Novatek’s Grand LNG Strategy

Yamal LNG project is presently the most important project for Novatek. Yamal LNG will be the world’s first LNG project inside the Arctic Circle

Firstly, when the final investment decision was taken in December 2013, a target date for the commercial launch of first LNG in 2017 was set and a budget of $26.9 billion was established. As the project now stands, it seems that, despite the impact of US sanctions, which undermined Novatek’s initial financing plans for the project, the date for first gas will be met (albeit with a slight delay to the second rather than the first half of 2017) and the budget will be adhered to. Given the turbulence of oil and gas prices during the entire development period and the necessity to re-negotiate project financing to avoid using US banks, this is an impressive performance, especially when the Finance Director of Novatek, a US citizen, was forbidden from taking part in any discussions.

Secondly, Novatek has successfully managed a foreign consortium of investors including Total, CNPC and the Chinese Silk Road Fund to bring technical expertise, financial support and an important LNG buyer together to help optimise the Yamal LNG project. Total has brought its global LNG expertise, CNPC has contracted to buy 3mtpa of LNG and the Silk Road Fund investment has catalysed Chinese financial support, with Chinese banks lending a total of $12 billion to the project while the Fund directly invested €1.087 billion for its 9.9% stake. As a result, Novatek not only became an important vehicle for international partnership but also became a key link in Russia’s drive to expand links with Asia as part of the country’s “Pivot to Asia”.

Thirdly, Novatek also managed a development that has been technically challenging and has required significant innovation. Yamal LNG necessitated new technology to be used in a number of areas. Special drilling equipment was designed and constructed for the 200 wells required; tens of thousands of piles have been driven into the permafrost to support all the liquefaction and storage equipment on a scale not seen before; an international airport and new shipping port have been constructed to receive much of the new facility in modular form from yards in Asia; and specially designed ARC7 ice-breaking LNG tankers have been designed to deal with the significant issue of transporting LNG across ice-bound waters.

A fourth point to be noted is that Novatek has also received vital government support that has underpinned the commerciality of the Yamal LNG development. A 12-year tax holiday from Mineral Extraction Tax, added to the fact that Russia LNG exports pay no export tax, has improved project economics, and the Russian government has also subsidised the construction of the port facilities as part of its plan to develop the Far North of Russia. These factors have all been vital in making Yamal LNG a viable project in a low gas price environment. Furthermore, it can be asserted that Yamal LNG forms an important part of Russia’s broader plan to establish itself as an Arctic power, and it is interesting to note that Vladimir Voronkin, the deputy head of Yamal LNG, was quoted in 2014 as saying that “we are confident. The port and the plant are under the protection of the president and the government.” Overall, then it would seem that Novatek is set to bring Yamal LNG online within the agreed timeline and budget, and has helped Russia to advance its Arctic and Asian ambitions while also expanding the country’s presence in the global gas market. It is perhaps not surprising then that the project has received significant support from President Putin. Indeed, Novatek now appears to be confident enough in this support to be making ambitious plans for further LNG developments in the region, with an overall goal of seeing production from the Yamal and Gydan peninsulas actually overtaking Qatar in terms of LNG production, and also participating in Asian markets where the LNG is being sold.

Source: Oxford Institue for Energy Studies