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Home / Issue Archive / 2009 / January - December #1 / One Step Forward, Two Steps Back. Is the Latest Crisis Cause for Another Time-Out in the Barents Sea?

№ 1 (January - December 2009)

One Step Forward, Two Steps Back. Is the Latest Crisis Cause for Another Time-Out in the Barents Sea?

The world financial crisis precipitated a ticker tape parade of stories in the Russian media this autumn that suggested that development of offshore oil and gas in the giant Shtokman gas-condensate field might again be delayed.

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The project has been “on again, off again” since the field’s discovery 20 years ago. And while the media frenzy might be regarded as sensational, the question of whether a delay might be prudent is being widely debated within the industry, such as at recent meeting of the Mining Council of the Northwest Federal District and International Conference “Oil and Gas of the Arctic Shelf.”
In 1992-1993, Rosshelf (a company founded by Gazprom and a number of partners) won development licenses for the Shtokman gas-condensate field and the Prirazlomnoe. First oil at Prirazlomnoe was projected for 1999. In 1998, Gazprom’s foreign partners, Australia’s BHP and Germany’s Wintershall stopped funding and exited the project.
At the same time, the Ministry of Natural Resources (Minprirody) was making plans to set up a state company to explore and develop Russia’s Arctic shelf with state budget funds and the offer to foreign companies to participate in a consortium under a PSA (production sharing agreement.)
Gazprom had other plans however and began negotiating with American, French, Norwegian and Finnish companies on its own. At a presentation in Murmansk in 1999, Gazprom even promised to produce the first 20 bcm of gas in the Barents Sea in 2006. To that end in 2001, Gazprom and yet another company, Rosshelf, set up Sevmorneftegaz to which licenses for development of the Shtokman and Prirazlomnoe fields were transferred. In 2006, Gazprom promised to produce first gas at Shtokman in 2011. It promised to make the Prirazlomnaya platform operational in 2004. But so far, no such luck.
Then in 2008 with oil and gas prices climbing higher with each passing day, Gazprom agreed to the formation of Shtokman Development AG. The license holder however would be Gazprom Dobycha Shelf company (GDSh). Meanwhile Sevmorneftegaz, Gazprom’s 100% subsidiary, holds the license for exploration, geological survey and production.
A Decade On, Another Crisis
Vladimir Vovk, Manager of the Gazprom Department of Offshore Field Development Technologies, told a recent conference in Murmansk that Shtokman will see first gas in 2013 and within a year petroleum liquification processing will commence at a facility to be built on the Kola Peninsula. Vovk added something that had not been heard previously: “Gazprom,” he said, “intends to develop not only the Shtokman field, but also the neighboring gas accumulations – Ludlovskaya, Ledovaya, Zapadno-Shtokmanovskaya and others.”
Vovk continued: “In the next few years, Shtokmanovsky region, which is estimated to hold about 4 bcm of gas, will become a hydrocarbon producing region of the same size as West Siberia. The Prirazlomnoe field will become the base for development of the neighboring fields – Varandey-morey, Medyn-morey and Dolginskoye.”
Vovk called Shtokman “the engine” that will drive Russia’s shelf development. The gas monopoly has started construction of the field facilities in the Kara Sea, continues operations on the Sakhalin shelf, in the Caspian, Black and Azov Sea. Gazprom is also trying to approach to the Kamchatka shelf.
According to Vovk, gas production in the Ob and Taz Bays will start in 2015. Just as at Shtokman, these projects will use a combined platform and an underwater production system. The first priority is to develop an ice-resistant platform by finishing the Prirazlomnoe platform which has been under construction at Sevmash in Severodvinsk for 13 years and may not be completed now until 2010.
In explaining the delay, Vovk has stressed that it is the first Russian-built structure of this type and the project requires the development of a production facility to handle 8 million tons of oil a year. Financing might explain more of the problem.
Offshore Surveys and Attitude of Minprirody
Perspectives in the Russian Arctic are great however. Only 20 percent of the Barents and Kara Seas have even been explored. Vovk projected that by 2030, 63 percent of Russia’s explored oil and gas reserves will be offshore with 31 percent located in Eastern and Western Siberia and six percent elsewhere.
