Shtokman Partners: Development Costs 'Too High'

PARIS - French oil major Total SA Friday insisted that the partners in the Shtokman natural gas field, in Arctic Russia, are still studying the project's economic viability but for now had concluded that in the current conditions the costs of development were too high.

In a brief statement the French group, which teamed up with Russia's OAO Gazprom and Norway's Statoil ASA to develop a liquefied natural gas project at Shtokman, said it "would like to point out that there has been no decision by partners to postpone Shtokman project sine die."

The French group was reacting to reports that Gazprom, the project's operator, has indefinitely postponed an investment decision.

Launched in the 1990s, Shtokman has been repeatedly delayed, notably on disagreements between partners over investment terms, on the technical challenges set by the extreme Arctic conditions and on the changes to the world's gas market following the boom of U.S. shale gas, which precipitated prices to their lowest. The lack of any tax rebate deal with the Russian authorities added to the complex financial equation.

Yet as Total's comments underscore, the increased demand for natural gas and the huge potential of the field means the project remains too important to be dropped or to let it slip into rivals' hands. According to Gazprom's estimates, the field holds some 3.8 trillion cubic meters of gas, the equivalent of one year of global demand.

"The partners have come to the conclusion that the cost of the project with its current definition is too high," Total explained in its brief statement, adding that "teams are pursuing technical studies to achieve an economically viable project."

"With Shtokman, cost and only cost has always been the problem," Total's chairman and chief executive Christophe de Margerie said in an interview early June, at a time when Gazprom admitted looking for new partners to develop the field.

Both Exxon Mobil Corp. and Royal Dutch Shell PLC admitted then being interested.

The consortium had already spent millions of dollars on studies and plans for the extraction and liquefaction of natural gas there, under extreme weather conditions, by the expiration of the joint-venture deal July 1, as Total's chief financial officer Patrick de la Chevardiere revealed then.

Earlier in August Statoil, which had a 24% interest in Shtokman to Total's 25% and Gazprom's 51%, completely wrote off its stake in the project, representing EUR286 million ($357.8 million), but insisted it remained in discussions with Gazprom.



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