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Russia: The Shtokman Gas Game

German Chancellor Angela Merkel (right) and Russian President Vladimir Putin at their latest meeting, in Dresden on October 10 (epa) It is unclear why Gazprom has decided to go it alone in developing the Shtokman fields, but it seems clear it is using the project for political leverage.

WASHINGTON, October 15, 2006 (RFE/RL) -- After two years of mysterious silence, Russia's gas monopoly Gazprom found the appropriate moment to send shockwaves throughout European and American energy markets by announcing on October 9 that the company will develop the giant Shtokman gas field in the Barents Sea without the participation of foreign partners.

The Shtokman gas field has long been considered the jewel in the crown of Russia's unexploited gas reserves. With some 3.7 trillion cubic meters of gas and 30 million tons of gas condensate, every major oil and gas company in the West has set its sights on getting a piece of Shtokman.

Gazprom's announcement was timed to coincide with Russian President Vladimir Putin's visit to Germany to attend a meeting of the Petersburg Circle, a group established five years ago to promote economic and social ties between Germany and Russia.

For now, Russia is able to play hardball. But many, including Kremlin insiders, have warned that by 2007 Russia will not be able to meet domestic demand for gas, not to mention the country's export commitments.

Putin was quick to reassure his hosts by telling them that Germany would be getting the bulk of Shtokman gas, some 45 billion cubic meters yearly by 2011. The gas will come in the form of liquefied natural gas (LNG), via the planned Nord Stream pipeline (whose operator is employing the German chancellor Gerhard Schroeder) under the Baltic Sea, which would make Germany a hub for Russian gas in Europe.

The decision was hailed as exceptionally good news for Europe by Burckhard Bergmann, the boss of Germany's largest gas firm, E.On Ruhrgas, who is also a member of the Gazprom board.

The Shtokman Project As A Political Lever

In the last few years, Gazprom has dangled the Shtokman spoils in front of the noses of Europe and the United States -- and has used the project as political leverage.

In long negotiations with potential foreign energy partners, Gazprom had demanded that money, assets, and proprietary technology owned by Western companies be transferred to them in return for participation in Shtokman. Moscow also refused to provide guarantees to potential partners that they would even be allowed to export gas from Shtokman.

Gazprom and Russia kept up the pressure on Europe and the United States.

In March, Putin promised to supply China with 30-40 billion cubic meters of gas by 2011.

Pressure on Europe increased when Gazprom spokesman Sergei Kupriyanov told the London-based "Financial Times" on April 20: "We just want European countries to understand that we have other alternatives in gas sales. We have a fast-growing Chinese market, and a market in LNG in the U.S. If the European Union wants our gas, it has to consider our interests as well."

And then in May, the Kremlin connected the Shtokman project to Russia's World Trade Organization entry. Kremlin spokesman Dmitriy Peskov told "The Moscow Times" on May 15 that during an April 12 visit to Washington, presidential aide Igor Shuvalov told an audience that "if the United States puts new demands to Russia in World Trade Organization (WTO) negotiations that haven't been put before other countries, then it can't be excluded that new demands will be put forth before American companies for participating in the Shtokman project."

Those U.S. companies now will not get a chance. After Gazprom's announcement this week, the shock was felt mostly by Chevron and ConocoPhillips, U.S.-owned companies that were on the shortlist to win 49 percent of the $20 billion Shtokman project. Adding to the disenchantment was a statement by Gazprom that most of the LNG from Shtokman will not be shipped to the United States as originally planned, but sold on European markets.

This, however, will have little if any impact on natural gas supplies in the United States in the near future as LNG only accounts for 1 percent of gas consumed in the country.

For now, Russia is able to play hardball. But many, including Kremlin insiders, have warned that by 2007 Russia will not be able to meet domestic demand for gas, not to mention the country's export commitments.

German enthusiasm for the Shtokman project could quickly end if Gazprom is unable to deliver the promised gas by 2011. Currently the cost of drilling for offshore gas runs to about $200,000 per day, and this is under optimal conditions -- which the Shtokman fields most definitely do not enjoy.

Experts argue that Gazprom does not have expertise in offshore gas drilling, a problem that cannot be solved merely by subcontracting technical work to foreign companies.

Many also believe that Russia will be hard-pressed to finance the Shtokman project despite Putin's assurances that Russia will turn to Western financial markets for the needed funds.

It is still not clear why Gazprom has decided to go it alone in developing Shtokman. Perhaps the Kremlin was seeing how far it could push the United States to kowtow to Gazprom demands. And by making a deal with German Chancellor Angela Merkel, Russia has split Europe and the United States, using gas as a weapon.

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