Novatek still bullish on Yamal LNG prospect
Cut off from Western financing, the Russian gas firm is relying on Chinese and Russian backers to fund its export project
Western sanctions on Russia have made progress more difficult at Yamal LNG, Novatek’s liquefied natural gas project on the northern peninsula. But Mark Gyetvay, the firm’s chief financial officer, says he remains hopeful that financing will be concluded for the $27bn development and that production from the plant will start in the second half of 2017.
“We underestimated the difficulties, given the sanctions environment, for closing some of the financing, particularly where it relates to Western banks. But, at the same time, it hasn’t really delayed the project, because the shareholders have continued to make investments,” Gyetvay told Petroleum Economist in an interview in Florence.
Yamal LNG was envisaged as a 16.5m tonne-a-year three-train venture, to be completed by 2021. But US sanctions against Novatek, which holds 50.1% of the project, have brought doubts about funding for later stages of development. Novatek is co-owned by Gennady Timchenko, who has been the target of US sanctions since the 2014 Ukraine crisis due to his relationship with Russian president Vladimir Putin.
Gyetvay says the sanctions have left Novatek unable to raise new US dollar debt of greater than 90 days. “It has obviously had an impact on the concluding of the financial structure for the loan arrangements that we have.” An arrangement with Chinese and Russian banks has, however, allowed them to “pick up the slack”. Novatek, says Gyetvay, is “comfortable with that. “We have enough finance to continue, but obviously we would like to close the structure as quickly as possible.”
Novatek’s main partners in the project are Total and China’s CNPC, which each holds 20% (Total has a direct stake of around 18% in Novatek itself). The other 9.9% stake in Yamal is held by China’s Silk Road Fund, which acquired its holding from Novatek in 2015.
Around 95% of the project’s initial production is said to have been sold on long-term contracts to buyers in Europe and Asia, including Shell and French utility Engie. Energy trader Gunvor, which Timchenko co-founded, may also agree a sales tie-up with Yamal.
The project initially struggled to get financing on acceptable terms from Chinese banks, while European funding has also been complicated by Western sanctions. However, the Yamal is now believed to have secured around $15bn of the cash it needs, thanks to a spurt in commitments over the past few months from the partners, banks and also Russia’s National Welfare Fund – part of the country’s sovereign wealth fund – which has agreed two $1.2bn loans to Yamal in recent months.
As part of its deal to take a stake in Yamal, the Silk Road Fund – a vehicle for a group of Chinese insurers to invest in foreign infrastructure projects – agreed to inject an initial sum of around €0.73bn. The deal was approved by the Russian government in late January. Around the same time, Russian economy minister Alexey Ulyukaev also discussed possible financing of Yamal by banks with his French counterpart Emmanuel Macron.
Options through expense
Falling LNG prices in Asia and the complexity of Yamal LNG’s development in Russia’s far north have raised other doubts about the project’s viability. But Gyetvay, speaking to PE during GE Oil and Gas’s annual meeting in Florence, says the low cost of gas supplied to the project will make it competitive with LNG coming on stream elsewhere. While feedstock gas for an Australian project might cost $5-6 per million British thermal units, for example, Yamal will secure its gas for $0.50-0.60, he says.
While he concedes that other LNG projects have a competitive edge in terms of shipping to markets in Asia and elsewhere, Novatek will make use of the Northern Sea Route across the top of Russia – shipping either west to Europe or eastwards to Asia.
Acquiring a fleet of Arctic ice-class LNG tankers to ship the gas is a major expense, potentially running to around $5bn if the envisaged 16 vessels are eventually ordered to carry production from the three planned trains. Work on the first of the 170,000-tonne, 300-metre-long “Yamalmax” vessels, ordered by Russian state-owned Sovcomflot, started in 2014 at one of Daewoo Shipbuilding & Marine Engineering’s South Korean shipyards. This first vessel will be used for training and testing. Further vessels have been ordered by various Asian, European and Canadian companies hoping to take Yamal’s output.