Russia makes fateful gas switch to LNG

MOSCOW, May 25, 2012: Russia’s Gazprom energy giant said on Friday it was switching its vast Shtokman field to LNG production and seeking new clients in Asia from initial plans to use half of it to pipe supplies to Europe.

The announcement and accompanying hint of Royal Dutch Shell soon joining the deal marked a fundamental shift in strategy for one of Russia’s most important energy investments to date.

The enormous Barents Sea field is one of the world's largest and believed to hold enough natural gas to meet the world’s entire demand for a year.

But the costs — once estimated at $30 billion by Gazprom — and uncertain demand in economically struggling Europe have repeatedly delayed the project since its was joined by Norway’s Statoil and France’s Total in 2008.

Europe’s gas consumption is now expected to either fall or remain steady while plans to sell the liquefied natural gas (LNG) to US clients have been scuppered by booming North American shale production and fast-falling prices.

This has made the LNG investment uneconomical without new Asian clients and the European pipeline risk too great for either Statoil or Total. Both have been reported to be seeking an exit from the deal in recent months.

Gazprom now hopes to keep the project alive by selling LNG to fast-growing Southeast Asian countries such as South Korea and eventually moving further afield to Latin America.

This required reworking the project essentially from scratch after four years of planning and a reported $1.5 billion in initial costs — a move Gazprom finally announced on Friday.

Its boss Alexei Miller said after talks with President Vladimir Putin and Statoil chief executive Helge Lund that the formal decision to switch to LNG would be finalised at a conference in Saint Petersburg next month.

“The balance between pipeline and liquefied gas is changing toward LNG. We are talking about 100 per cent liquefaction except for gas intended to supply (the nearby) Murmansk region,”

the Interfax news agency quoted Gazprom boss Alexei Miller as saying.

The Kommersant business daily had earlier on Friday reported that Statoil was about to leave the project because it was concerned abo-ut cost overruns and not entirely supportive of Gaz-prom’s plans to switch to LNG alone.

Kommersant said the Norwegian firm’s place could be taken over by Royal Dutch Shell and Miller refused to rule out the option when pressed about it by a reporter.

“We are examining the possibility of new partners entering the project. We are already working on LNG with Shell in other projects,” Interfax quoted Miller as saying.Putin for his part told Lund that Shtokman was a project of “global significance” that needed to be given a quick final push by its partners — comments that appeared to set an ultimatum for Statoil to become more involved.

“No final decision has yet been reached on this project, but we need to actively keep moving ahead,” Putin told the Statoil boss.

The Kremlin’s Russian-language wesbite quoted Lund as telling Putin in response that Statoil was planning to “optimise its dialogue with Gazprom.” —AFP

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