Norsk Hydro VP: Gazprom May Not Demand Shtokman PSA Deal

STAVANGER, Jun 27, 2006 (Dow Jones Commodities News Select via Comtex)

OAO Gazprom (GSPBEX.RS) may not push for a production sharing agreement for its massive 3.7 trillion cubic meter Shtokman liquefied natural gas project, a senior vice president with potential partner Norsk Hydro ASA (NHY) told Dow Jones Newswires Tuesday.

Analysts say although the commercial benefits of having a PSA - which would secure a locked-in return from the project - or a contract based on a traditional tax system would only become clear with a final contract, partner companies can book more reserves from the gas giant without a PSA.

Hydro is one of five companies, including Total SA (TOT), Chevron Corp. (CVX), ConocoPhillips (COP) and Statoil ASA (STO), shortlisted for a final stake in one of the biggest offshore LNG developments in the world.

"The way it looks today, Gazprom won't demand a PSA, but (a contract) based on a normal tax regime," said Hydro Senior Vice President Bengt Lie Hansen on the sidelines of an IBC Energy conference here. Previously, top Gazprom and Russian government officials said they would rather have a PSA contract that would help to minimize competition between gas exports from Shtokman and other Russian gas supplies.

Hansen said Hydro is "strongly requesting that (gas sales) be based on international competition."

Last week, however, Gazprom's head of project analysis Igor Mescherin said Russia's recent abolition of its LNG export tax made considering non-PSA Shtokman deals a possibility.

DnBNOR Markets equities analyst Bjørn Inge Tønnessen said whether having a PSA or an agreement under a normal tax regime would be more beneficial to the foreign investors would only be determined by the specifics of a final deal.

"But a tax royalty system would allow a larger booking of reserves in the companies' accounts," he said.

Hansen said the current schedule for a 2010-2011 start up was optimistic, adding, we need to make a selection of partners before we can come up with a realistic time schedule."

Based on the fact that a thorough engineering study would take at least a year to develop after a final partner selection, "I think it will be later than 2011," the VP said.

The Shtokman project, already almost two decades old, has continually been postponed, including naming a final partner list. Although Gazprom has lately said the partner structure could be finalized by August, analysts, investors, and even the top executives of shortlisted companies have said they think it could be as late as next year.

Asked how Hydro planned to mitigate the risk of cost overruns and delayed schedules - a key analysts' fear and a problem that has plagued many of the world's largest LNG projects - Hansen said careful front-end engineering studies were vital to preventing budget overruns.

He said poor planning was the major cause of most project overruns.

Acting as a technical advisor, Hydro will supervise the drilling of Well 7 on Shtokman - scheduled to start within weeks. Information from the well will provide essential information about the reservoir that will help to determine whether the field can be developed with a platform, a subsea development or a combination of the both.

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