February 4, 2010 11:02 pm

Gazprom consortium hit by weak demand

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Gazprom

All at sea: lower demand for gas has thwarted projects

An oil consortium headed by Russia’s Gazprom is considering postponing its vast Shtokman liquefied natural gas project in the Russian Arctic due to depressed global demand for gas.

Shtokman Development, which is a venture between Gazprom, Total of France and Norway’s Statoil, had expected the project to produce its first gas in 2013 and begin liquefied natural gas shipments to North America in 2014. But a surge in domestic shale gas production has reduced the US’s need for LNG in the past 12 months, and forced the Shtokman partners to review their strategy.

A Shtokman Development employee said this week that initial work at the field would be postponed for at least two years. “Everyone knows about this. It definitely won’t begin in 2013,” he said.

Technical challenges at Shtokman, which is located in icy water within the Arctic circle, 500km off Russia’s north-western coast, could further slow the field’s development.

Shtokman Development will hold a board meeting on Friday in Zug, Switzerland, attended by Christophe de Margerie, Total chief executive, and Helge Lund, his counterpart at Statoil, to discuss future plans for the field.

Analysts said Gazprom might abandon its plans to liquefy gas from Shtokman and instead feed gas from the field into pipelines to Europe.

Gazprom said on Thursday that there had been “no official changes” to its plans at Shtokman.

A delay at the field, if approved, will intensify concern about Gazprom’s vulnerability to dramatic changes in global gas markets that threaten its export business.

High oil prices have spurred US companies to develop technology to extract shale gas more cheaply, which has in turn reduced demand for energy imports. LNG producers that earlier targeted the US have switched supplies to Europe, where they compete with Gazprom in a market already depressed by the economic downturn.

Falling European gas demand prompted Gazprom last June to delay the development of the huge Bovanenkovo field on Siberia’s Yamal peninsula by one year until the third quarter of 2012.

Jonathan Stern, head of gas research at the Oxford Institute of Energy Studies, said Shtokman LNG could not compete economically with US shale gas at current prices.

“Gas is a cyclical industry and we are at the bottom of the cycle,” he said. “This is a particularly unfortunate time for Gazprom.”

The Russian group is under pressure to renegotiate contracts with European gas consumers after reporting a drop of more than 12 per cent in its gas exports to Europe last year.

Gazprom owns a 51 per cent stake in Shtokman’s first development phase with Total holding 25 per cent and Statoil-Hydro 24 per cent. Under existing plans, phase one will produce about 23.5bn cu m of gas a year for liquefaction at an onshore plant on the Barents Sea coast.

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