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Russian Gas Giant Novatek Presents Answer To U.S. Shale

In the same way that the U.S.’s global hydrocarbons power has been turbo-boosted by the rise of its shale energy industry, which began with gas in earnest in 2006 and with oil in 2010, so Russia’s has seen its own oil and gas power extended by the sustained development of its Arctic oil and gas reserves. As of now, Russia’s Arctic sector comprises over 35,700 billion cubic metres of natural gas and over 2,300 million metric tons of oil and condensate, the majority of which are located in the Yamal and Gydan Peninsulas, lying on the south side of the Kara Sea. According to Russia’s President, Vladimir Putin, the next 10-15 years will witness a dramatic expansion in the extraction of these Arctic resources. The period will also see the corollary build-out of the Northern Sea Route as the primary transport route to monetise these resources in the global oil and gas markets, especially to the Kremlin’s core economic and geopolitical partner, China. Russia’s number two gas producer (after state-owned Gazprom) – Novatek – is at the heart of these plans and last week made further significant announcements to this end.

The first of these, according to Novatek’s chief financial officer, Mark Gyetvay, is that the company’s Arctic liquefied natural gas (LNG)-2 project, based on the Gydan Peninsula, will receive at least an additional US$6 billion in investment this year, 50 percent more than last year. This will be in line with ensuring that the first of the project’s three proposed production lines is launched in 2023, with around 40 percent of the LNG plant currently completed.

Overall, Gyetvay added, the participants in Arctic LNG-2 have already approved US$11 billion in external financing for it, with a third of the total coming from Chinese banks, another third from banks in Europe and Japan, and the remainder coming from Russian financial entities. There is no question that whatever the amount required to successfully bring in the Novatek project it will be found, as the effective sequestration of as large a portion of the Arctic’s oil and gas resources as possible is one of Putin’s principal personal political objectives. “The entire Arctic development is an absolute priority for President Putin, aimed at bringing Russia’s LNG standing in the world market into line with its status as a global gas superpower, as its LNG capability has always been way behind what its gas production power would warrant,” Andrey Polischuk, senior oil and gas analyst from Raiffeisenbank, in Moscow, told OilPrice.com.

Indeed, just last week, Russian state development bank, Vnesheconombank, together with a consortium of other Russian banks, announced a 15-year loan to the project totalling €3.11 billion (US$3.7 billion). The result of these efforts will be that the Arctic LNG-2 project will have three major LNG production plants (trains) of 6.6 million tons per annum (mtpa) each, totalling 19.8 mtpa, and a cumulative gas condensate production capacity of 1.6 mtpa.

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This will complement the continued progress at Novatek’s original LNG project at Yamal (‘Yamal LNG’), which saw first output from its slightly delayed fourth train began earlier this year. According to Novatek, it is ‘highly likely’ that the first full cargo from the 900,000 mtpa LNG plant will be loaded on to a tanker within the next three months or so from now. The delay to the fourth train came within the context of Novatek having previously brought the first three plants of its US$27 billion flagship Arctic LNG project in the Yamal Peninsula online on time or even ahead of schedule. Specifically, the first train opened in December 2017, the second in July 2018 and the third in December 2018, allowing Novatek to produce capacity of 16.5 million mtpa by the beginning of 2019 from the Yamal LNG facility. Just a few months after that, Novatek had also completed a fleet of 15 icebreaking carrier ships that could move its LNG product from Yamal to the global LNG markets. All of this had been achieved despite the full weight of U.S. sanctions having being imposed on Russia in 2014 as a result of its annexation of Crimea.

Overall, Gyetvay, has repeatedly stated that Novatek will be able to produce at least 100 million mtpa of LNG soon after 2030 if not before and will be able to do so at a very low relative cost of production. Specifically, he said that it will be possible to deliver LNG into northeast Asian markets on a sustained basis for ‘a little over’ USD3 per million British thermal units (MMBtu). This is comprised of a USD0.07/MMBtu cost of feedgas, USD0.43/MMBtu of liquefaction costs, plus between USD2/MMBtu and USD2.50/MMBtu of shipping costs. This all fits neatly within Russia’s plans for LNG production of 80-140 million mtpa by 2035, which would exceed even the expanded output capacity of LNG powerhouses Qatar and Australia.

The second announcement that falls within Putin’s Arctic LNG ambitions for Novatek was that the partners in the Arctic LNG-2 project have now also concluded 20-year deals to take LNG from the plant. The sales agreements will cover total LNG production from the facility as from when that begins in earnest in an expected 2023 and will be based pro-rata according to each partner’s stake in the project at the time, Currently, in addition to Novatek’s own 60 percent stake in Arctic LNG-2, France’s Total holds 10 percent, China’s CNPC and CNOOC hold 10 percent each, and the remaining 10 percent is held by a consortium comprising Japan’s Mitsui and Jogmec. The loadings will be made on a ‘free-on-board’ basis and will travel from any of the transshipment terminals available at the time, although two are currently in development; one at Murmansk (for vessels going West) and the other at Kamchatka (for vessels heading East). “The long-term off-take agreements between Arctic LNG-2 and its participants ensure the future revenue stream from LNG sales and de-risks the project,” underlined Novatek chief executive officer, Leonid Mikhelson.

By Simon Watkins for Oilprice.com

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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… More