scuppered the flagship project in Russia's sector of the icy Barents Sea, about 300 miles north of Finland.

The field, which was first discovered in 1988, is large enough to supply more than a tenth of Europe's gas and the decision to put it on hold will be seen as a setback for Vladimir Putin. Russia's President is actively involved in the country's energy policy and has taken a close interest in Shtokman.

Gazprom insisted that the project could still go ahead, but only if costs fell or gas prices rose, which analysts said was unlikely.

In its latest attempt to bring Shtokman to production, France's Total and Norway's Statoil were brought in to the project in 2005. But Gazprom's junior partners had become increasingly nervous about soaring costs. The project was originally slated to cost $15 billion when it was announced four years ago but costs are since thought to have doubled.

Vsevolod Cherepanov, the head of Gazprom's production department, said: "All parties have come to the conclusion that the financing is too high to be able to do it for the time being."

But he failed to mention the recent shale revolution in the United States, which has depressed prices and made Shtokman redundant. The plan in 2005 was to ship some of the gas to the US. Thanks to shale gas, America is close to becoming self sufficient in energy.

Even more galling for Russia, by the end of the decade the US is expected to start exporting gas to Europe, a market that Russia has traditionally dominated.

The recession in Europe has also sapped gas demand and high Russian energy taxes further undermined the economics of the project.

Jonathan Stern, senior research fellow at the Oxford Institute for Energy Studies, said: "The Russians have taken a long time to admit that, despite Shtokman's size, the economics do not make sense. It may be a blow to prestige. But it's a triumph for common sense."

Last month, Statoil said that it had written off $336 million of investment in developing the field and wanted to renegotiate the terms of its participation.

Shell, the world leader in LNG, had been touted as a possible replacement for the Norwegian company. Gazprom needs international partners because it does not have the expertise to proceed with the project on its own.

Total and Statoil are the latest multinationals to come a cropper after being lured by the vast oil and gas reserves off Russia's northern coast. BP's Arctic alliance with Rosneft collapsed last summer after its Russian partners blocked the tie-up. The British company has since been replaced by Exxon Mobil.

The decision to shelve Shtokman is also a blow to Gazprom, whose export monopoly on gas is under threat. The Russian independent rival Novatek received President Putin's blessing to go ahead with its $24 billion Yamal LNG project in the Arctic last year, which is thought to be less technically challenging.

On ice 520 billion cubic metres Europe's annual gas consumption 70 billion cubic metres Maximum annual production projected from Shtokman $15bn Original cost of project $30bn New estimated cost $336 million How much Statoil has written off from the project World's largest gasfields Trillion cubic feet 1,000 Gasfields Russia North of Arctic Circle 750 Shtokman 500 250 0 5th 10th 15th 20th 25th Liquefied natural gas to be transported abroad by carriers Barents Sea Murmansk Teriberka Shtokman Vyborg 1,000 feet Depth of Shtokman field Greifswald Gas delivered by Nord Stream pipeline


From The Times