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. Last Updated: 07/27/2016

Gazprom Taps Total for Shtokman

Gazprom on Thursday invited French energy major Total to help develop the Shtokman project, ending years of wrangling over whether foreign companies would take part in developing one of the world's largest and most difficult gas fields.

The state-run gas company gave Total a 25 percent stake in the field's operating company, Gazprom CEO Alexei Miller said in a statement. A further 24 percent stake could be doled out to one or more foreign companies, but Gazprom would retain a majority 51 percent stake in the project, the statement said.

Norway's Statoil and Norsk Hydro, which are due to be merged in October, and U.S. oil firm ConocoPhillips are the players that remain in the running for the stake.

Total's entry into the project marks an admission by Gazprom that it would be unable to develop Shtokman, a huge field located in the harsh environs of the Arctic Barents Sea, on its own. The field is estimated to hold 3.7 trillion cubic meters of gas.

No financial details were disclosed, but the project is believed to cost $20 billion to $30 billion.

Total CEO Christophe de Margerie was due to fly to Moscow for a one-day visit Friday to sign the deal with Gazprom deputy CEO Alexander Medvedev, Total spokeswoman Patricia Marie said by telephone from Paris.

Miller's statement said Gazprom had set up a "special-purpose vehicle" to allow foreign partners into the project. Gazprom would retain full control of license holder Sevmorneftegaz "and will also be the owner of the whole amount of hydrocarbons to be extracted," the statement said.

All the foreign firms short-listed earlier said they would only enter the project with an equity stake that would allow them to book reserves.

Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, said the new contract format would likely allow the foreign firm to book reserves.

"It is clear they will be compensated, but how they are going to be compensated is unclear," he said. One possibility would see Gazprom selling gas to Total and any future foreign partner through the operating company.

Gazprom unexpectedly shut down bidding for the project in October, after years of negotiations. The final short-listed firms were Total, ConocoPhillips, Norsk Hydro, Statoil and Chevron. Chevron said in March that it was no longer interested.

Spokesmen for Norsk Hydro and Statoil said they were still in discussions with Gazprom on their entry into the project, but declined to provide details.

The two firms are carrying out negotiations with Gazprom together, Statoil spokesman Ola Morten Aanestad said.

"We are looking at this together with Norsk Hydro since we will be a merged company on October 1," he said by telephone from Oslo.

The new firm, provisionally named StatoilHydro, will be 62.5 percent owned by the Norwegian state, a figure due to rise eventually to 75 percent.

The announcement of Total's entry into Shtokman came one day after Putin held telephone talks with French President Nicolas Sarkozy.

The two men "discussed trade and economic cooperation projects, including in the fuel and energy sector" during their talks Wednesday, a statement on the Kremlin web site said.

Analysts said it was unclear what Total's entry into the project would bring the French energy firm.

It has come under fire for purported environmental violations at the northern Kharyaga oil field, which it runs under a production sharing agreement, or PSA, with the government. It owns 50 percent of the project, while Norsk Hydro holds 40 percent and the Yamal-Nenets regional government holds the rest.

With oil prices surging above $70 per barrel, Putin has expressed his displeasure with PSAs that were signed in the 1990s to invite foreign participation in the unstable Russian economy.

The state also holds PSAs with ExxonMobil at Sakhalin-1 and with Shell at Sakhalin-2, which Gazprom joined as a majority partner last December after months of pressure from environmental authorities.

A Gazprom spokesman, who requested anonymity in line with company policy, said Kharyaga was not discussed as part of the Shtokman talks.

In May, Rosneft CEO Sergei Bogdanchikov said the company was seeking to boost its cooperation with Total in and outside Russia. The two companies previously fell out over Rosneft's decision to boot the French company out from developing the Vankor fields in east Siberia.

Valery Nesterov, an oil and gas analyst at Troika Dialog, said Gazprom had chosen Total because of its experience with liquefied natural gas and of working deep offshore both in the North Sea and West Africa.

Gazprom plans to produce 23.7 bcm of gas from Shtokman for pipelines to Europe by 2013, with LNG production likely aimed at the North American market starting the next year.

"Total controls 40 percent of global LNG capacity," Nesterov said. "And it's a company with very important experience in the offshore business and working in harsh environments."

The French company owns six regasification plants around the world and owns capacity rights to an LNG plant in Louisiana, said Marie, the Total spokeswoman.

Despite the Kremlin's uneven relations with Washington, ConocoPhillips, which owns a 20 percent stake in LUKoil, could still be offered a stake in the project.

"Conoco has a chance to participate," Nesterov said. "It would be slim if Gazprom opted for just one more partner -- then it would be the Norwegians."

On Wednesday, Russia and Norway signed a deal demarcating their border in the Barents Sea, an area believed to be rich in hydrocarbons.

The only development in the region for now is Statoil's Snoehvit project, which is due to come online this fall to supply LNG to the United States. That development, smaller and located in conditions less harsh than those found at Shtokman, has already been delayed by at least one year.

Gazprom has been aggressively seeking to break into the LNG market, with its move into Sakhalin-2 and its decision to retain 100 percent ownership of Shtokman's reserves.

Yet analysts said Gazprom's proposed schedule for Shtokman appeared ambitious.

"If they get the first gas by 2015, it would be a miracle," said Stern of the Oxford energy institute.