By Swann Bigot – November 24, 2016
Yamal LNG Plant – Photo by Total, April 12, 2016
Abstract : In a global energy transformation context, liquefied natural gas projects can help governments and companies in the move from the high-polluting coal to natural gas-fired electricity generation in Europe and Asia. Southeast Asia and especially India are a promising market for Yamal LNG, a project led by the Russian private company Novatek. The main assets of Yamal LNG are its low cost production and transport. The $ 27 billion project has therefore attracted Russian, Chinese, Japanese and Italian investors. The South Tambey gas field and the LNG plant will produce around 16,5 million tons of LNG each year. The LNG cargo will be shipped by special icebreaking LNG tankers towards Asian and European markets. The first cargo is expected in November 2017.
As the 2015 Paris climate change agreement entered into force on 4 November, the governments of the US, China, India and the EU now face the legal obligation to limit the increase in global temperatures to two degrees Celsius above pre-industrial levels. To overcome the threat of climate disaster, governments, companies, and citizens have to rapidly reduce carbon emissions. As a transition fuel, natural gas could help the change towards low-carbon energy. Low prices and abundant export capacity can encourage governments and companies to move from high-polluting coal to natural gas-fired electricity generation to meet domestic demand in countries such as China and India. This global transformation leads to the increase of LNG liquefaction plants, LNG carriers and regasification terminals.
In the Yamal peninsula, the gas company Novatek is leading with foreign partners the project “Yamal LNG” which encompasses natural gas production, liquefaction and shipping toward European and Asian markets.
This is one of the biggest current investments in the russian gas industry and the first to be implemented in the north of the Arctic polar circle, in extreme climatic and logistical conditions, for a global cost of $27 billion. Russian, Chinese, Japanese and Italian banks and investors support this project decided in December 2013. The competitiveness of Yamal LNG lies on the huge gas resources of the South Tambey field and cheap extraction. This region accounts for approximately 80% of Russia’s natural gas production and approximately 16% of the world’s gas production.(1)
The LNG plant in construction will produce around 16,5 million tons of LNG each year. The production will begin next year and the first export by sea shipping will take place by the end of 2017.
The shareholders of the « Yamal LNG » joint venture are Novatek (50.1%), France’s Total (20 %), China’s CNPC (20%) and Silk Road Fund (9.9%).
The private gas company Novatek was founded in 1994. Its main assets are concentrated in the Yamal-Nenets Autonomous District, which is the Russia’s largest natural gas producing area.(2)
The Yamal LNG project involves the exploitation of the vast South Tambey gas field, the construction of a LNG production plant, a 100 km pipeline, new infrastructures in Sabetta port, an international airport and the design and building of fifteen new icebreaking LNG tankers. To obtain financing from banks and investors, 96% of the planned production has been pre-sold by long-term contracts. Several factors indicate that this project could provide good returns for shareholders.
1. A giant gas field beyond the Arctic circle
According to the information provided by Novatek, the proven and probable reserves of the South Tambey field are estimated at 926 billion cubic meters of natural gas and 30 million tons of liquid hydrocarbons (PRMS reserves standards). The potential production of the field amounts to approximately 27 billion cubic meters of natural gas each year. The operations at the gas field involve the drilling of 208 production wells.(3)
The gas from the South Tambey field will be transported to the LNG plant through a 100 km pipeline network.(4)
The exploration and exploitation license owned by Novatek is valid until December 31, 2045.(5)
2. The LNG plant
The LNG plant located on the coast of the Gulf of Ob will consist of three liquefaction trains each with an annual capacity of 5.5 million tonnes. The first liquefaction train is expected to be operational in 2017, the second and third trains in 2018 and 2019. The first shipping of LNG cargoe is expected in November 2017 said Leonid Mikhelson in a meeting with the Russian President held on November 14.(6)
Last July, Mark Gyetvay, the deputy chairman of Novatek’s management board and chief financial officer, told journalists that the construction of a fourth liquefaction train was envisaged as the productivity of the 208 wells drilled on the South Tambey gas field exceeded the estimations(7). This fourth liquefaction train would increase LNG production and improve the economy of the Yamal LNG project.
