Novatek backs LNG in low carbon future
Following FID on Arctic LNG 2, the low-cost Russian producers sees itself well placed to benefit from the energy transition
Novatek took another big—albeit long anticipated—step to fulfilling its stated aim of becoming a leading global LNG player when it approved FID for its Arctic LNG 2 project in September.
The largest independent Russian natural gas producer joined the world stage with the launch of its Yamal LNG facility in 2014. Arctic LNG 2 is set to add 19.8mn t/yr across three liquification trains, scheduled to be launched in 2023, 2024 and 2026.
Ahead of a Wednesday Gastech panel session, Novatek CFO Mark Gyetvay set out his vision for where LNG fits into the energy transition.
Now FID has been taken, how will Arctic LNG2 develop over the next years?
Gyetvay: I characterise FID as a formality that needs to be done in relation to our partners. Before FID a couple of weeks ago, we had secured about 90pc of the main equipment. We had even begun pouring concrete for the first gravity-based structure and were already building the Murmansk LNG terminal. A lot of investment had been made so everybody knew that FID was inevitable.
FID has been taken on a lot of gas projects recently. How do you see supply evolving over the next few years?
Gyetvay: There is likely to be a five-year construction phase following FID. We are experiencing the tail end of the last big LNG surge—the Australian and US surge is getting closer to its tail end and a Russian one will be next.
Supply always comes in a lumpy manner and never directly corresponds to demand. It always outstrips demand when a new project comes on stream. All of a sudden you have a big quantum of LNG entering the market before the demand side is able to absorb it. The market is looking at how to absorb the supply side that just came on, some of it a little later than anticipated.
By the time Arctic LNG 2 come on stream, the demand side should have caught up with supply and we will be in a deficit period. All projects coming on board during this period will be in a good position.
Did price forecasts influence the decision to FID?
Gyetvay: We would never base a decision—one predicated on a 35-40 year economic life—on short-term price movements. During the life of any project it will go through various price cycles, including ones where it benefits. What differentiates Novatek is that we can bring on a large volume of natural gas at a very low cost. The LNG process takes gas down to -162C, so working where the average temperature is between -30C and -40C for much of the year means we have an advantage over those on the US Gulf Coast or Mid-East Gulf.
Price is a double-edged sword. A low price should stimulate demand, especially in geographical regions where price is very important. India has similar import potential to China but penetration as a primary energy source is very price sensitive.
The transition from coal to natural gas can only happen once a country has made capital investments. Once India has built out regasification terminals and infrastructure to move gas around the country, it has made a commitment to gas.
The other side of the sword is that a period of low prices takes away FID for high-cost LNG projects. This means that some expected supply will not materialise, which obviously supports a stronger price going forward.
How long can higher cost providers survive a period of low prices?
Gyetvay: The shale revolution is very successful from a technical perspective—but financially it has been a disaster. Many US shale companies have not generated positive free cash flow for years and there have been a slew of bankruptcies. It was all due to Wall Street banks providing easy access to capital.
The US is essentially adopting a tolling model, whereby the sponsors of LNG projects are largely just the builders of the liquefaction plant. In my opinion, that model doesn't work in a low-cost environment. It assumes it does not matter what I spend on capex so long as I can sell it on an operational basis.
It essentially demonstrates very low capital discipline—it is why we are starting to see shareholder activism against the US oil and gas industry, and even against some global players. Shale firms are being asked by investors to start returning capital, pay dividends or engage in share buybacks because the returns have been pretty anaemic over the last five-plus years. The US industry needs to think about a model that works in this environment.
What role do you see for gas in a low carbon future?
Gyetvay: I have long been a big advocate of environmental, social and governance (ESG) reporting—on 28 August we released our 12th sustainability report. We have been a leader in the Russian market and were early adopters of carbon disclosure. This year we published our views on climate change. It is extremely important and the industry is only starting come around to the idea of promoting natural gas as a clean-burning fuel.
Should natural gas even be included as a fossil fuel? It does not have the same characteristics and problems as coal or crude. The industry has to do a better job of capturing methane—once we do that we can make intelligent decisions.
Do governments need to push the energy transition?
Gyetvay: The discussion has always been about about whether it needs to be a Paris Agreement-type, government-mandated change or a society-led change, where people will no longer tolerate pollution. I think it will be a combination, but today we are seeing more of a societal push.
People are saying, ”I want to leave a better legacy for my grandchildren.” The oil gas industry has actually not been bad in terms of its commitment—it has done a lot, just not enough. I take the question very seriously—in my role as CFO I am dealing with new investors asking new questions. They no longer ask me about profitability—they ask me about our carbon footprint. We are seeing a big change.
The industry needs to step up a little bit more because climate change is a definitely a defining question of this generation.