Abu Dhabi, UAESunday 21 July 2019

Russia ploughs on with huge Arctic LNG ambitions

Already the world’s top exporter of pipeline gas, exports from Sabetta are giving the country another route into the world economy for its energy resources

Participants at the International Arctic Forum in St Petersburg, Russia. Novatek is pushing its LNG exports. EPA
Participants at the International Arctic Forum in St Petersburg, Russia. Novatek is pushing its LNG exports. EPA

Almost 2,000 kilometres from Moscow, the tiny port of Sabetta nestles in a desolate Russian Arctic peninsula.

A former outpost for Soviet geologists, it’s now the site of Russia’s most ambitious liquefied natural gas project, operated by a company that only entered the market just over a year ago.

Several times a week, a giant tanker leaves this remote place carrying the super-chilled fuel to buyers in Europe and Asia. It’s not the only LNG plant beyond the Arctic Circle but it’s by far the largest.

FILE PHOTO: The Christophe de Margerie (R), an ice-class tanker fitted out to transport liquefied natural gas, is docked in Arctic port of Sabetta, Yamalo-Nenets district, Russia, March 30, 2017. REUTERS/Olesya Astakhova/File Photo
An ice-class tanker fitted out to transport LNG in the Arctic port of Sabetta. Reuters

Novatek, the main shareholder of the Yamal LNG plant, says plans for further projects will transform Russia into one of the biggest exporters of the fuel within a decade. Already the world’s top exporter of pipeline gas and second-biggest shipper of crude oil, exports from Sabetta are giving President Vladimir Putin’s Russia another conduit into the world economy for the country’s unrivaled energy resources.

“Russia can be in the top four main LNG exporters,” Novatek’s chief financial officer Mark Gyetvay told Bloomberg in London.

Novatek has demonstrated that it’s possible to produce and liquefy the fuel in such harsh conditions at competitive prices and ship it to markets thousands of miles away in Europe and Asia. That’s helped by receding Arctic ice which is allowing a specially built fleet of strengthened tankers to ship fuel along Russia’s northern coast.

This week, Mr Putin touted the potential for development of Russia’s hydrocarbons at the International Arctic Forum in St Petersburg.

On Tuesday he invited foreign investors to take part in the construction of port infrastructure in Murmansk and Petropavlovsk-Kamchatsky that would serve the Northern Sea Route, Reuters reported. Speaking at the forum in of St Petersburg, Mr Putin also asked the government to draw up plans for tax relief that would promote the development of the Arctic region.

"We invite our foreign partners to joint work to create port hubs at the end points of the [Northern Sea] route," he said.

Russia’s leader has been a long-standing supporter of developing oil and gas resources locked under the region’s permafrost. When opening the first production train of the Yamal LNG project in late 2017, Mr Putin said the region gives Russia the opportunity to take up the fuel’s “niche it deserves”.

Vladimir Putin, Russia's president, gestures as he speaks during the plenary session of the International Arctic Forum in St. Petersburg, Russia, on Tuesday, April 9, 2019. Putin has been a long-standing supporter of developing oil and gas resources locked under the region’s permafrost. Photographer: Andrey Rudakov/Bloomberg
Russian President Vladimir Putin at the International Arctic Forum. Bloomberg

“We can boldly say that in this century and the next, Russia will expand thanks to the Arctic,” he said at that time.

Novatek, whose biggest shareholders include Russian billionaires Leonid Mikhelson, also the chief executive, and Gennady Timchenko, as well as French energy giant Total, became Russia’s top LNG producer after starting up its plant in the Yamal peninsula almost two years ago. The facility reached its full capacity at the end of 2018, ahead of schedule, doubling Russia’s share of the global LNG market to 8 per cent.

The gas producer has aggressive plans to command a 10th of the global market by 2030, Mr Gyetvay said, and position Russia as one of the world’s largest exporters.

All three of Yamal LNG’s production units, with a combined actual capacity of 17.5 million tonnes a year, are now online. Novatek is attracting partners for a second plant, the so-called Arctic LNG 2 project, which is expected to come online in 2022.

