Oil and Natural Gas Reserves

Thursday, November 02, 2006

Thoughts on Gazprom's Development of the Shtokman Gas Field

Gazprom appears to be aiming to develop Shotkman mainly on its own. Therefore Gazprom's access to financing is critical -- Gazprom almost certainly won't be able to finance Shtokman from internally generated cash flow.

Gazprom's forecasted budget is still up on the Russian version of the Moscow-based Institute of Energy Policy's website site. The budget is included on page 22 of the December 7, 2005 presentation here: (in Russian): http://www.energypolicy.ru/pv.php?id=1002396 (the English version of this presentation is not available)

There are three highlighted lines towards the bottom of the page, first (towards the top) reads: (translated from Russian): Total Revenues,
Second highlighted line reads: Total Spendings (ie costs), third reads: total debt. All numbers are in US dollar billons.

Summary: In 2012, Gazprom will have revenues of $US46.14 billion and spendings (costs) of $US 74.37Bn, leaving debt to increase from $21.0Bn in 2005 to $119.05Bn in 2012.

Assumptions of forecasted budget: 1. constant price domestically and in Europe and CIS of Gas (maybe reasonable, although likely the price will rise a bit), 2. slower internal Gazprom cost growth than historical, 3. Capex includes Yamal, NEP, Shtokman, but does not count oil, petrochemical, power capex at Gazprom 4. interest rate = 5.6%. 5. lower Russian gas production offset by higher Central Asian production (in which Gazprom collects a tariff) 6. Gas transportation tarrif increases from USD 0.82 per tcm to USD 2 per tcm by 2008 (likely to happen).

It seems to me that as soon as European banks realize the dire situation of the finances within Gazprom, -- if the projection above is accurate and the assumptions are reasonable -- they won't be willing to finance the Shtokman project. And/or the Russian government and Gazprom will have to become more flexible about revenue sharing and access to the project, which may or may not happen -- it depends on the political situation in Russia, which is the subject of another article.

I would lean towards more delays at this point as European banks worry about repayment -- and Russia is not extremely enthusiasic about pushing the project through as there is a saying in Russia: "Why not leave the oil for our grandchildren?" -- they acknowledge that oil and gas is non-renewable and also feel the price they get now is on the low side, so lower supply from less projects will encourage a higher price from their existing supply.

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