Novatek’s Yamal project a watershed moment for Russia’s hydrocarbon industry

Leonid Mikhelson beamed with pride when Vladimir Putin this month hailed Novatek’s $27bn liquefied gas pipeline project as an “extremely important step” for the country.The chief executive of the nation’s biggest privately owned gas producer and the Russian president had for years been told that the Yamal liquid natural gas project in the Russian Arctic was too difficult to build and not viable in a country where gas exports have been dominated by state-owned Gazprom. “This is a complex project, of course, and in this room there are very good people, good specialists, who at the beginning of the process, told me: ‘Do not do this’,” Mr Putin told the chief executives of Russia’s other top energy companies, including Gazprom’s Alexei Miller and Rosneft’s Igor Sechin, who were summoned to fly to Yamal for the pipeline’s opening ceremony. “But those who took on this project took a risk; this risk proved to be justified — and achieved results.”

It was not hard to see who Mr Putin was addressing with his stinging rebuke as the energy chiefs were made to listen to the president praise a rival’s project as an initiative that “ensures the future of Russia, the future of its economy”.Yamal LNG’s launch — on time and on budget — is indeed a watershed moment for Russia’s hydrocarbon industry, the beating heart of the country’s economy. And Mr Putin’s remarks were also a warning to producers in other countries that have been quicker to the LNG market.Yamal LNG “is one more confirmation of the status of Russia as one of the world’s leading energy powers”, Mr Putin told the energy bosses. “Of course, the number of such promising projects needs to be increased,” he ordered.Global demand for LNG has roughly doubled over the past decade to 258m tonnes last year.

Its liquefied state means it can be shipped without the need for costly pipelines, and the relatively low levels of carbon the gas emits makes it a popular choice for countries looking to cut down on coal usage. That has made LNG a threat to Russia’s dominance of the European gas market but Mr Mikhelson and Mr Putin have sought to turn this into an advantage.Russia has traditionally been a natural gas player owing to Gazprom’s Soviet-era pipelines that have fuelled Europe. The country is now aiming for a 15-20 per cent share of the global market for LNG, which has been dominated by producers in the US, Qatar and Australia. Mr Mikhelson, who has battled western sanctions as well as the extreme weather conditions to deliver the world’s most northern LNG project, reckons that target is achievable by 2020. “Starting from today, the number of people who have never heard of us will decrease dramatically,” Mr Mikhelson said. “Russian gas will be marketable on the global arena.”There are plans for a second project nearby — Arctic LNG 2 — in the next few years.

France’s Total and China’s CNPC both hold a 20 per cent stake in the Yamal LNG project and are in talks over participating in the new development.Last week rating agency Fitch upgraded Novatek’s credit rating from triple B minus to triple B, citing “the start-up of the transformational Yamal LNG project”. Meeting those ambitions will not be straightforward. Western sanctions restrict overseas the financing packages needed to make them viable, giving potential foreign partners a cause for concern. Rival projects in other countries will also dampen demand. “Securing long-term contracts and funding new LNG projects in these circumstances is a challenge,” Fitch said a report this week, adding that sanctions made it “even more of a challenge for Russia”.Russia already has some LNG operations on the Far Eastern island of Sakhalin. But Novatek’s Yamal project offers larger output and easier access to Europe. The first shipment, loaded by Mr Putin, was sent to the UK.Mr Mikhelson said more powerful icebreakers that would allow LNG from Yamal to be shipped to Asia via the northern route through the Arctic year round were “only a question of time”.

This would reduce the cost of sending gas to markets such as China, Japan and South Korea by 30 per cent.“It is just a matter of time that for 12 months of the year we can sail eastward,” he said. “Not tomorrow, but perhaps the day after tomorrow.”

Russia was late to the LNG game but hopes it can catch up fast.

Source: Financial Times