The Novatek’s CEO told the Russian President that the LNG complex is now built at 68% and the first liquefaction train is complete at 85% .(8)
About 22,000 people work today in Sabetta. The total volume of orders for materials and equipments from Russia amounted to 580 billion rubles ($9 billion). Around 650 companies are working on the project, with 60,000 jobs created.(9)
3. The Sabetta Port
Sabetta Port – Novatek Photo Gallery 2016
Important work has been carried out in the port of Sabetta. Ice protection barriers have been built, new port infrastructures with LNG and gas condensate transshipment docks and approach channels for LNG tankers have been set up. A 68 million cubic meters dredging work has been carried out. A new vessel traffic management system and navigational support aids have been established. LNG and gas condensate jetties will be fully operational in 2017. More than ten million tons of goods, materials and equipments have so far been delivered to the Sabetta Port.(10)
4. The Sabetta International Airport
The specially built Sabetta International Airport has connected the cities of Noviy Urengoy, Moscow and Samara since February 2015. In July 2015, the airport received federal authorization for international flights. In March 2016, the first international Beijing-Sabetta-Moscow commercial flight took place.11
5. The shipping of LNG towards Europe and Asia
A fleet of 15 special ARC 7 icebreaking tankers will ship the LNG to european and asian buyers, some of it along the Northeast Passage. These world’s first ever carriers are built by the shipyards of the Korean Daewoo Shipbuilding and Marine Engineering (DSME).
The 15 icebreaking LNG tankers will be able to autonomously break through 2,1 meter of ice, enabling them to sail all year round without escort through the Arctic waters. The temperature in the Sabetta region can drop to -56 ° C and the waters near the port are frozen 300 days per year. The tankers will take the Western sea route in winter and will cross the Northeast passage along the Russian coast during the Arctic summer.
The shipping of LNG towards Europe and Asia – Image from the French company Total
Each 300 meters long icebreaking LNG tanker will have a capacity of 172,000 cubic meters at a unit price of about $300 million. The maximum speed in open waters is 19.5 knots. When breaking through a 1.5 meter thick ice, the maximum speed will be 5.5 knots. The high power required will be provided by the LNG cargo, thereby reducing the impact on the environment.
The Russian standard Arc7 is equivalent to an intermediate level between Polar Class 3 and Polar Class 4 of the International Association of Classification Societies (IACS).
Four shipping companies will own the fleet of 15 icebreaking LNG carriers. The first carrier will be delivered to the Russia’s largest shipping company Sovcomflot, six other units will go to the operator Teekay Tankers associated with China LNG Shipping, five units to the Greek shipping company Dynagas associated with Chinese Sinotrans and China LNG and three to Japanese Mitsui OSK Lines (MOL). The fifteen LNG tankers will be registered in the Russian Maritime Register.
The first vessel named after former Total’s CEO, Christophe de Margerie, who died in a plane crash in 2014 was launched on water last January by the Korean DSME. This Arc7 icebreaking carrier is fitted with three 15 MW ABB Azipod propulsion units enabling great maneuverability. This 45 MW propulsion system is comparable to that of the nuclear ice breakers, giving sufficient power to break through 2,1 meter of ice.
LNG carrier Christophe de Margerie – Image courtesy of DSME
Following the completion of sea trials in Arctic conditions, the 172,400 cubic meter LNG carrier will be delivered to its owner, Sovcomflot, on January 31, 2017. These sea trials will enable the owners of the Yamal LNG fleet to assess the efficacity of the Arc7 carriers design in the Arctic winter conditions in December and January.(12)
The vessel will be operated under a long-term charter agreement between the russian shipping company and Yamal LNG.
Sovcomflot and DSME signed the USD 316 million worth agreement for this new carrier in March 2014. (13)
On June 17, the Russian shipping company and VTB Bank signed USD 260 million 13-year loan agreement to finance the construction of the tanker. (14)
DSME has further 14 Arc7 LNG carrier on order, all contracted to serve the Yamal LNG project, for a global cost of $ 5 billion. The last tanker will be achieved by early 2020.
The French newspaper Les Echos reported last march that the LNG terminal of Montoir located on the French Atlantic coast will welcome LNG tankers of the operator Novatek Gas & Power from 2018. (15)
The LNG transported from Sabetta will be transhipped on other conventional LNG tankers. According to the French newspaper, the agreement would cover 1 million tonns of LNG per year from 2018 for a period of 23 years. The terminal would receive 14 cargoes per year.
