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Novatek’s Yamal LNG fast-track wins plaudits

Once regarded as an unlikely addition to global liquefied natural gas capacity, the Yamal project is ready to roll and Novatek has even bigger plans

The decision by Novatek, Russia's largest independent gas producer, to accelerate the speed at which it expands its vast Yamal LNG project in northwestern Siberia has received a warm reception from market observers.

Leonid Mikhelson, the company's chief executive, says the timeline for the completion of the $27bn project will arrive sooner than scheduled by fast-tracking the second and third stages. Previously, the company intended to launch three 5.5m-tonne liquefaction trains sequentially in 2017, 2018, and 2019, but it now plans to start the second train three months earlier than planned. The third train will come onstream six-to-nine months earlier while the first train may become operational by November, according to Russian energy minister Alexander Novak.

"Launching the plant with full operational capacity earlier than expected would be a generally positive development for Novatek, as it would allow the company to receive revenues faster," says Dmitry Loukashov, senior energy analyst at VTB Capital.

Novatek, which controls 50.1% of the project, has already overcome western sanctions related to the Ukrainian conflict by raising financing from Russian and Asian lenders. Now the company's outlook and balance sheet is improving after passing the peak of its capital expenditure spend.

BCS Financial, an independently-owned Russian brokerage, says the launch of Yamal LNG could trigger a 15% rise  in Novatek's stock during the last quarter of this year. Kirill Tachennikov, an oil and  gas analyst at BCS, says the market is currently "mispricing" the value of Yamal LNG for Novatek.

The market currently assigns an equity value of just $11bn to Yamal, whereas Tachennikov says fair value should be about $22bn, given a net debt target of $25bn and its equity of around $2bn.

"The project has a capacity of 16.5m tonnes and an all-in cash cost of just $3/m Btu (British thermal units), including transport, and 80% of the volume has been contracted for delivery to high-margin Asian markets, with the price of LNG linked to oil," he says.

Novatek is now considering building a fourth line at Yamal with annual capacity of 1m tonnes, which would increase the plant's overall capacity to 17.5m tonnes. The company is to conduct an assessment of the environmental impact of the project in the next two months, while a public hearing on the project is scheduled to be held on 28 November.

Novatek holds 50.1% of the project, France's Total and China's CNPC own 20% each and the remainder is held by a Chinese investment fund. The Yamal partners have said some 95% of the project's production has already been sold on long-term contracts to buyers in Asia and Europe, including Shell and France's Engie, though pricing terms are not known.

The project involves the creation of transport infrastructure, including a seaport, a power plant and an airport near Sabetta village on the Yamal peninsula. Sabetta was practically built from scratch, mostly using government funds, as it was deemed a project of federal importanceit is expected to grow into a massive LNG hub.

The Kremlin has abolished the export duty on LNG deals, exempted producers from paying a mineral extraction tax for the first 12 years after coming online, as well as from paying VAT on imported LNG-related equipment.

Novatek's ambitions don't stop after Yamal LNG has been commissioned, with the company aiming to become one of the world's largest LNG exporters in 10 years' time.

In late August, Novatek said it had secured subsoil licences to three gasfields in northern Yamal-Nenets with potential reserves, expanding the resource base for its LNG hub in the region by 1.37 trillion cubic metres (48.38 trillion cubic feet). Given the close proximity of the fields to Novatek's existing resource base on the Yamal and Gydan peninsula, analysts say the deal is supportive of the company's fundamentals.

Novatek is also considering a second project, Arctic LNG-2, which may start production in 2022, instead of the initially planned 2022-24.

Mikhelson says the resource base for the Arctic LNG-2 plant will be the Utrenneye oil and gas condensate field, with a production plateau of 30bn cm/y. That would allow the building of three lines with 6m tonnes of LNG capacity per line at the plant. A final investment decision on Arctic LNG-2 is not expected until 2019 and some analysts remain cautious about the project given prevailing LNG prices of around $6/m Btu.

"We think that given the current low LNG prices, implementing the project might be questionable unless Novatek can find a way to decrease capex substantially," says VTB Capital's Loukashov.

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