The Air Goes Out of Arctic Gas Project

Economics has a funny way of intruding into the most complex geopolitical strategies.  It was about a year ago that Gazprom began talks in earnest with international partners Total and Statoil to develop the massive Shtokman Arctic gas field in the Russian offshore Barents Sea.  The Wall Street Journal reported that developments plans for Shtokman have been shelved because of disagreements over the investment terms among the partners.  Gazprom owns the majority stake of 51 percent.

Things have reached the stage where Norway's Statoil has returned its 24 percent stake in the joint venture and written off $340 million of its investment to-date.  The economics of natural gas markets would have certainly turned prospective Shtokman project returns upside down. Gas from this project had been planned for shipment into Europe through the Nord Stream pipeline. 

It has been well documented that, on an energy equivalent basis to oil, natural gas prices in 2012 are at all-time historical lows. 

Put this together with declining demand in developed markets due to economics slowdowns in China, Europe and the U.S., and it is not the scenario for taking on high-risk projects, particularly where the prospects for the partners' getting paid their contractual share on time are subject to political whims.

It also makes little sense for the Russian company to take the risk also, because of their own internal market issues, including competition from newer entities, like Novatek.

Statoil's recent 2012 investor presentations paint a very healthy picture of their operations in North America, where some 30 percent of the corporate resource base is located.  The shale gas boom onshore, and offshore resources offer better opportunities to deploy capital in North America.  There is no geopolitical risk to these ventures.

Energy, in the form of natural gas exports, was to be a near-term, foreign policy lever for Russia.  Global resource markets have put this lever out of service, for the time being.

It's also interesting to note that other commodity markets are being affected by the global slowdown, particularly from China.  The Guardian has noted what seems like a collapse of an "iron ore" bubble. The slowdown of Chinese demand for Australian iron ore exports, which represent 60 percent of Australian merchandise exports to China, puts the Australian currency's exchange rate at risk.  

Our long period of global easy money, which fueled a consumer-driven, housing led boom in U.S. consumption that led to surging imports from China, has created a global economic landscape that is showing some pock marks.  Our demand has slowed, and Europe's slowdown may be accelerating.  Therefore, demand from the Chinese export machine has fallen off to the point that Chinese firms continue to produce, even when merchandise is just being stockpiled, without orders. 

Even if indirectly, the low rates also fueled speculative commodity booms, as the Chinese and EM demand would absorb marginal global supplies.  Some twelve to eighteen months later, these former consensus forecasts now seem like pipe dreams.