The title of this article may seem rather provocative and overstating the tendencies that are only emerging in the global economy. Yet these tendencies are rooted in objective processes that, should they persist, may drastically change the overall situation in the world economy.

SHTOKMAN – THE FIRST ROBIN?

Gazprom’s recent refusal to set up an international consortium for developing the Shtokman offshore deposit in the Barents Sea sparked uproar around the world. This deposit, boasting the biggest reserves of hydrocarbons under the seabed – its estimated resources stand at over 3 trillion cubic meters of natural gas – is really unique. It is located about 600 kilometers away from the shore, in an area that is prone to icebergs. Thus, experts from this field realized in the early 1990s that its development would require unconventional technological solutions. However, since the discovery of this deposit in the 1980s, few practical steps have been made to prepare this deposit for commercial use.

Discussions over the Shtokman gas field have been underway since 1991 when the first consortium (then consisting entirely of foreign companies) submitted its initial feasibility study to a board of government experts. As the economic and political situation in Russia at that time was highly unstable, Western corporations – with their experience of hydrocarbon production in the North Sea – hoped to make the project a fully export-oriented one.

The plan called for the installation of platforms in accordance with Western technologies that would deliver gas shipments via pipelines to the European continent, thereby minimizing dependence on “Russian risks.” In 1992, liability for implementation of the project was handed over to a new Russian company on the scene called Rosshelf, which brought together Gazprom and several defense producers. The latter were meant to manufacture equipment for the offshore mining of hydrocarbons in line with the then popular policy of converting defense production to civilian use.

The project, however, had a low start. In the mid-1990s, Russia had enough operational gas fields to meet a sizably diminished domestic demand, as well as in the former Soviet republics and East European countries. In the meantime, the growing demand for gas in Western Europe was supposed to be met by ramifying the pipeline infrastructure rather than launching the extremely expensive Shtokman project. But the second half of the 1990s saw a sharp decline in the price of crude oil. As a result, Gazprom’s financial situation deteriorated and, in order to remedy the falling production levels, it was forced to focus on an immediate commissioning of the Zapolyarnoye deposit in north Siberia.

The beginning of the new century witnessed a steep growth in the demand for liquefied natural gas (LNG). Today, novel technologies help to considerably reduce the cost of its production and delivery by sea, and its competitiveness with the transportation of gas via pipelines (in areas where the two methods of transportation can be used alternatively) continues to grow. Add to this the growth of gas prices on the North American gas market (where prices remained rather low after liberalization for many years). The biggest U.S. corporations that had receiving terminals, contract portfolios and a history of deepwater hydrocarbon resource development (above all, in the Gulf of Mexico), displayed great interest in organizing wide-scale supplies of LNG. It should be no surprise that they turned their eyes to the Shtokman deposit.

The Europeans also took an interest in the project, although just a few years before this market seemed to be at a standstill, with outdated terminals in Britain mothballed and hardly any new terminals being built. Thus, the participation of European companies in the project looked not only as a way of bringing liquefied gas to the European market at an earliest possible date, but also as a counterweight to U.S. influence. Moreover, Norwegian companies, which showed the biggest interest in the Shtokman project, really had much to offer in terms of technology.

The decision to change resources to LNG has made the Shtokman project one of the biggest global enterprises in this sphere. However, the scale of this initiative does not match the gas field’s potential. Initially, the international consortium was supposed to implement the entire integrated project – from developing the deposit, to building a liquefaction plant, to exporting the gas, most of it to the U.S. The shortlist of potential Gazprom partners included five foreign companies: Conoco and Chevron of the U.S., Total of France, and Statoil and Norsk Hydro of Norway. The announcement of the winning contender was put off numerous times until an unexpected notification came that Gazprom had undertaken to develop Shtokman on its own.

How can this drastic change be explained?

Gazprom’s rapidly growing foreign liabilities, together with the markedly expanding capacity of the domestic market, have put full-scale development of the Shtokman deposit to the top of the agenda once again. Early tests suggest this project will have an annual output of around 90 billion cubic meters (bcm), as opposed to 22 bcm estimated for the LNG supplies. Importantly, “pipeline gas” will be channeled to the Unified System of Gas Supplies, which pools together gas supplies for foreign and domestic consumers. This project stands in dramatic contrast to what was envisioned previously: namely, it targets an altogether different market (it is no accident that a decision was made to reorient main exports to the North-European Pipeline System). Also, the new project concept makes it difficult to estimate contributions and interests of participating companies, should their number be great; at least this would require too much time.

Another important factor is the volatility of the U.S. gas market where prices are not pegged to oil. Thus, the recent start of a price slide there poses tremendous risks for the LNG project.

Arguments in favor of the recent decision to exclude foreign energy companies from the Shtokman project vary, yet all observers agree that the latest developments were very abrupt.  And why were such actions taken against the largest international oil and gas corporations? It would be an oversimplification to explain the situation by Gazprom’s style of conduct.

DICTATE OF THE MAJORS

The largest oil and gas projects are traditionally implemented by a limited number of the most powerful – and mostly transnational – corporations (the ‘majors’ as they are often collectively referred to in English), or they are carried out under their guidance. The reason for this standard practice is simple: large-scale and technologically sophisticated projects require huge investment. Their implementation demands the concerted effort of numerous contractors, together with their extensive production experience. Such projects also require a steady position on relevant markets of commodities and services.

