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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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This Delayed Megaproject Raises Questions About Arctic Energy

In the context of global liquefied natural gas (LNG) companies, Russia’s number two gas producer (after state-owned Gazprom), Novatek, has always been seen as being unusually reliable in terms of delivering its projects on time and on budget. This applied equally to the first three liquefaction and purification facilities (trains) of its US$27 billion flagship Arctic LNG project in the Yamal Peninsula (Yamal LNG) despite the full weight of U.S. sanctions being imposed on Russia in 2014 as a result of its annexation of Crimea. The announcement last week from Novatek that it has delayed the launch of the fourth train of the Yamal LNG project, then, raises serious questions about the company’s ambitious plans for the project and for similar projects being undertaken or considered by Russia in the Arctic.

These questions go the heart of the Kremlin’s commitment to Arctic exploration, as the previously rigorous implementation of the earlier three trains was seen as a sign of how seriously Russia’s President Vladimir Putin regarded the Yamal LNG project for three key reasons, according to Moscow-based analysts spoken to by OilPrice.com last week. First, there is the physical expansion of Russian entities into the Arctic region, clearly marking the country’s claim to all the resources that the entire area has to offer. Second, for a long time Putin has thought that Russia’s status as an energy superpower – and especially a gas one - has not been reflected in its standing in the lucrative LNG sector. And third, LNG is a key part of Russia’s ongoing plans to secure as much of the still fast growing Asia segment of the gas market  as possible to augment its pipelined gas plans.

According to various independent energy sources, Asia’s robust economic growth over the next 10 years is set to continue, as is its uptake of gas, with China expected to increase the gas share of its energy mix from 6 per cent to 15 per cent by 2030. The importance that Novatek is placing on the Asian markets and the magnitude of volumes that are expected to move in the Eastern direction is underlined by the fact that it is moving forward with the trans-shipment LNG facility on the Russian Far East coast in Kamchatka, Anna Belova, senior Russia and FSU oil and gas analyst for GlobalData, in New York, told OilPrice.com. The US$1.5 billion Kamchatka terminal itself allows for substantial cost reductions to be made on shipping LNG to all key buying destinations. Using this route, a fleet of icebreaker tankers can ship gas to Asia for around five months of the year, a route that takes around half the time of the standard route via the Suez Canal and reduces costs by about 25%. Related: 5 Weird Ways To Generate Renewable Energy

Such was the Kremlin’s determination to move ahead with its Arctic projects that various Russian entities were inveigled in and around the time when the U.S. imposed its 2014 sanctions to finance key parts of the Yamal LNG project. The Russian Direct Investment Fund, for example, established a joint investment fund with the state-run Japan Bank for International Cooperation with each contributing half of a total of about JPY100 billion (US$890 million) to it. The Russian government itself, having bankrolled Yamal LNG from the beginning with money from the state budget, supported it again when sanctions were introduced by selling bonds in Yamal LNG (the program began on 24 November 2015, with a RUB75 billion 15-year issue), and then provided it with another RUB150 billion (US$2.2 billion) of backstop funding from the National Welfare Fund.

Putin was also determined that U.S. sanctions should not tangentially hamper Yamal LNG’s technological development, advocating that Novatek become as self-sufficient as possible in this regard. “Novatek aimed to localise the fabrication and construction of LNG trains and modules to decrease the overall cost of liquefaction and develop a technological base within Russia, and it has made great progress in realising this,” Andrey Polischuk, senior oil and gas analyst for Raffeisenbank, in Moscow, told OilPrice.com. Indeed, Novatek chief executive officer, Leonid Mikhelson, at the time was confident that Novatek could review its overall strategy of reaching 57 million tonnes per year (mtpy) of LNG production by 2030 as early as 2021. This was based on the progress of Yamal LNG at the time, and the rolling out of the new LNG plant - Arctic LNG 2 - which is intended to have a production capacity of 19.8 million tonnes per year.

In its most basic terms, then, the current delay to the fourth train of Yamal LNG – able to export just under 1 mtpy of LNG - is likely to be extremely short-lived, given the huge political interests involved. “It is likely to be the result of the pipelines that were initially installed that are used for gas processing not being able to optimally handle the exceptional cold temperatures involved at times, so they will need to be replaced, which is not a major setback,” Polischuk told OilPrice.com last week. “It does not mean that there is anything wrong in the basic Arctic Cascade design,” he added.

Indeed, Arctic Cascade - based on a two-stage liquefaction process that capitalises on the colder ambient temperature in the Arctic climate to maximise energy efficiency during the liquefaction process - is the first patented liquefaction technology using equipment produced only by Russian manufacturers. The overall goal of Novatek, as the company itself has stated more than once, is to localise the fabrication and construction of LNG trains and modules to decrease the overall cost of liquefaction and develop a technological base within Russia. This means that these Arctic LNG operations are not subject to the whims of other countries and future sanctions. “I wouldn’t expect the changes that need to be taken to the current pipelines in Yamal LNG to take more than a few weeks, so the delay to Novatek’s overall schedule will be very small, and there should be no knock-on effect to the launch date of the Obsk LNG plant in 2023,” he concluded. Obsk LNG will be Novatek’s third large-scale LNG export project, with its 5 mtpy also based on the use of the Arctic Cascade technology. The final investment decision on it is due to be taken in the second half of this year.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on February 10 2020 said:
    No it doesn’t raise questions about Arctic energy. There is a simple explanation for the delay to Novatek’s fourth train of Yamal LNG: the current low price of LNG as a result of glut or a technical issue which will soon be resolved.

    It is most probably a technical problem which Novatek is taking advantage of current glut in the market to resolve. The delay of adding 1 million tonne of LNG per year (mtpy) will hardly affect Novatek rising LNG exports and presence in the global LNG market.

    President Putin has attached great strategic importance to developing the huge oil and gas reserves in the Arctic to replenish depleting Russian oil reserves in Siberia and also enhance its gas reserves thus enabling Russia to consolidate its position as the world’s largest producer of crude oil and the world’s largest gas producer well into the future. To that end he spared no money in supporting Russian oil and gas companies’ exploration in the Arctic and also the development of a home-grown Arctic exploration technology. Putin wanted to demonstrate that US sanctions won’t deter Russia from Arctic drilling.

    Russia is reported to have more than $8 trillion worth of untapped oil and gas in its sector of the Arctic. This will enable it to add more than 1.5 million barrels of oil a day (mbd) to its current oil production of 11.23 mbd in a few years’ time.

    Partly because of natural gas, Russia has emerged as the world’s superpower of energy. It is also the world’s superpower of natural gas. Furthermore, it accounts for 40% of the EU’s growing gas market and is now headed to also become the largest supplier of natural gas to China, the world’s largest energy market.

    And while Russia’s gas giant Gazprom is launching new pipelines east and west, Russia’s largest private gas producer Novatek is boosting its presence on the global LNG market. Novatek already accounts for 19% of the LNG market in the EU.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Rudolf Huber on February 11 2020 said:
    I confess - Novetek dealt me quite a surprise when it became clear that Yamal LNG is going to go forward. In LNG, we are quite used to a lot of bluster without substance and seeing a project taking off so quickly is pretty impressive. They have earned a tip of the hat for that. OK, back to Earth. In today's price environment, it's hard for the cheapest LNG producers on Earth to cut a profit. Qatar is in a league of its own and they still make money when almost anyone else is bleeding like a headless chicken. And they must tighten belts quite a bit in this environment. All the fundamentals indicate that LNG from Yamal must come at a price that's quite a bit higher than Qatar. If the market does not provide this cash, someone else must. This may help to rationalize some things ...

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