MOSCOW/LONDON High hurdles facing Russia's Shtokman gas project leave the developers little choice but to delay the Barents Sea gas field plan that is too big to fail.
The partners in the venture -- Norway's Statoil (STL.OL), France's Total (TOTF.PA) and Russian gas export monopoly Gazprom (GAZP.MM) -- met on Wednesday, but a long-awaited final investment decision was put off again.
Russia has yet to tell the partners how the project will be taxed. Without a firm tax regime in place, they are unlikely to go ahead with the multi-billion dollar investments needed to deliver the Arctic field's estimated 3.9 trillion cubic metres of gas to market.
But demand in Europe -- the only realistic market for Shtokman after a boom in U.S. shale gas production -- is still unsure because of lingering economic problems, making the huge up-front costs of developing Shtokman look all the more daunting.
"We still need to work out some things dealing with the commercial issue and the fiscal terms," Statoil spokesman Baard Pedersen said. "This is a big and complex project and the fiscal terms need to be right to make this project feasible."
Formally, Shtokman is due to begin pipeline deliveries to Europe via the Nord Stream pipeline in 2016 and start shipping more costly liquefied natural gas LNG.L from 2017.
But a boom in alternative gas output in North America has not only effectively closed the export market Shtokman's backers had hoped to supply but also led to a wider gas glut, which has weighed on prices around the world and challenged Shtokman's already tough economics.
Russia's Subsoil Ministry said in February that 2018 was a more likely start date, but some analysts say even that is optimistic.
Russia's tax regime is still a moving target for producers, although the government has been aiming to pass a revised oil and gas tax policy by the middle of the year to encourage new production and maximise output from old oilfields.
Tax incentives -- even for new fields critical to sustaining export volumes and revenue -- are under closer scrutiny by the Finance Ministry, which has said it will redistribute but not reduce the levies which make up over 40 percent of the budget.
Onshore independent gas producers, led by Novatek NOTK.MM and oil company TNK-BP TNBP.MM say they will press on with major expansion, encouraged by access to domestic pipelines and promises to make domestic sales as lucrative as exports.
But for Shtokman, the calculus is different: The field, which contains 3.9 trillion cubic metres of gas and 56 million tonnes of condensate, is 550 km offshore at a depth of 340 metres, and has no transport infrastructure in place.
Statoil is all too aware how hard the surge in shale gas production has hit tricky LNG project economics.
It has been forced to sell LNG from its U.S.-focused Snoehvit plant in the Arctic to European countries where it already ships gas more cheaply by pipeline.
Only one major Russian gas field, Yuzhno-Russkoye, won project financing since European demand slumped in the recession of 2009. And the $1.5 billion lent to the already-operating field shared by Gazprom and Germany's Wintershall is a tiny fraction of the tens of billions required for Shtokman and the rest of Russia's harsh, remote new Arctic fields.
"Will banks lend before they become truly operational? That is a big question," a Moscow-based lawyer who deals in project finance said.
"No-one has a feel for the true capex requirements for these projects. Banks are going to want to see a lot of equity."
Returns on those big initial outlays are uncertain.
Europe faces a glut of gas for the first half of the decade, with large amounts of relatively cheap Qatari and other LNG supplies flooding Russia's formerly captive pipeline gas market since the United States lost interest in imports.
"Where is the LNG going to go, that's the big question at the moment, because it was all originally developed on the assumption it was going to go to North America," Frank Harris, head of LNG consulting for Wood Mackenzie in Edinburgh said.
"It's not going to go to North America now, not given the price outlook and their unconventional gas." Harris said. "The question then becomes will it become more economic to take Shtokman LNG to parts of Europe rather than putting it in a pipe?"
Although pumping gas down long pipelines to Europe may make more economic sense than building expensive gas liquefying plants to freeze it to -163 degrees Celsius and loading it onto tankers, the shareholders insist they will make a single final investment decision on both LNG and pipeline gas by year-end.
"At the moment we just don't see Shtokman as an LNG project," Harris of WoodMac said. "From our perspective, Shtokman is first and foremost a pipeline project that gives you an option on being an LNG project."
(Additional reporting by Wojciech Moskwa in Oslo; writing by Melissa Akin and Daniel Fineren; editing by William Hardy)
Our top photos from the last 24 hours.