Over the decades, only the majors have had the capabilities to meet all of these conditions. They are capable of drawing the best financial resources since they have high financial ratings, as well as good reputations. Their capitalization power puts them in the ranks of the biggest global companies. The majors clearly have the knowledge and skills required for such projects, especially since the specific skills necessary for organizing business activities are often not directly linked to oil or gas.

However, it is a big question whether the majors hold leading positions in the field of innovation. It is a popular belief nowadays that the majors should focus on their core business, i.e. their main and narrowly specialized sphere of activity. This suggests they should outsource knowledge, skills and services. Innovations are highly specific and risk-prone, so the majors often assign them to technological, servicing and engineering companies that are specialized in these fields. As for the skill of operating on modern energy markets, the latter are becoming increasingly more open to new suppliers, due to high prices and the fear of resource shortages.

Still, the majors are able to maintain their status due to the expansiveness of their activities, of which capitalization plays an integral part. They draw their power from the amounts of resources they control. The resources are easily recalculated into capitalization and form the long-term basis for their business activities. Whereas the business of the servicing companies is contingent on the success at bidding for specific customers’ orders, the majors enter these contests as certain winners by having secured huge resources.

The struggle for resources, of course, runs through the history of the global corporations. Propped up by overt support from political circles in Western countries, the majors for decades fought against the tide of nationalization and put up obstacles to the formation of OPEC as an association of countries where the production of oil and gas had been nationalized. However, in a large number of countries, they had to reconcile themselves to the roles of project operators, not owners.

THE MATURING GENERATION

A new generation of the largest oil corporations – like Statoil and Norsk Hydro in Norway, Petronas in Malaysia, CNPC and CNOOC in China – have surfaced across the world in the past few decades. This phenomenon was the result of state policies of strengthening “national champions” in the oil and gas sector; in other words, the ones that would eventually replace the “invited coaches.”

Norway offers an illustrative example. Unexpected wealth poured into this country when oil and gas deposits were discovered in the North Sea. Since the Norwegians did not have either the experience or personnel in that sphere, they pursued active cooperation with foreign companies. At the same time, they endorsed rigid tax regulations (which brought to existence the ‘future generations fund’ – experience that Russia decided to follow).

Furthermore, serious efforts were made to develop national research centers and production facilities, as well as to assimilate novel technologies. Large integrated projects embraced key areas of oil and gas technologies, such as construction of the biggest marine platforms, the extraction of deepwater resources, etc. All of the major international companies that worked on Norway’s continental shelf joined in this activity (unfortunately, the realm of cooperation has not been exactly copied by Russia).

From the very start, the Norwegians realized that oil and gas wealth is finite and it must be used in a way that could ensure long-term results. Today, the output of crude on the Norwegian shelf is decreasing and the output of gas will soon reach its peak. In the meantime, Norway’s largest producers, Statoil and Hydro, which are co-owned by the government, have achieved the rank of global technology leaders. Statoil built Europe’s  first gas liquefaction plant on the Snovit deposit, while Hydro engaged in subsurface development of the Ormen Lange gas deposit, located in the Norwegian Sea at a depth of about 1,000 meters. In their offer to join the Shtokman project, they planned, primarily, to contribute novel technological solutions.

Other resource-rich countries have set for themselves the similar goal of turning their leading oil and gas companies that possess highly qualified technical personnel into major international players. These companies seek to export their skills and even force the traditional giants to make room not only at home, but also on the world market in general. True, an opposite trend is observable as well: oil companies in the OPEC countries, for example, also receive super-profits on crude, but lack potential in research, technologies and organization that might grant them a new stage of growth. Russian oil and gas majors should consider these examples if they seek to become powerful and independent global players in the foreseeable future.

A CHANGE OF THE GUARDS

The formation of new energy majors has received a new incentive of late after oil prices surged, which gave the oil and gas producing countries and their largest companies huge financial resources. Public companies (even those where the governments have sizable or dominant stakes) have beefed up their capitalization. The leading ones, like Gazprom, have taken over the top positions in the rankings, pushing aside the traditional majors. Their capitalization, together with growing revenues and the attendant rise of ratings, are paving the way to greater financial might.

The newly emerging majors – or at least the most advanced of them – have good prospects for replacing the traditional majors on the global market. This may be accomplished, for example, by them becoming powerful organizers and operators of projects, first in their own countries and then globally. Their main advantage over the traditional competitors is national mineral resources, which serves as a prerequisite for gaining strength, as well as a launching pad for further expansion. Incidentally, the traditional majors developed in much the same way at the dawn of their history. They relied on their own resources (like European resources that have been exhausted or are waning now), or on the resources of the colonies.

If one views the current developments as a long-term tendency, the older-generation majors are heading for very tough competition. The governments of the resource-rich countries, and national companies enjoying governmental support, are interested in reducing the role of transnational corporations to that of ordinary contractors in developing large deposits. Naturally, the majors deem it unprofitable, since work on contracts brings virtually nothing in terms of capitalization. What is more, they will have to compete with specialized servicing companies even for these contracts.

Undoubtedly, it would be premature to write off those corporations that have dominated the energy market for over a century. Challenging projects are a tricky business. Also, it cannot be ruled out that the traditional majors will start restructurings in order to expand the scope of their core business and win back their market positions. For instance, they may focus on gaining control over crucial cutting-edge technologies. If this happens, one can expect some form of a battle between the existing resources (possessed by the new majors) and the new technologies. Whatever the case, the Shtokman project may be a forerunner of critical changes in the global energy sector.