06MOSCOW11371, RUSSIAN ENERGY: RUSSIANS RETHINK SHTOKMAN

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Reference ID Created Released Classification Origin
06MOSCOW11371 2006-10-10 15:01 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO4521
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #1371/01 2831501
ZNY CCCCC ZZH
O 101501Z OCT 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3693
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 011371 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA 
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK 
DOE FOR HARBERT/EKIMOFF/PISCITELLI 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR GRAHAM, MCKIBBEN, MCCORMICK AND COEN 
 
E.O. 12958: DECL: 10/10/2016 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY: RUSSIANS RETHINK SHTOKMAN 
 
 
Classified By: Amb. William J. Burns.  Reasons 1.4 (b/d). 
 
1. (C) Summary.  Gazprom's October 8 decision to reject 
foreign equity participation in the giant Shtokman gas and 
LNG project in the Barents Sea, in favor of developing the 
field itself, reflects a growing trend towards energy 
nationalism, and genuine concern about maintaining control of 
such a key gas flow.  Putin's impending trip to Germany may 
have been a factor in the announcements timing.  Our 
companies and the others on the "short list" are taking a 
low-key approach to the news, probably in part because 
Gazprom insists it will use foreign firms for Shtokman as 
contractors. 
 
2. (C) Gazprom's decision to flip-flop the priority 
destination for Shtokman gas from North America to Europe in 
the first phase of development does not mark the abandonment 
of the North American market.  Most analysts believe these 
moves reflect a growing acknowledgement of the gas supply 
problem beginning to plague Gazprom's foreign (and domestic) 
commitments.  Amplifying this was Gazprom's decision on 
October 6 to develop the supergiant Bovanenko field on the 
Yamal peninsula that promises faster gas flows and quicker 
payback.  WTO undertones were markedly absent from the 
official rhetoric surrounding these recent announcements. 
End Summary. 
 
3. (C) In a statement posted on the Gazprom website, Gazprom 
CEO Alexey Miller indicated that the company would not bring 
on foreign companies as partners in developing the giant 
Shtokman field but would instead maintain complete control of 
the project and contract out the work to willing firms. 
Miller explained this move as resulting from the failure of 
the foreign bidders to offer assets and activities for trade 
that "correspond to the volume and quality of Shtokman 
reserves."  The statement goes on to say that Gazprom will 
send the field's gas through the North European Gas Pipeline 
(NEGP) as a priority over Liquefied Natural Gas (LNG) 
supplies to North America. 
. 
4. (C) We canvassed the companies on the so-called "short 
list".  ConocoPhillips told us they had only discovered the 
news on television the night before and as of October 9 still 
had received nothing official from Gazprom and as such had 
not developed an official position.  Chevron said the same, 
except that they have drafted some official talking points 
welcoming whatever form of cooperation with Shtokman (and 
implicitly other projects) Gazprom may deem appropriate.  The 
Norwegian embassy told us that their companies (Norsk Hydro 
and Statoil) are "disappointed and frustrated" but are 
keeping a low profile until the situation is clearer.  Their 
companies doubt Gazprom is capable of developing the field 
efficiently alone and the embassy adds that the decision 
heightens concerns the Norwegian government has about 
responsible stewardship of the Barents Sea environment. 
According to Vladimir Konovalov, head of the Petroleum 
Advisory Forum (PAF), the companies he has spoken with seemed 
to have been caught flat-footed and are still in assessment 
mode. 
 
5. (C) Other actors in the Shtokman drama had 
similar/differing observations and analyses. 
 
-- Gazprom itself told us officially on October 9 two points 
that differ from the tone of the press coverage (but are 
consistent with their website's words).  First, there 
"absolutely" will be a role for foreign firms, just not the 
equity stake previously considered -- they will now be 
"contractors".  (By implication, this may well mean U.S. and 
other foreign companies not on the longstanding "short 
list.")  Second, Gazprom stressed that the marketing strategy 
for Shtokman gas will not change at all - some will go to 
North America and some to Europe, as was always envisioned. 
 
