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Can Novatek lure Aramco to Arctic LNG-2?

Closer Russia-Saudi relations could bring new investment

Russian gas producer Novatek wants to entice Saudi Aramco to become a partner in Arctic LNG-2, after successfully launching production at Yamal, its first liquefied natural gas project, late last year.

Novatek, Russia's largest independent natural gas producer, signed a memorandum of cooperation with Aramco in February related to the LNG-2 project on the Kara Sea coast, without disclosing any details. Their home countries of Russia and Saudi Arabia have been instrumental in implementing a global pact on cutting oil production by almost 1.8m barrels a day—cooperation that could provide a favourable backdrop for further collaboration.

Analysts are speculating that Aramco is negotiating with Novatek for a stake in Arctic LNG-2 equal to Total's, as well as purchasing some of the project's LNG. Total and China National Petroleum Corporation are expected to participate after taking a 20% stake each in the Yamal project, but may take a smaller share in LNG-2 to accommodate Aramco.

Investment drive

"We believe the sale of shares in LNG-2 will be perhaps the most important driver for Novatek's share price over the next 12-18 months, bringing in billions of dollars to the company upfront and helping to finance its share of the second LNG project," said Alex Fak, senior energy analyst at Sberbank CIB. "We had expected most of the deals to be confirmed in 2019, but it might be that some visibility as to the future partners will materialise this year."

Novatek's founder and chief executive, Leonid Mikhelson, has said that the firm plans to finance the new project mostly via its shareholders, with 45% of total financing expected to be raised through equity, while 55% could come from external debt.

19.8m t/y—Expected capacity of Arctic LNG-2 by 2026

Yamal LNG had been selling gas and condensate exclusively on a spot basis until 1 April, at which point its long-term contracts came into force. The company previously said it expected to sell 17 LNG cargoes before 1 April, totalling around 1.24m tonnes, which investment bank VTB Capital has estimated could have brought in some $500m in revenues.

Investment banking sources in Moscow say Italian lender Intesa Sanpaolo, which participated in an opaque Rosneft deal last year, will be crucial to financing the new project. Intesa and Austria's Raiffeisen Bank both participated in Yamal.

However, Chinese lenders are again expected to backstop a significant share of the funding, after providing $12bn out of the overall $27bn required for the Yamal project.

By building gravity-based structures for the production facility locally, Novatek hopes to cut plant construction costs by 30%, compared to Yamal. The first of three trains for the 19.8m tonnes per year LNG export plant on the Gydan peninsula is planned to be operational by 2022, with full capacity expected by 2026.

To China and beyond

As Russian companies seek alternatives to Western capital—the flow of which is hindered by financial sanctions imposed on Russia—and to European energy markets, they are becoming more dependent on China. Once the Yamal project is fully operational in 2019, 4m t/y of LNG is designated to go to China. By 2030, it is expected that China will be the main importer of Russian natural gas, including LNG.

Novatek also wants to diversify into new markets beyond China. On 27 March the company announced it had shipped its first consignment of LNG to India.

However, it's not all plain sailing for Russian LNG developers. The Kremlin may soon review a bill that would require energy produced in the Russian Arctic to be transported aboard Russian-made vessels. It is unclear yet whether it would require domestic tankers for all Arctic shipments or just those made via the Northern Sea Route to Asia.

"The measures in the tanker bill, which would take effect as soon as 2019, could significantly raise the effective transportation costs of Novatek's second LNG project, Arctic LNG-2, and even those of Yamal LNG," said Sberbank CIB's Fak. "In fact, it could even threaten the timely launch of Arctic LNG-2."

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