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Russia’s comeback in the LNG race

In a little more than a month's time, Russia will formalize its claim for a bigger role in the ever-expanding global LNG market.

Russia’s comeback in the LNG race



In a little more than a month's time, Russia will formalize its claim for a bigger role in the ever-expanding global LNG market. Early October, when the Yamal LNG will see its commissioning and first cargo delivered, expect to hear «Russia» and «LNG» in the same sentence in increasing frequency.

Yet in Yamal LNG, Russia's bid to consolidate its claim as a gas stronghold and to garner at least 10% of the global LNG market, one can discern a quite unconventional project for Russia.
Although led by NOVATEK, a non-state-owned company (albeit with multiple connections to the political establishment) and not the usual «suspect» Gazprom, it stands a good chance to propel Russia into the LNG vanguard.

This being said, behind the viability of Yamal LNG stand several factors absent which the project would be commercially feasible only with gas prices strictly above $11-12/MMbtu - most importantly, large-scale government help.

LNG has been a matter of disquiet for the Russian energy sector for quite some time.
Since the 1970s, various variants have crept up, virtually all based on the idea of selling LNG to Asia Pacific and North America.

The 1st such assumptions were put forward in the 1970s but were cut short by the Reagan Administration shortly thereafter, the 1990s brought renewed interest in LNG, yet only the Sakhalin LNG hub got past the plan-making stage.

Up to now, Russia's entire LNG potential was condensed in the Far East island of Sakhalin, where an annual production of 9.6 Mtpa (14 BCm) have allowed Moscow to secure 4.5 % of the global LNG market.
A lack of market outlets has bogged down the Shtokman LNG project, which was destined to supply North America when the shale upsurge took place, a similar fate met Vladivostok LNG.

The Yamal peninsula is a more than adequate spot to locate Russia's new LNG venture.
With total 3P reserves of 26.5 TCm, it is the most gas-rich first-phase region on the planet.

Yamal LNG's main feed will come from the South Tambeyskoye gas field that contains 1.3 TCm.
The project will see the gradual commissioning of 3 LNG trains, all 5.5 Mtpa/year, the first to be brought online this October, the last most likely late 2018-early 2019.

Although the construction of the $27 billion Yamal LNG project was almost entirely carried out within the sanctions regime, its ambitious timeline will most likely be fulfilled even quicker than expected.


From the 1st LNG terminal inside the Arctic Circle, Sabetta, which was specifically built for the Yamal LNG project, the state-owned SovComFlot will operate a fleet of 15 ice-class LNG tankers.

It is assumed that most of Yamal LNG will go to Asia - for this to happen, the tankers will take the Northern Sea Route in the navigable period (July to November) or transship at the Belgian Zeebrugge terminal at all other times.

A short navigation period in the Arctic Ocean is just one of the manifold challenges NOVATEK had to face when pushing forward the Yamal LNG project.

Port Sabetta was built completely from scratch, mostly from government funds as it is deemed a project of federal importance - it is expected to grow into a massive LNG hub, becoming a home for both Yamal LNG and Arctic LNG-2.

The construction work also included the dredging of the Ob Bay for it to be more easily navigable.
Yet the government did not stop there - it has also built a 1st-category airport, a power plant to cater the needs of Yamal LNG, and various sorts of necessary urban infrastructure in Sabetta.

The institutional conditions for LNG to develop in Russia are nothing short of providential.
The government abolished the export duty on LNG deals, exempted producers from paying the mineral extraction tax for the 1st 12 years after coming online, as well as from paying VAT on imported LNG-related equipment.


The massive government backing might make it seem as if Yamal LNG was built in an impracticable location, however, the polar conditions at the Yamal Peninsula have upsides, too.
For instance, the liquefaction of gas to the desired temperature of -170 °C is much more profitable when the outside temperature is -50 °C than in subtropical conditions.

Moreover, on the back of global warming processes, the navigation period along the Northern Sea Route might gradually become longer and longer.
The thawing of ice ridges in the Kara Sea and massive zones of thick ice in the mostly shallow Laptev Sea might render the crews' life less difficult (although polar winds are expected to intensify).

Thus, if today it takes around 15 days to reach the Asia Pacific region from Sabetta during the navigation period, it is not implausible to see a decline to 12-13 in the foreseeable future.
What is more, apart from increasing Russia's LNG footprint, Yamal LNG puts out a geopolitical statement, too - that Moscow takes its Arctic commitments seriously and is there to stay from now onwards.

Whilst enumerating the ways the Russian government helped Yamal LNG, one might lose track of NOVATEK, the project's main shareholder operator.

1st, it managed to attain an optimal shareholder structure on the project, namely 50.1 % went to itself, 20 % - to CNPC and Total, 9.9 % - to the Silk Road Fund.

2nd, the long-term LNG supply contracts NOVATEK managed to secure allow its partners to be flexible with delivering the allotted volumes.


Apart from marketing LNG through its own NOVATEK Gas & Power outlet, Yamal LNG will also flow to world markets through Total (4 MMtpa), CNPC and Gazprom (3 MMtpa) and Gas Natural Fenosa (2.5 MMtpa).
Since the contracts include a flexible destination clause, the LNG, mostly believed to be destined for Asia, can be essentially traded to any destination.

3rdly, the way NOVATEK managed to keep Yamal LNG's construction delivered on time is a rare phenomenon in a country where almost all energy projects suffer delays or postponements.

Yet NOVATEK will not stop after Yamal LNG had been commissioned, the company intends to become the world's largest LNG exporter in 10 years' time.
This May, the company has already concluded an agreement with Linde and Technip on designing NOVATEK's next top project, Arctic LNG-2 (the platforms will be built by Saipem).

Arctic LNG-2, located nearby Yamal LNG, right across the Ob Bay on the Gydan Peninsula, will be fed from NOVATEK's Salmanovskoye and Geofizicheskoye fields (total estimated and potential reserves of 1.2 TCm).

Moreover, just to prove that NOVATEK is genuinely intent on establishing the Gydan Peninsula as one of Russia's leading gas hubs, it secured late August 3 new licences - the Verkhnetiuteyskoye, Zapadno-Seyakhinskoye and Shtormovoye fields - which combined boast estimated and potential reserves of 1.37 TCm.

If institutional conditions remain unchanged, both Yamal LNG and Arctic LNG-2 will be profitable above the $6-7/MMbtu level.
Now that Gazprom is making headway with Baltic LNG, Russia's LNG prospects are a far cry from being as dim as 10 years ago.

Author: Viktor Katona