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Shtokman Production Delayed Two Years

Source: The Wall Street Journal 11/19/2009, Location: Asia

Shtokman, a natural gas field in Russia's Arctic waters that is one of the world's largest gas deposits, will start producing two years later than OAO Gazprom's planned launch date, according to one of the partners in the megaproject.

Jean-Jacques Mosconi, head of strategy at French oil company Total SA, said the first gas from Shtokman would begin flowing into export pipelines in 2015, with liquefied natural gas production starting up a year later.

The reason for the delay is the "numerous technical issues" Shtokman presented, he said. Gazprom's original timetable, which envisaged the development coming on stream in 2013, was "impossible," he added.

The hold-up reflects the escalating costs, vast logistical challenges and uncertain outlook for gas now facing the Shtokman partners - Gazprom, Total and Statoil ASA of Norway. Spot gas prices have slumped as recession demolished demand and new supplies swamped the market from new LNG projects and the shale gas fields of North America.

Total's chief executive, Christophe de Margerie, said last month that Shtokman won't be profitable with gas prices at their current level. He said a final investment decision on Shtokman will be made at the end of 2010 -- months later than originally flagged.

Shtokman would not be the first megaproject Gazprom has delayed. Last summer, it said it was postponing the launch of Bovanenkovo, a huge field in the northern Yamal Peninsula, by a year to 2012.

The delays are important because Bovanenkovo and Shtokman are key to Gazprom's growth ambitions. The company wants to increase its market share in Europe from 25% now to a third by 2020. But its mature Siberian fields are in decline, and it needs to develop its reserves fast to avoid steep falls in output.

Located under the iceberg-strewn Arctic waters of the Barents Sea, Shtokman has reserves of 3.8 trillion cubic meters, enough to meet the world's demand for gas for more than a year.

Gazprom initially said it would develop the field on its own, but later tapped Total and Statoil to help. The three formed Shtokman Development AG. to carry out the first phase of the project. Gazprom owns 51%, Total 25% and Statoil 24%. The Russian company retains ownership of all the gas Shtokman will produce.

Under plans for the first stage, Shtokman was supposed to start producing pipeline gas for Europe in 2013, with production of liquefied natural gas for export to the U.S. beginning the following year. In total, the first phase would produce 23.7 billion cubic meters of gas a year--just under 5% of the Europe's current consumption.

But Gazprom warned recently that the steep fall-off in gas demand in Europe could prompt it to review Shtokman's timetable.

The first phase of Shtokman will use a huge floating production unit connected to several subsea wells. The gas will be pumped ashore through a 550-kilometer pipeline to a terminal at Teriberka, where an LNG liquefaction plant will be built. The production unit will be moored on a turret that can be moved up and down to avoid the Barents Sea's biggest threat -- stray icebergs.

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