Putin approves PSA structure for Shtokmanovskoye gas field

Rosshelf, a subsidiary of Russia's natural gas giant, Gazprom, plans to sign an agreement with the Russian government by the end of 2000 to develop the massive Shtokmanovskoye natural gas field in the Barents Sea. In May, the Russian legislature approved a bill allowing a production-sharing contract structure for the field. But the field lies above the Arctic Circle, in 300 m of water, and about 4 km below the sea floor, so there are questions about whether the gas can be tapped profitably.


MOSCOW�Rosshelf, a subsidiary of Russia's natural gas giant, Gazprom, plans to sign an agreement with the Russian government by the end of 2000 to develop the massive Shtokmanovskoye natural gas field in the Barents Sea.

In May, the Russian legislature approved a bill allowing a production-sharing contract structure for the field. But the field lies above the Arctic Circle, in 300 m of water, and about 4 km below the sea floor, so there are questions whether the gas can be tapped profitably. Over the next decade, $10-20 billion will be needed to build three offshore gas production platforms and create the necessary coastal infrastructure.

Recently, President Vladimir Putin signed the PSA bill into law, allowing Shtokmanovskoye field, one of the largest in the world, to be developed on a production-sharing basis. Western companies developing oil and gas fields in Russia over a period of many years tend to prefer PSAs in order to avoid meeting complex and often contradictory tax regulations.

Russia already has the world's largest reserves of natural gas. But Shtokmanovskoye, discovered in 1988, will allow Gazprom to counter declining production from older fields. With gas reserves of about 3.2 trillion cu m, Shtokmanovskoye is more than double the size of Norway's Troll gas field. It is less than a third the size of Qatar's supergiant North field, however, which has 10.76 trillion cu m.

"The Shtokmanovskoye field is not a giant natural gas field, but a supergiant," said Igor Gramberg, one of the Russian scientists who discovered the field and director of St. Petersburg's Institute of Oceanology and Mineral Resources. "The whole Arctic Shelf is a vast province of giant oil and gas fields, but there is not enough money to develop all of it," he added.

Shtokmanovskoye is expected to reach a production level of 90 billion cu m/year of gas by 2008, which will increase to 150 billion cu m/year by 2020.

"Now that Putin has signed, the field can be developed," said Vyacheslav Kuznetsov, an adviser to Rosshelf's general director. "We plan to sign an agreement between our partners and the Russian government by the end of the year."

Development likelihood
According to the American news agency Bloomberg, Gazprom expects to produce 520 billion cu m of gas this year, down from 546 billion cu m in 1999. The company expects its output to recover to 530 billion cu m next year.

Rosshelf, which was given exclusive rights to the field by the Russian government, plans to create a joint venture with Conoco Inc., TotalFinaElf SA, Norsk Hydro ASA, and Fortum Oy. The foreign companies will most likely have a total of about 50% in the venture, said John Capps, president of Conoco Russia.

Fortum has already said that it plans to invest as much as $1.9 billion for a 12.5% share in the field. Conoco, however, said it would like a larger share: "Assuming that the foreign companies cut it four ways, we'd like to have more than a 12.5% stake," said Capps.

Making the project economically justifiable, however, will not be an easy task, capital spending estimates ranging from $10 billion to $20 billion, said Capps.

"The project is very expensive and physical conditions there are difficult, and whether or not it will be profitable depends on how cheaply they can extract it, and as well as the market price for gas," said Lev Savulkin, senior analyst at the Leontieff Center for Social & Economic Policy in St. Petersburg.

"Shtokmanovskoye will be developed, but the main question is, Can we deliver it competitively?" said Capps. "Still, the fact that it has tremendous reserves will help us to be cost-effective and offset the high costs of drilling in the Arctic."

Russia's Arctic gas will still have to compete with natural gas from other parts of the world, such as Norway and Algeria. Shtokmanovskoye's costs will, in large part, depend on what type of technology will be used to develop the field and how the gas will be transported, added Capps. "The drilling complex might end up being one of the largest structures in the world," he said. "So the challenge is, How can we do it so that we have a smaller structure so that costs are driven down."

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