Boris Sapozhnikov, the First Deputy General Director of Sevmorneftegeofizika (SMNG), believes that a priority needs to be placed on exploration now. Murmansk companies - SMNG, Marine Arctic Exploratory Expedition (MAEE) and others can handle the work.
Meanwhile, partners in Shtokman Development AG, Total and StatoilHydro, say they are committed for the long-term. Or so, Bengt Lie Hansen, Statoil Hydro Russia president and Total’s Pierre Nergararyan have been saying in Murmansk.
Among other things, there is already certain progress in respect of the Shtokman. The partners have agreed on the main engineering solutions; now pre-project stage is being realized (FEED and Feasibility Study). An investment decision is expected to follow in late in 2009 or early 2010 that will leave the project six months behind schedule.
French Doris and Technip, British JP Kenny, Russian Giprospetsgaz and Central Design Department Rubin are already working on the project. A number of Russian research, engineering and production centers received orders for work (VNIIGAZ, AANII, institutes of the Kola Research Center of the Russian Academy of Science, SMNG, AMIGE, Research and Production Company DIEM, PINRO, FRECOM, Vyborg ship-building yard and others).
At the Moscow meeting in September of 2008, the Executive Director of Shtokman Development AG Yury Komarov assured once again that the tenders on selecting general contractors for the main parts of the Shtokman Project will be held in the second half of 2009. Then there will be four years left till the “Zero Hour”. Global experience suggests however that meeting such a schedule is impossible.
The problems to be resolved
One big bottleneck is the market. In November of 2008, the European Commission initiated discussions aimed at reducing EU dependence on imported fuel and power resources. The United States also wants to become more involved in non-traditional power engineering technologies and thereby reduce its dependence on energy imports.
Given the pace of economic growth before this autumn’s financial crisis, it appeared that even with the advent of new technologies, demand for hydrocarbon based fuels would still outpace supply. And for the EU and United States, Shtokman was a good medium term bet for LNG. Reserves of this one field exceed all of those discovered over the last 30 years on the Norwegian shelf. And in the long term, demand will be satisfied by the Leningradskoye and Rusanovskoye fields in the Kara Sea (gas reserves estimated to exceed 7 tcm). Total initial recoverable hydrocarbon reserves of the offshore provinces of Russia are estimated in the amount of 100-110 billion tons of equivalent fuel, including 70 percent located on the shelf of the western part of the Russian Arctic (18 oil and gas fields have been discovered, but not developed yet).
For LNG delivery to the American continent, in May of 2008 Gazprom contracted 100 percent facilities of the re-gasifying terminal Rabaska under construction in Canada (it should be completed in 2014, the year of Shotkman’s first gas). Construction of the gas pipeline “North Stream” is also timed to the Shtokman Project.
Unless Russia starts producing on its Arctic shelf in the near future, it may put itself on the back foot with respect to the coming skirmish to divide Arctic resources. Currently, 80 percent of the world industrial production occurs in countries which control only 20 percent of the world hydrocarbon reserves.
One of the complicated problems in Russia is staffing of the offshore sector of the gas industry, including the Shtokman Project. The Murmansk State Technical University (MSTU) trains specialists for the oil-and-gas sector; 65 specialists graduate this University every year, but it is not sufficient.
‘It will be impossible to develop mineral and hydrocarbon resources of the Arctic Ocean shelf and later of the ocean resources on the whole without the foundation of a specialized technological university in Russia,” said Professor Alexander Papusha, Director of the Department of Continuum Mechanics and Offshore Oil and Gas, MSTU.
Gazprom has other open questions as well. When will the new technological regulations corresponding to the modern level of science and technology in the industry come into effect? How will the personnel flights to the facilities be arranged? Who will provide the navigational and meteorological information for the Shtokman Project? How will high-latitude communication be arranged? How will emergency-rescue operations be organized? Will it be possible to use Novaya Zemlya as a base? Gazprom undertakes to solve many problems, but a number of infrastructure problems need to be resolved by the state.

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