Shock as Russia goes solo on gas field

By Jorn Madslien
Business reporter, BBC News, Murmansk

Murmansk celebrates its anniversary, and gas riches to come

Just hours after the Arctic city of Murmansk celebrated its 90th birthday with a giant fireworks display in the town's main square, its patriotic people again have good cause to fly the Russian flag.

The Russian energy giant Gazprom has said it will construct the world's largest offshore gas field, Shtokman, on its own, thus dealing a huge blow to some of the world's largest oil and gas companies, who had hoped to be part of a consortium.

"Gazprom has decided the project will go ahead without international participation," said chief executive Alexei Miller on Monday.

"Gazprom will own 100% of it."

Frustrated Americans

Through years of negotiations, Gazprom said it would choose only two of the five companies that had been shortlisted as potential members of a Shtokman consortium.

Hence, there was never any doubt that there would be losers in this spectacular beauty contest that has taken centre stage in the energy industry for years.

The rejection of the international partners has hit the Americans particularly hard, as its two contenders, Chevron and ConocoPhillips, will not only be denied a place on board the $20bn project.

In addition, Gazprom has signalled that the US will be denied much-anticipated gas supplies, which they had hoped would be shipped in liquefied form in super-tankers from Murmansk, Russia's only western all-year ice-free port.

Shocked Norwegians

Yet it will be across the Norwegian border, just four hours drive from Murmansk, along the Kola Peninsula's rugged Barents Sea coastline, that Gazprom's decision will be taken the hardest.

Only last month, officials from Norway's Hydro told BBC News that they were confident they would be chosen as one of Gazprom's partners.

Murmansk is Russia's only western all-year ice-free port

They insisted that Russians would want to employ the technology used to construct Langeled, the world's largest underwater pipeline running 1,200 kilometres across the North Sea seabed from Norway to the UK.

Similarly, Norway's Statoil had expected to be chosen on the back of its Snohvit project on Melkoya, currently the only gas project in existence in the Barents Sea, though this project has suffered delays and stretched budgets.

Directly to Europe

The only contender for a stake in the project that has not been as confident recent months has been Total of France.

However, in recent weeks its chances also appeared to have improved as Russia has been pushing for closer links with and a greater stake in the aerospace consortium EADS.

Talk of cooperation with Russia's own aerospace industry was also linked with a recent suggestion by President Vladimir Putin to ditch plans for a liquefied natural gas plant on the coast near Murmansk.

Instead, it is likely that the Shtokman gas will be pumped across the Kola peninsula to the Baltic Sea.

There it could link up with the planned 1,200 kilometre Northern European pipeline that will bypass all Russia's neighbours before plugging into the German, and thus the European Union's, gas pipeline network.

Barents region backing

A giant pipeline across the Kola peninsula now seems certain to be constructed, perhaps even with the involvement of Germany's E.ON Ruhrgas, one of Gazprom's closest allies.

The pipeline plan has the backing of 94% of the people in the Murmansk region.

There is a general perception that increasingly politics are driving these big energy deals Stephen O'Sullivan, Deutsche Bank Russia

And, unusually, even environmentalists approve.

Local green group Bellona has told BBC News that it approves of the pipeline's construction, as long as it is laid in a way that does not destroy the area's salmon-rich rivers.

And it says it has no objections whatsoever to the 555 kilometre underwater pipeline that will eventually pump the gas from Shtokman to shore.

Local suppliers to the energy industry also have reason to cheer.

Many of them have been built up with much technical and practical support of foreign Shtokman contenders, so they should be ready to respond when Gazprom signals what its future demands will be.

Writing on the wall

But unlike people here in Murmansk, the international reaction has been one of dismay.

"This decision is not helping the investment climate in Russia," says Peter Westin, chief economist, MDM Bank in Moscow.

Gazprom's decision comes after Russia's recent threat to revoke the licence of the $20bn Sakhalin project off its Pacific coast, raising concerns about the participation of foreign partners Shell, Mitsubishi Corp and Mitsui.

"There is a general perception that increasingly politics are driving these big energy deals," observes Stephen O'Sullivan, head of research at Deutsche Bank in Russia.

Mr Westin agrees that it will mean " key assets in the oil and gas sectors will be kept Russian".

However, given the aloof behaviour of some of Gazprom's executives, its latest move should not have come as a surprise.

"Statoil charters bigger planes," was their response to the lavish treatment they were given on a recent trip organised by one of its rival contenders, one of its bosses told BBC News during a recent dinner.

Tough stance

To many, it seems President Putin has milked the Shtokman project for what it has been worth, having using the promise of participation in the project as a carrot in negotiations on a broad range of subjects - including slow-moving talks about Russia's entry into the World Trade Organization (WTO).

"Russia has lost patience with the US," says analyst Chris Weafer of Alfa Bank in Moscow.

"That might also suggest that Russia's ambitions to WTO are also now dead."

But if the world is responding with despair at the prospect of having to square up to President Putin's increasingly assertive stance, the response in Murmansk is very different.

Here, many will cheer President Putin's refusal to share Russian energy wealth with the world.