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Novatek Arctic LNG project defies US sanctions

Novatek’s Arctic LNG projects are continuing apace, despite Washington’s so-called “bill from hell”

The development of Novatek's still-expanding Yamal liquefied natural gas project has so far proved to be largely immune from Western sanctions. As Asian demand surges, this is bolstering confidence among partners lining up to provide financing for the company's second LNG project on Russia's Arctic coast.

Funded by Chinese banks and part-owned by Total, the Yamal project represents the centrepiece of the Kremlin's efforts to develop LNG exports to rival Qatar and the US.

In early August, Novatek launched the project's second train even earlier than planned. By January 2019, the company is planning to commence the third and last train. The facility is expected to produce 16.5m tonnes a year when fully completed.

To get it up and running, Novatek successfully circumvented US sanctions four years ago by switching its financing to euros from dollars and drumming up $12bn worth of Chinese funding to replace Western financing.

Now, the Russian privately-owned gas producer and its partners may have to repeat a similar trick to make sure new US sanctions don't affect the planned Arctic LNG-2 development. This is located opposite the Yamal facility across the Gulf of Ob, which feeds into the Kara Sea.

Dubbed by one of its sponsors in the US senate as the "bill from hell", these sanctions include potential restrictions against Western involvement in Russian energy projects, curbs on the operations of Kremlin-controlled lenders and restrictions on holding Russian sovereign debt.

"Few would bet against Novatek, after the company defied all expectations to deliver Yamal LNG on time and on budget," said Kateryna Filippenko, senior Russia research analyst at Wood Mackenzie. "State support has already been secured [for LNG-2] and the government is expected to provide all necessary assistance ahead of a final investment decision. Our current valuation shows that project economics are also not a hurdle-the project provides a healthy return."

FID is expected in 2019, with plans to start up the first train by end 2023.

Russian technologies

To minimise the impact of further US sanctions, Novatek chief executive Leonid Mikhelson said the company will increase the use of Russian equipment and technologies for LNG-2.

Existing partners-as well as some new oneslook set to sign up for the project. Total has already agreed to acquire a 10% stake for $2.55bn while China's CNPC and Korea's Kogas are also in talks to take an equity share.

"They are all going at approximately the same pace in terms of the talks timeframes," Mikhelson told reporters in Moscow. "To consider [participation] they require a lot of information, and then they have to go through corporate procedures."

“Few would bet against Novatek” Filippenko, Wood Mackenzie

There've been discussions about Saudi Aramco acquiring a holding in LNG-2, although that may be affected by the oil giant's decision to postpone its initial public offering.

"The trick is to line up partnerslikely the eventual customers in Asiawho believe that the global gas balance will tighten strongly enough to make it worth their while to secure direct stakes in future LNG supplies," said Anna Kotelnikova, an energy analyst at Sberbank CIB.

Asian clients already account for about 54% of Yamal's contracted output, with the remainder being sold to the European market. Signs are that Novatek can rely on Asian markets for further growth after prices spiked during the summer to $11/m British thermal units.

"If sustained, this would be supportive of Arctic LNG and Novatek," said Dmitry Loukashov, senior energy analyst at VTB Capital. "Such spikes are commonplace during winter, but this represents a first for the summer. We believe it's likely to have been driven by tightened supply, as a result of maintenance at US and Australian plants and technical issues in Malaysia, which have led to the delay and potential cancellation of some LNG shipments."

If prices remain at current levels, Loukashov estimates Yamal could generate an additional $200m in earnings this year and could potentially justify the price Total has paid for its 10% stake in LNG-2. In its second-quarter earnings statement, Novatek said growth at Yamal contributed to a 12% spurt in export sales during the second quarter and an overall 4.2% rise in gas output year-on-year.

Source: Petroleum Economist

On 6 September, Novatek overtook export monopoly Gazprom to become the country's largest traded gas company for the first time.

"Novatek is the Ferrari of the Russian market," Luis Saenz, head of equities at BCS Financial, told Petroleum Economist. "It has transformed itself from a local gas producer into a holding company in five years, with a combined fair equity value of affiliates equal to its market cap."

In 2022-25, Novatek said LNG-2 will add another 20m t/y. The company said that, together, both Arctic terminals are forecast to produce more than 55m t/y of LNG by 2030.

Heading east

Two of Novatek's tankers to China passed through the Northern Sea Route in late July. The company claimed this was the first time that tankers had passed eastwards towards the Bering Strait without icebreaking support. The Christophe de Margerie, a 984ft LNG tanker built specifically for the journey, joined them at Tangshan LNG terminal in north-east China in early August.

The LNG in all three tankers is to be supplied to Asian LNG buyers, including CNPC, according to Novatek.

The ships completed their eastbound journey in 19 days, with navigation through ice limited to only nine days. A westbound Yamal shipment to Asia, by means of a cargo transfer to a conventional LNG carrier in European waters and passages through the Suez Canal and the Strait of Malacca, takes about 40 days to complete.

Novatek estimates that transport costs for an easterly run from Sabetta to Guangdong in southern China, is $64 a tonne of LNG. In contrast, the westerly route for that shipment between the same ports-involving a cargo transfer at Zeebrugge and the Suez Canal-costs $91.50 a tonne.

To further reduce transport costs, chief executive Mikhelson announced plans on 21 August to build a trans-shipment sea terminal in Murmansk, with an annual capacity of 20m tonnes.

Mikhelson said the Murmansk terminal's financing is expected to be similar to Novatek's $1.6bn Kamchatka LNG hub and could help save $0.20/m Btu on transportation costs.

"The planned trans-shipment terminals in Kamchatka and Murmansk might help Yamal LNG save on transportation costs in the Asian direction and optimise shipments to Europe," said VTB's Loukashov.

To enable shipment between Sabetta and the terminals in Murmansk or Kamchatka, Mikhelson has asked the Russian transportation ministry to allow Novatek to use Arctic-class tankers under flags other than Russian. Russian law currently bans the company from its 15 ice-class Arc7 tankers built by South Korea's Daewoo Shipbuilding Marine Engineering, if they are Russian-registered.

LNG ambitions

Yamal isn't the only LNG show in town. Rosneft is advancing plans to develop its $15bn Far East LNG project with ExxonMobil, even after sanctions forced the US company to pull out of other joint ventures in Russia.

Gas export monopoly Gazprom has a mixed record when it comes to LNG. Plans for its flagship Shtokman LNG project halted last year and has been postponed indefinitely because its main market in North America has collapsed due to the upsurge in domestic shale gas output there. Another project, Vladivostok LNG, intended to supply the Asia-Pacific region, has also been put on the back burner after management prioritised the development of the Power of Siberia gas pipeline project to China.

However, a recent initiative, Baltic LNG, might be just the thing Gazprom needs to kick-start its LNG portfolio on the western front. It plans to build a gas-processing plant on the Baltic Sea to supply feed gas for the Baltic LNG plant and the Nord Stream-2 pipeline.

But Yamal and Arctic LNG-2 are very much the focus. Novatek is also seeking to buy four additional fields on the Yamal Peninsula from Gazprom-or develop them with Gazprom-potentially allowing for a future expansion of regional LNG output. Analysis by Sberbank CIB forecasts that, if estimated production from those fields are factored in, the total LNG potential of the region could be as much as 80m t/y.

"This could place Novatek's LNG production above [the current production levels] of the world's biggest producer, Qatar, by 2030," said Kotelnikova.

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