-- Konovalov's (PAF) sources in the government told him that 
the giant cost overruns on Shell's Sakhalin-2 project gave 
Gazprom a glimpse at how costly and lengthy the Shtokman 
project might be.  He continued that Russia's walk-back on 
the project may be an indication that, rather than Shtokman, 
the company may develop fields in Yamal and/or in West 
Siberia, which Konovalov contends would be cheaper and 
quicker.  In fact, Gazprom's board on October 6 decided to 
invest heavily in the supergiant Bovanenko gas field on the 
 
MOSCOW 00011371  002 OF 003 
 
 
Yamal Peninsula that Gazprom calculates could be the major 
new source of pipeline gas to Europe. 
. 
WHY NOW? -- FOUR POTENTIAL EXPLANATIONS 
--------------------------------------- 
. 
6. (C) It is fashionable to attribute any Shtokman decision 
to Russia's WT
O ambitions.  Gazprom has said nothing 
officially about a WTO linkage, although obviously the 
Kremlin has in the past calculated the two in tandem.  If 
this announcement were truly linked to WTO accession as many 
observers surmise, then the GOR would likely have waited 
until November before making an announcement on Shtokman, 
given the schedule of current talks underway on WTO.  The 
optics of a November Shtokman decision would work better for 
the Russians by allowing them to publicly hang this on an 
inability to come to terms with the USG on the trade deal. 
. 
7. (C) If the WTO is a red-herring, or at least only one of 
several factors, what else explains these actions?  First, 
senior Gazprom officials are beginning to believe (perhaps 
mistakenly) that they have the technical wherewithal to run 
the project themselves.  The energy community in Moscow has 
heard this from well-placed sources and the evidence now 
seems self-explanatory.  Learning by doing through LNG swaps 
into the U.S., UK, and Japanese markets, they may now believe 
they have the requisite "smarts."  A solid year of learning 
inside baseball from five of the world's best companies 
probably amplified a self-confidence already brimming from 
high prices and sudden stature on world stock markets. 
Financial analysts in Moscow nonetheless roundly criticized 
the announcement for the reasons that Gazprom is neither 
technologically capable of solo development of Shtokman and 
that Gazprom has foregone the chance to share financial risk 
on what will be one of history's most expensive projects. 
 
8. (C) Second -- and the most convincing reason to us -- 
recently our contacts have been telling us that Gazprom 
officials are beginning to accept that the firm may face a 
looming gas production crunch just as many (including the 
IEA) have been predicting.  If this "lightbulb" has gone on 
at Gazprom, then the decision to switch priorities from LNG 
to piped gas to Europe makes some sense.  Gazprom has 
long-term commitments and relationships there and, as Miller 
said in the statement, the go-it-alone approach and the 
prioritization of supplies to Europe are "an additional 
guarantee of the long-term supply of Russian gas to Europe 
and proof that the European market is the most important to 
the company."  Piping Shtokman gas to Europe had always been 
on the original plan.  In fact, even after Putin (in Paris) 
hinted at sending more Shtokman gas to Europe by pipe, our 
companies here took it in stride with one company rep telling 
the Ambassador recently that they were "not concerned about 
the comments in Paris because they are consistent with 
longstanding plans." 
 
9. (C) Third, Gazprom's Miller has long been used to 
"advance" Putin's meetings with foreign leaders.  The fact 
that Putin is meeting Chancellor Merkel soon and that German 
firms (E.ON and Wintershall) have significant stakes in the 
NEGP lends credence to the idea that this announcement may 
partly be a trial balloon to gauge foreign reaction as well 
as to smooth the backdrop for Putin's trip to Germany.  On 
the other hand, vast conspiracy theories such as that 
published in Kommersant's October 9 article about a major 
turn away from the U.S. and the Comecon-like integration of 
Germany into Russia's energy infrastructure strike most here 
as imaginatively far-fetched. 
 
10. (C) Some instant reactions we have heard also attribute 
the announcements to the strong drift in Russian energy to 
move away from foreign participation in big projects. 
Although Gazprom is willing to work with the foreign firms as 
contractors, such "resource nationalism" is probably 
reinforced by the commercial calculation that foreigners 
should not have a complicating say over the disposition of 
Russian gas. 
. 
COMMENT 
------- 
. 
11. (C) These reasons all coincide and amplify one another. 
While the announcements are a blow to our companies' 
 
MOSCOW 00011371  003 OF 003 
 
 
prospects, the project's daunting technological and financial 
challenges coupled with the uncertain Russian environment 
cushions the blow.  Either way we do neither ourselves nor 
our companies any favors by jumping into the fray with the 
Russians, who would likely relish an opportunity to justify 
their own decision to politicize Shtokman via a WTO linkage. 
With the decisions made, the big operational questions are 
whether Gazprom really has learned as much as it thinks it 
has and, if not, how much of a delay this will entail.  The 
"diversion" of supplies to Europe directly impacts us, but 
even that hardly merits more than consistent reminders to the 
Russians that we welcome their LNG and are pleased that they 
are learning how the overseas LNG market works and keeping 
their options to North America open.  Our most recommendation 
is to maintain a professional tone in the interest of 
securing a position in whatever form for our companies in 
Shtokman and other LNG projects. 
BURNS

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