November 28, 2011 2 Comments
(Nov, 28, 2011) The Russian oil giant Shtokman (Штокман) did not receive the news that it was looking for yesterday. For what is to be a 25 year long operation, Shtokman Development AG (SDAG) is seeking tax reform along with simple clarity. The fact that the Russian State Duma has adjourned for the Dec. 4 elections means that the Russian government will be unable to grant any provisions, changes, and or clarity until at least the beginning of 2012. (The Moscow Times article here)
The Issue – All 3 major players (Gazprom, Statoil, and Total) must come to an agreement in order to launch into the full-scale development of the Barents Sea field. They had hoped to settle taxation issues with the Russian government before making any final decisions. Due of course to the Russian elections, this is unlikely to occur until at least the beginning of 2012. Statoil CEO Hedge Lund has said that without any significant tax breaks, Shtokman could run a loss. Total’s CEO Christophe de Margerie has joked about how difficult it has been in finding tax clarity as of yet.
CNG & LNG – Amid concerns, the head of tax, customs, and tariffs for the Russian Finance Ministry (Ilya Trunin) commented on the existing Russian gas tax regime, saying that it is indeed favourably positioned toward SDAG. Under Russia’s current mineral extraction taxes and export duties, the extraction of Compressed Natural Gas (CNG) is taxed at a relatively low rate, whereas Liquified Natural Gas (LNG) has no export duty.
- One half of Shtokman’s output is expected to be sold as CNG, and the other LNG.
- SDAG is planning to build a LNG facility in Teriberka (Териберка) to convert CNG to LNG in order to ship the product abroad via LNG carriers.
- The remaining CNG will be transported on through to Europe via the Nord Stream pipeline that begins in Vyborg (Выборг)
Opinion – “It is what it is”. Norway is well ahead of the game in building and improving on their northern infrastructures. If Russia does not launch into the Shtokman project on behalf of SDAG, it could be a detrimental blow to her potential GNP, along with her status among the Arctic nations. According to Ruskaya Gazieta, the project is projected to add 120 billion USD to Russia’s GNP. The government almost has the lower hand right now, as if it does not provide an adequate tax relief, Statoil or Total could flee. It takes years to organize for these projects. The markets will not quite be able to reflect the wealth-creating potential until final decisions have been reached, and orders to heavy industry begin to be made. Russia cannot afford to lose this right now.