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MOSCOW (Dow Jones), Oct. 28, 2009

Russia, the world's biggest gas producer, has invited international energy majors to help it realize its ambitions to conquer one-fifth of the global market for liquified natural gas by 2020, but experts say it could be more than a decade before new production comes onstream.

Russia says it wants to beef up shipments of liquified natural gas, or LNG, to Asian and U.S. markets at the expense of pipeline deliveries to Europe, which are threatened by questions over demand and ongoing transit issues with neighboring Ukraine.

State-run gas giant OAO Gazprom has invited foreign energy firms such as Royal Dutch Shell PLC, Exxonmobil and ConocoPhillips as minority partners to develop costly new projects in Russia's Arctic regions.

Russia's priority project, the massive Shtokman offshore field in the Barents Sea north of Murmansk -- a joint project with France's Total S.A. and Norway's StatoilHydro -- is slated to start deliveries of LNG in 2014, but many experts question Gazprom's financial and technical ability to realize such a project on time amid a recession.

"A great deal of uncertainty remains about the timing of these new projects," said Vitaly Yermakov, director of the Moscow branch of consultants Cambridge Energy Research Agency, or CERA.

For decades, Russia has sent the majority of its natural gas exports via pipeline to customers in Europe under long-term contracts, deals which generate about two-thirds of net sales.

But interest has shifted recently towards LNG -- where natural gas is cooled to a liquid form in which it can then be shipped to global markets in oceangoing tankers.

In February, Gazprom launched its -- and Russia's -- first LNG terminal on the Pacific island of Sakhalin in a joint venture with Royal Dutch Shell and Japanese companies Mitsui & Co. Ltd. and Mitsubishi Corp.

By 2020, three new export terminals -- at Shtokman in the Barents Sea, on the undeveloped Yamal peninsula in Russia's north, and in the Far Eastern city of Vladivostok -- will bring total production to between 80 million and 90 million metric tons a year, or about one-fifth of global demand, Gazprom's Chief Executive Alexei Miller said last month.

But while no one questions the importance of Russia's north as a key future resource base, many experts and analysts are skeptical about Gazprom's ambitious timeline for new projects.

"We do not include any volumes from Shtokman in our production forecast, either pipeline or LNG, as we don't see them delivered prior to 2020," analysts from UniCredit wrote in a research note.

CERA's Yermakov says Gazprom will start LNG production at Shtokman no sooner than 2018 and possibly as late as 2025, depending on how fast demand recovers. Nor is LNG likely to be produced at Yamal before 2030, he said.

The main stumbling blocks for Gazprom are a lack of cash, as a result of reduced demand in its key markets, and a lack of technical know-how.

Gazprom's production has fallen by more than one-fifth so far this year, compared with 2008. Demand from domestic and European markets has plummeted with the economic downturn, and the disruption of gas deliveries to Europe via Ukraine in January 2009 also had an impact. Export prices under long-term contracts have risen in comparison with spot prices.

In response to lower sales, Gazprom scaled down its investment program for this year by 30%, postponing a number of large-scale investment projects.

Although European demand is expected to rise towards the end of the year as winter sets in, a sustainable increase in Gazprom's sales could be years away, depending on the speed of economic recovery in Europe.

Although delaying development of the new fields would free up cash flow in the short term, analysts say it may pose a threat to the medium-term supply picture, if demand recovers earlier than Gazprom currently anticipates.

Such a scenario, analysts say, may hurt the company's long-term growth and impede its ability to bring online its flagship Arctic developments without foreign investment and expertise.

Despite the widespread skepticism that Gazprom will bring new terminals and key fields like Shtokman onstream on time, the company has insisted the development of new areas remains its top priority and won't be affected, as it scales back investments amid the economic downturn.

Moscow has recently sought to bring more investment from overseas into costly projects in new regions. Last month, Prime Minister Vladimir Putin invited a dozen executives from international energy majors to a meeting on the Arctic Yamal peninsula - around 2,000 kilometers northeast of Moscow - in an attempt to woo their expertise and capital.

Gazprom is believed to have shortlisted Shell and Total as part of its drive attract Western money and technology into the country, and is in talks with several other companies such as Spain's Repsol YPF SA, Germany's E.ON AG, Malaysia's Petronas and South Korea's Korea Gas Corp.

That approach to foreign investment is a remarkable change from earlier this decade, when the Kremlin re-nationalized most of its energy sector.

In the most high profile example, in 2007 Shell was forced to give up control of the Sakhalin-2 oil and gas development to Gazprom, which started LNG production this year. Since then, Russia has imposed laws restricting foreign ownership of energy assets.

Nevertheless, Shell's Chief Executive Peter Voser said last month after the meeting with Putin that his company is ready to undertake a feasibility study for the construction of an LNG plant in Yamal.

But even with foreign help, the technical challenges for such projects are enormous, skeptics say, questioning the logic in taking on such big developments amid uncertainty about future demand.

This summer, Gazprom for the first time said it may revise the timeline for some of its priority projects, including developments on the Yamal peninsula. Launch of Shtokman -- scheduled for 2014 -- may be delayed, depending on market conditions, the company said.

"I wouldn't be surprised if they decide to put off Shtokman indefinitely," says Ron Smith, chief strategist at Moscow-based Alfa Bank.  

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