26-09-06

A Russian plan to re-route a significant amount of natural gas from a huge new field originally intended for the US market to Europe is a political move linked to deteriorating US-Russian relations, analysts have said. Experts linked the apparent change of thinking on the Shtokman gas field to recent bilateral spats such as US sanctions on Russian state arms exporter Rosoboronexport and aircraft maker Sukhoi and troubled bilateral talks on Russia's entry into the World Trade Organisation (WTO).
"There are not many people who don't think that the WTO is a factor," said Stephen O'Sullivan, co-head of research at Deutsche UFG. "Politics is obviously involved."

Speaking after talks with French President Jacques Chirac and German Chancellor Angela Merkel, Russian President Vladimir Putin said Russia may ship some of the gas from the Barents Sea field to Europe rather than the United States.
"At present, Gazprom is reviewing this possibility," Putin said, referring to Russia's state-run gas monopoly. "Such a decision might be made in the very near future," he said.

A Kremlin source was quoted as saying that half of Shtokman's gas would likely be sent to Europe. If the decision were confirmed, it would be a dramatic shift in plans for the Shtokman field, one of the most coveted energy sources in the world with estimated reserves of around 3.2 tcm of gas.
Gazprom is in the process of picking partners to develop the field, which is expected to begin exporting in 2010.

Aside from WTO negotiations, another factor appears to be the US sanctions again Rosoboronexport and Sukhoi in August, said Andrei Gromadin, an oil and gas analyst with Russian financial group MDM. The United States alleged that the two Russian firms had been involved in the sale to Iran of equipment that could be used to make weapons of mass destruction. While the political logic may call for an increase in Europe's share of Shtokman gas, the economics appear to point in the opposite direction, analysts said.
"The US market would make economical sense as the US economy has a strategy to increase imports of LNG in the long term," said Gromadin. "Gazprom has also said that its strategy is to diversify. It does not want to be over dependent on its European customers."

On September 6, Gazprom informed the five foreign companies it has shortlisted to help develop the Shtokman field that their proposals were still under consideration. The firms shortlisted are France's Total, Statoil and Hydro of Norway, and US majors ConocoPhillips and ChevronTexaco.
The choice of companies is likely to follow a higher level decision about where the exports will be sent, said UFG's O'Sullivan.

The possible freezing out of US companies from the project is a worry but is unlikely to be at the top of Washington's energy agenda due to the long-term nature of the project and its questionable economics, said Julia Nanay, a senior director at Washington-based Petroleum Finance.
"The highest concern at this point is Sakhalin," she said, referring to recent pressure from Russian officials on foreign companies who hold production sharing agreements with the state, such as the Sakhalin I project led by US firm ExxonMobil.

At the same time, a shift in Shtokman export plans away from the United States would clearly send a signal, Nanay said.
"It would be the last piece in the puzzle of deteriorating energy relations," she said.