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. Last Updated: 07/27/2016

Gazprom in a Hurry to Begin LNG Sales

VedomostiGazprom deputy chief executive Alexander Ryazanov
Gazprom will select partners by the middle of this year for a $10 billion project to develop the Shtokman gas condensate field and sell liquefied natural gas to the United States.

Gazprom will choose up to three partners from companies with which it has signed memoranda of understanding, such as U.S.-based ConocoPhillips, ChevronTexaco and ExxonMobil, and Norway's Statoil and Norsk Hydro, said Gazprom deputy chief executive Alexander Ryazanov at a briefing on Saturday.

Gazprom risks missing its window of opportunity to supply energy-hungry North America if a Barents Sea LNG project is further delayed, Ryazanov told reporters.

"We need to hurry," Ryazanov said. "If it keeps dragging on, we'll lose our momentum. If the consortium isn't finalized by midyear, then we won't make it."

Gazprom plans to start selling as much as 15 million tons of LNG per year in the United States by 2011. The company's renewed enthusiasm for the LNG project, which had made little progress over the past two years, comes as its plans to create a major oil company through acquiring state-owned Rosneft have stalled.

Gazprom and its partners will have to sign a production-sharing agreement with the government by the first quarter of next year to meet the 2011 target, Ryazanov said. Gazprom wants partners that have drilling experience in northern seas, know the U.S. gas market, can tap major financial resources and will commit to the company's time frame.

The first stage, which includes the construction of a plant to liquefy gas, may cost $10 billion. Gazprom will borrow as much as 70 percent of its share in the project costs, Ryazanov said. Gazprom is rated Baa3, the lowest investment grade, by Moody's.

As much as 80 percent of the planned 30 billion cubic meters of gas per year in the first stage will be used for LNG, he said. At full capacity, Gazprom expects to produce 100 bcm of gas per year at the Shtokman field, which holds more than 3 trillion cubic meters of gas, and use all of it for LNG sales.

Gazprom, which exports all of Russia's gas, wants to keep a controlling stake in the project, Ryazanov said. The company is consolidating full ownership of the field after buying out Rosneft's stake.

The Russian company is in talks with operators such as BP about swapping pipeline gas headed to Europe for a small share of liquefied natural gas sales as early as next year.

"It's important to get experience," Ryazanov said.

Gazprom also plans to decide by the middle of this year on the scope of a liquefied natural gas plant and export terminal in Ust-Luga on the Gulf of Finland, along a branch of the North European gas pipeline, Ryazanov said.

The company may form a partnership with Petro-Canada, which will be able to accept LNG in Canada and ship it to Massachusetts and New York, he said.

The plant would process between 5 bcm and 7 bcm of gas per year, to produce between 3 million and 5 million tons of LNG annually, Ryazanov said. The larger plant would cost between $1 billion and $1.2 billion to build, he said.

"By midyear we could make a feasible economic decision on size, volumes," Ryazanov said. "We can do this project quickly, within three years."

The latest partially foreign consortium involving Shtokman was abandoned in 2002 after failing to strike a production-sharing agreement with the Russian government. These agreements ensure a stable fiscal regime and tax rates over the lifetime of capital-intensive mineral extraction projects.

"Russian officials say they'll support a PSA for this project," Ryazanov said. "There won't be a conflict. Everyone understands we need LNG."

(Bloomberg, Reuters)