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Yamal LNG's slow sailing

The development is moving ahead, but Russia’s broader LNG-export plans are off course

THREE years ago, Russia announced bold plans to raise liquefied natural gas-export capacity from 10m tonnes a year, all from one plant, to as much as 40m t/y by 2020. No longer. Western sanctions and an over-supplied market have almost certainly done for what was always an ambitious aim, even for the world’s natural gas superpower. Just one new project is now moving ahead and others remain under discussion.

Novatek’s Arctic project hasn’t been trouble-free either. Sanctions have complicated the firm’s plan to finance the $27bn Yamal LNG development in the Arctic. One of Novatek’s co-owners, Gennady Timchenko, a close associate of President Vladimir Putin, was explicitly targeted by the US’ sanctions after Russia’s entry into Ukraine. Weak global gas prices haven’t helped either. In April, though, things started to look up for the project, when Yamal LNG clinched a final $12bn line of credit from Chinese institutions. It should mean the 16.5m-t/y project now moves ahead.

The first train is two-thirds complete and on schedule to start producing in 2017, according to Yamal LNG. The company’s original timetable envisaged the other other two trains starting up in 2018 and 2019. Novatek holds 50.1% of the project, France’s Total and China’s CNPC 20% each, with the rest held by a Chinese investment fund.

The project can count on cheap feedstock from the Tambeyskoe gas-condensate field – which the company estimates costs $0.50-0.60 per million British thermal units to supply – but faces stiff transport costs given its location on Russia’s Arctic coast, a long way from markets. The Yamal partners have said some 95% of the project’s production has already been sold on long-term contracts to buyers in Europe and Asia, including Shell and France’s Engie, though pricing terms are not known.

International relations

Whatever the economic rationale, this is a flagship project deemed important by the leaderships in both Russia and China, as reflected in the origin of recent funding from institutions close to both governments. The $12bn segment comes from the Export-Import Bank of China and the China Development Bank, adding to previous Chinese investment in the project, while an agreement signed earlier this year for €3.6bn ($4.11bn) was made with Russia’s Sberbank and Gazprombank.

Whatever the economic rationale, Yamal LNG is a flagship project deemed important by the leaderships in both Russia and China

The latest announcement is also neatly timed. Putin is due to meet his Chinese counterpart, Xi Jinping, in Beijing in June.

Elsewhere in Russian LNG, slow progress with other potential projects better reflects the uncertain times for the industry. Gazprom said in April it was still discussing with partner Shell the addition of a third train to the country’s only existing LNG export plant, Sakhalin-2, located in the Russian far east. Plans announced so far are for the longer term, though.

Gazprom deputy chairman Alexander Medvedev said earlier this year that a third 5.4m-t/y train at Sakhalin-2 could be operational in 2021, taking Sakhalin-2’s capacity to more than 15m t/y. But with a final investment decision not due before 2017, at the earliest, the timetable could prove fluid.

A fourth train at Sakhalin-2 has also been mentioned for the longer term, but building that would most likely depend on Rosneft and ExxonMobil, the partners at the nearby Sakhalin-1 oil- and gasfield. They have considered building their own LNG export project in the 2020s, rather than supply gas to an expanded Sakhalin-2.

Gazprom and Shell are also considering working together on an LNG project in Russia’s west. The Russian firm said last year it was seeking partners to take a 49% stake in its Baltic LNG project in the Leningrad region, output from which would be targeted initially at the European market. No partnership has been struck yet, though both Gazprom and Shell have said in recent weeks that a deal is still being considered. A Japanese consortium has also been mooted as a possible partner for Gazprom. But growth in Europe’s market is slow, pipeline gas (from Russia) probably cheaper, and growing US LNG supplies will put a cap on prices in the continent. So the rationale for a greenfield Russian LNG facility is not obvious.

The facility, at the Baltic Sea port of Ust-Luga, would have an initial capacity of 10m t/y, potentially increasing to 15m t/y later. Gazprom is targeting commissioning in late 2018, though given the nascent stage of the project, that date looks several years too soon.

In short, all Russian LNG plans bar Yamal LNG remain speculative at present. Production from Yamal could bring Russian LNG capacity up to around 26m t/y from two plants by 2020 if all three of the proposed trains are built by then. In theory, Baltic LNG would increase the total to 36m t/y. But 40m t/y looks a stretch – not just by 2020, but for the foreseeable future.

This article is part of an in-depth series on Russia. First article: Why Russia's exports aren't about the fall.

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