It’s reasonable to extend the timeframe for making the investment decision on the Shtokman project development
Leonid Grigoryev, Energy and Finance Institute
The world’s natural gas consumption is nowadays predetermined by a severe economic crisis and increased competition among natural gas producers (in particular, LNG producers). According to optimistic forecasts, the industrial production rates of fall 2008, when the crisis began, are expected to be achieved in Europe and the USA no sooner than in late 2010, according to realistic forecasts – in 2011.
Naturally, gas consumption by industrial consumers has decreased in the crisis environment – at the beginning of the year, the industrial production dropped 10-15 per cent in the Organization for Economic Co-operation and Development (OECD) member countries. At the same time, for the first time over the recent 25 years the economic crisis has been accompanied by considerably high prices for oil and gas that leads to energy resources saving. So far, European energy-saving programs haven’t made any significant impact on gas consumption. Everybody wonders when Europe is likely to need large amounts of gas much in excess of historic peaks?
Let’s also consider the fact that over recent years, when energy prices hit the unprecedented heights, extensive capacities for LNG production have been built. Some of them haven’t been demanded in Japan, other Asian countries and the USA. That is why a great amount of LNG has flooded the market and these redundant volumes will be “dissolved” during several years to come.
The United States are experiencing a tough competition between the currently cheap LNG and the so-called shale gas. It will soon become clear when gas demand is high enough to permit the launch of new projects for gas supply to the American market.
A considerable rise in demand for natural gas in Europe can be expected beyond 2015. Therefore, all the investment decisions on the financing of large-scale and cost-intensive gas projects are to be taken with due account for the crisis and the competition. In this respect, it seems quite reasonable and feasible to postpone for 2011 the investment decision on the Shtokman project. By that time the prospects for both the European and American markets will be more evident.
The Shtokman project with its ample opportunities will be undoubtedly sought later on, when the economy goes up. At the same time, the specific terms for making such considerable investments should be closely linked to the market ability to digest extra gas volumes and, therefore, to ensure return on investment.
Valery Nesterov, Troika Dialog
The decision to postpone the launch of gas supplies from Shtokman is beneficial for Gazprom as it enables to ease the Company’s financial, administrative and intellectual burden in the mid term.
However, this move is crucial not only from the cost-saving standpoint. A number of Gazprom’s competitors on foreign markets are unable to halt the construction of gas liquefaction facilities that will result in excessive LNG production in 2013–2014 when the Shtokman project is to put onstream. Thus, Gazprom will not permit ever more excessive LNG production, which will definitely make a positive impact on the prices.
The postponed launch of gas supplies from Shtokman is quite predictable. But this is another proof of Gazprom’s ability to adapt to market changes and economic benefits rather than pursuing a dogmatic strategy.
At present, there is an escalating competition on the gas market. Thus, western experts speak of the market revolution caused by the shale gas. Nevertheless, I support the Russian experts who disagree with these statements. According to our calculations, conventional gas production in Russia is much cheaper than shale gas production. It takes time, however, to assess everything properly.
Over the additional year provided to make the investment decision, the Shtokman project participants will be able to evaluate the market environment and prospects more precisely. This is a timely decision that will facilitate the implementation of Gazprom’s ongoing projects.
We are confident that the Shtokman project will definitely be implemented. This is likely to happen when the project could be maximally profitable for Gazprom.
The opinions expressed in this section may not necessarily coincide with the official position of Gazprom