Russia’s Energy Development Drive Slows Down

Against the background of difficult international energy market conditions Russian companies have become less interested in finding new oil and gas fields and developing existing deposits. Notably, the country’s gas monopoly Gazprom dropped its earlier plans to take over a giant Kovykta deposit and has postponed the development of yet another huge project, Shtokman.

Earlier this month, Russia’s subsoil resources agency, Rosnedra, issued a forecast indicating that the country’s energy companies were likely to find fewer new deposits. New discoveries amounted to a total of 620 million tons of oil and 580 billion cubic meters (bcm) of natural gas in 2009, but the number is expected to drop by 14 percent this year and decline further in 2011-2012, the agency said (Interfax, February 2).

However, Natural Resources and Environment Minister, Yuri Trutnev, argued that by January 1, 2010 the country’s proven oil resources equaled 1990 levels, due to the continued programs of geological research, aimed at finding new oil deposits (Interfax, RIA-Novosti, February 3). In March 2008, the natural resources and environment ministry suggested doubling government funding for all geological research projects, up to 40 billion rubles ($1.33 billion) per year in 2011-2020, or up from about 20 billion rubles ($851 million) in 2007. However, in 2010 the government is yet to confirm these figures.

Amid the weakening international energy demand, Russian oil and gas giants apparently became less keen to develop existing deposits. Notably, Gazprom said it was no longer interested in the acquisition of the giant Kovykta gas field in Eastern Siberia’s Irkutsk region. On February 3, Gazprom’s CEO Alexei Miller announced that the company would not need Kovykta to export gas to Asia-Pacific. Gazprom would rely on its deposits in Western Siberia and Yakutiya for that purpose, he said. Until November 2009, Miller had insisted that Gazprom was interested in the Kovykta deal (Interfax, RIA-Novosti, February 3).

On February 17, the country’s environmental watchdog, Rosprirodnadzor, said in a statement that it recommended withdrawing the Kovykta license. However, Russia’s subsoil resources agency Rosnedra did not review the recommendation on February 19, and the matter was put off until March 4 (RIA-Novosti, February 19).

Last summer, TNK-BP reportedly tried to find another buyer, including Rosneft’s shareholder Rosneftegaz, but Kovykta was not sold. Subsequently, TNK-BP may be losing not only the Kovykta license but also the $664 million it spent to develop the deposit. BP’s Russian subsidiary TNK-BP is the main shareholder in Rusia Petroleum, which still holds the license to operate Kovykta. TNK-BP owns 63 percent in Rusia Petroleum. Russia’s Interros controls 26 percent and the Irkutsk regional government holds 11 percent.

In 2007, Russian authorities targeted the Kovykta project, officially for failing to fulfill its 9 bcm per year production quota. The regulatory pressures were understood to be aimed at putting the giant Kovykta gas field, which is estimated to hold between 2 and 3 trillion cubic meters (some 71-106 trillion cubic feet) of gas, under state control.

However, three years ago, Moscow refrained from stripping TNK-BP of its Kovykta license, but administrative pressures apparently helped a state-run energy giant to clinch a deal. In June 2007, Gazprom, Britain’s BP and TNK-BP agreed that Gazprom was to acquire a 63 percent stake in Kovykta. TNK-BP, which is Russia’s third-largest crude producer, also pledged that its natural gas producing subsidiary, Rospan International, would form a joint venture with Gazprom.

Prior to the June 2007 deal, Gazprom repeatedly denied any interest in Kovykta, and insisted that demand for Kovykta was not expected before 2015. The companies initially planned to finalize the Kovykta deal in the third quarter of 2007, but the deadline was repeatedly postponed.

Meanwhile, another Russian state-run energy giant became less keen to use its licenses. On February 16, Vostok Schmidt Neftegaz, a joint venture between Rosneft and BP, voluntarily discontinued its license to develop the East Schmidt deposit of Sakhalin-5 project (Interfax, February 16). Furthermore, the development of another major project, Shtokman, was put off. On February 16, Shtokman Development said production at the giant Shtokman gas field may start in 2016, or three years later than originally planned. It also said the project may not include liquefied natural gas (LNG) production during its first stage, and a final decision on LNG is due in 2011 (Interfax, February 16).

In February 2008, Gazprom, France’s Total and Norway’s StatoilHydro signed an agreement to create Swiss-registered Shtokman Development AG that would develop and finance the Shtokman project. Gazprom and its partners pledged to start gas supplies from the Shtokman field, with estimated gas reserves of 3.7 trillion cubic meters (131 trillion cubic feet), by the end of 2013 and start LNG supplies in 2014.

The project’s first phase was expected to produce some 23.7 billion cubic meters (837 billion cubic feet) of natural gas annually. The total cost of the Shtokman project to develop the Arctic off-shore gas field was earlier estimated at $30 billion.