(FILES) This file photo taken on April 16, 2015 shows natural gas reservoirs under construction at the port of Sabetta in the Kara Sea shore line on the Yamal Peninsula in the Arctic circle, some 2450 km of Moscow. Russia on December 05, 2017 launched the first terminal for liquefied natural gas project, Yamal LNG, in the Russian Arctic, Russian gas producer Novatek said. / AFP PHOTO / KIRILL KUDRYAVTSEV
Natural gas reservoirs under construction at the port of Sabetta. AFP

The company is also considering commissioning a third facility and may increase its LNG production target for 2030 by about 20 per cent, to as much as 70 million tonnes a year.

Novatek’s resource base at two Arctic peninsulas - Yamal and Gydan - allows the company to raise production volumes to as much as 140 million tonnes a year in future, according to Mr Mikhelson.

Leonid Mikhelson, billionaire and chief executive officer of Novatek PJSC, moves between halls during the International Arctic Forum in St. Petersburg, Russia, on Tuesday, April 9, 2019. Russia’s leader Vladimir Putin has been a long-standing supporter of developing oil and gas resources locked under the region’s permafrost. Photographer: Andrey Rudakov/Bloomberg
Leonid Mikhelson, CEO of Novatek. Bloomberg

Russia, the world’s largest gas exporter, has been slow to join the global LNG boom as it has focused investment on pipeline supplies to Europe. Until recently, the country had just one liquefaction project in operation, the Gazprom-led Sakhalin 2 project near Japan with an annual capacity of about 10 million tons.

The country has now taken an interest in the market for tanker-borne fuel amid growing global LNG demand and more difficult relations with its customers in the European Union.

Russia’s Energy Ministry pegs total gas in place within the region at about 210 trillion cubic metres, or over 70 per cent of the nation’s total. Novatek’s Arctic gas reserves are “conservatively” estimated at about 3.3 trillion cubic metres, Mr Gyetvay said.

“We believe that Russia could be the fourth or even the third” biggest holder of LNG production capacity, said Karen Kostanian, Moscow-based oil and gas analyst for Bank of America Merrill Lynch.

The resources are located more than 5,000 kilometres away from key markets in Asia and are almost 4,000 kilometres from the European trading hub at the port of Rotterdam. That requires extensive shipping capability.

The freezing environment also means Novatek has to produce natural gas at temperatures as low as minus 56°C, according to regional government data. This requires special techniques for construction in permafrost areas, including installing pylons in ice, and for ships to navigate frozen routes.

Furthermore, not only does Novatek manage in the harsh environment but it sees the Arctic’s location as a competitive advantage, Mr Gyetvay said, because the lower temperatures actually make production costs cheaper because less energy is needed to chill the gas.

The cost of producing Yamal feedstock gas is only around $0.1 per million British thermal unit, whereas US producers typically buy their gas on a market such as the Henry Hub, where prices are currently about $2.60.

After starting up its $27bn Yamal LNG project, Novatek is finalising the partnership structure for the planned Arctic LNG 2 project.

A vessel carrying liquefied natural gas (LNG) cargo from Russia's Yamal LNG project, is seen at Rudong LNG Terminal in Nantong, Jiangsu province, China July 18, 2018. Picture taken July 18, 2018. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT.
A vessel carrying LNG from Russia's Yamal LNG project at Rudong LNG Terminal in Nantong China. Reuters

Novatek’s potential has attracted investment from global players from Total to China National Petroleum Corp, a rare bright spot for Russia’s energy segment hit by US and European sanctions. While Novatek is on the American sanctions list, and the US Congress is considering restricting investment in Russia’s LNG facilities outside the country, it won’t impact the start-up of Arctic LNG 2 or the company’s longer-term expansion plans.

Total, a shareholder in Novatek’s first LNG project, last month signed a deal to buy a 10 per cent stake in the second plant. The French major’s commitment could prompt a rush of other potential partners to take stakes in the project, Mr Gyetvay said.

Whether other companies buy stakes in Arctic LNG 2 or not, Novatek will move forward with it regardless. The company is already doing pre-marketing for the future cargoes, discussing potential off-takers and volumes, Mr Gyetvay said.

Last week, Novatek signed 15-year agreements with Vitol and Repsol to supply each with 1 million tons of LNG a year from the Arctic LNG 2 and other projects.

“We’re basically at that point in time when the train has started to move and it’s time to jump on or miss it,” Mr Gyetvay said.

Updated: April 12, 2019 10:23 AM

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