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Novatek closes in on Arctic LNG 2

FID on Novatek’s second Arctic LNG production project, expected in Q3 2019, appears to be a formality

The rule that a new multi-billion-dollar energy project cannot truly be regarded as under way until its sponsors have reached a final investment decision (FID) does not seem to apply to Novatek's Arctic LNG 2 (ALNG2). FID on the 19.8mn t/yr Russian liquefaction project is not due until Q3 but construction has been underway for months.

It is not just the case that a handful of long-lead time items were ordered well in advance to ensure they do not cause unnecessary delays once construction begins-a large chunk of the $20-21bn project cost has already been committed.

"More than 75pc of the equipment for the project" has been contracted, says Novatek's deputy chairman, Mark Gyetvay, adding that work on a new LNG construction centre in Murmansk-where the project's three gravity-base structure (GBS) platforms and topside modules will take shape-is in full swing.

"There are around 3,000 people working on site along with 500 construction vehicles," he says. By the end of June, four concrete batch plants were due to be up and running, with fabrication work on the first GBS scheduled to begin during July in a newly completed dry dock.

An engineering, procurement, supply, construction and commissioning contract for all three trains was signed with engineering contractor TechnipFMC in May, effectively re-assembling the team of engineers that executed Novatek's first liquefaction project, Yamal LNG.

Securing partners

The structure of the joint venture that will own and operate ALNG2 is also taking shape fast. In March a 10pc participating interest was sold to Total, setting a template for future deals. Partners will be expected to lift LNG in proportion to their equity shares and to facilitate finance. US sanctions mean any loans will have to come from non-Western banks, as was the case with Yamal LNG. Novatek appears unconcerned.

In April, at the Second Belt and Road Forum in Beijing, Novatek announced binding agreements for 10pc stakes with China National Petroleum Corporation (CNPC) and Cnooc, two of China's big-three national oil and gas companies. Share purchase agreements for both deals were signed at an economic forum in St. Petersburg in June, with closing expected in the near future subject to regulatory approvals.

With Novatek intent on retaining a 60pc interest in ALNG2-"the 60/40 structure is ideal for us at this point in time," says Gyetvay-that leaves just 10pc for other potential partners.

Talks are ongoing. Contenders include the Japanese companies Mitsui and Mitsubishi and, despite rumours to the contrary, Saudi Aramco. At the St. Petersburg forum the Saudi energy minister and chairman of Aramco, Khalid Al-Falih, confirmed to the Tass news agency: "We are hoping that Novatek will agree to Aramco's offer."

Maintaining momentum

Novatek's credibility is running high, following its impressive performance in bringing train three at Yamal LNG on stream a year ahead of schedule, despite the construction and logistical challenges of a harsh Arctic environment. Milestones are approaching thick and fast as Novatek pursues its vision of:

· Establishing a Russian LNG project construction capability

· Creating physical LNG trading hubs at proposed transshipment terminals in Kamchatka and Murmansk (a first contract for free on board (FOB) sales from these hubs has already been agreed with Vitol)

· Revising its long-term strategy to raise its LNG production capacity target for 2030 from 57mn t/yr to an astonishing 70mn t/yr-which would make it the world's second-largest LNG-producing company after Qatargas

Even before it has reached formal FID on ALNG2, Novatek is already hatching plans for Arctic LNG 3 and a smaller project that will employ its proprietary Arctic Cascade liquefaction technology; Arctic Cascade will make its debut around the turn of this year at the 0.9mn t/yr fourth train currently under construction at Yamal LNG.

So, when are we likely to see the updated strategy? "Probably in the second half of next year," says Gyetvay. The company certainly has plenty to keep it busy until then.


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