The shipping company Dynagas Holding Ltd and Yamal LNG have signed in September 2015 long-term charter agreements for nine LNG carriers covering the operation of five future 172,000 cubic meter ARC7 LNG carriers and four existing 150,000/162,000 cubic meter ARC4 LNG carriers. The ARC4 vessels will ship LNG to asian buyers from 2019 till 2034.
Last September Yamal LNG has signed a 15-year charter agreement with Teekay LNG Partners. The shipping company will provide Yamal LNG with conventional liquefied natural gas transportation services. The natural gas will be transported by a 174,000 cubic meters MEGI LNG carrier that is scheduled for delivery in early 2019.
Rosatom will also participate in the export of LNG from the Sabetta port with its new atomic ice-breaker Arktika launched last June in Saint Petersburg. The ship can break ice up to 3 meters thick and is due to enter service in 2017. (16)
The new icebreaking LNG carriers will ship liquefied natural gas to asian countries such as China, India and Thailand, as well as to Europe.
Despite of the harsh climatic conditions, these tankers are the only way to transport the liquefied natural gas produced by Yamal LNG. The only alternative would be to sell gas in Russia through Gazprom’s pipeline network. But the main Russian gas company could introduce a transit tax on gas from Yamal LNG or deny it access to its network on the basis that it is threatening its market shares. Even if Novatek was able to transport its gas by pipelines easily, the demand for gas in Russia is currently low due to the economic downturn.
These icebreaking LNG carriers are the cornerstone of the financial viability of the Yamal LNG project. This mode of transport reduces costs and benefits from greater flexibility by avoiding the onshore pipeline networks. Long-distance shipping of gas allows to diversify LNG customers.
6. An international funding
The US sanctions taken in 2014 over the Ukrainian crisis target the private company Novatek and make it impossible to obtain long-term loans in US dollars. The Russian company has since conducted negotiations to obtain new funds, planning to cover nearly 65% of the development costs by long-term loans endorsed by the joint venture Yamal LNG itself. Since then, financing issues are fully resolved.
In April 2016, Novatek announced that the $ 27 billion Yamal LNG project had secured the billions in financing it needed from Russian and Chinese banks (17). Loan agreements have been signed with Gazprombank JSC (€ 900 million), Sberbank PJSC (€ 2,7 billion) and the Chinese banks Export-Import Bank of China and China Development Bank for an amount equivalent to $ 12 billion over 15 years. The Russian National Wealth Fund also provided funding worth 150 billion rubles in 2015 ($ 2.3 billion). Novatek has also announced that it would invest about $ 7 billion in 2016, reports the daily Vedomosti(18). In the global amount, shareholders finance $ 13 billion.
On September 2, Japan Bank for International Cooperation (JBIC) Chief Executive Officer Tadashi Maeda said the bank will provide $400 million in financing for the Yamal LNG project. The 15-year loan agreement will be sign before the end of 2016. Following this statement, JBIC and Novatek signed a memorandum of understanding for strategic partnership.
Novatek has also invited Japanese companies to invest in the next « Arctic LNG-2 » project in the Gydan peninsula. Leonid Mikhelson estimates the LNG potential in the Yamal and Gydan to be 100 million tons per year.
The Russian president Vladimir Putin and the Japanese Prime minister Shinzo Abe have discussed the Arctic LNG-2 project during their meeting in the margins of the Eastern Economic Forum in Vladivostok according to the TASS agency.(19)
Following the United States and the European Union, Japan has also imposed sanctions on Russia, to a lesser extent, however. Japanese sanctions do not target the exploitation of the seabed and the continental shelf, contrary to US and European sanctions.
Finally, on November 8, the Russian economic development minister Alexei Ulyukaev told the journalists of Ria Novosti that Italian banks, including Intesa Sanpaolo, will provide Russia’s Yamal LNG project with more than 400 million euros ($440 million) in 2017.(20)
Moreover, the Italian export-credit agency SACE will guarantee the credit for an amount of €400 million. Alexei Ulyukaev said that issues related to the loan-agreement are almost finalized.
7. The LNG planned production already sold
In order to convince the financial institutions to grant funding for the project the consortium had to pre-sell 96% of the planned production of LNG.(21)According to Maksim Moshkov, an UBS analyst interviewed by Vedomosti last July, « Yamal LNG » is one of the most profitable LNG project in the world. Almost all the planned production is sold.(22) Evgeniy Kot, the general director of Yamal LNG, said that 86% of the production will be delivered to the Asian-pacific countries.
From its 2.38 million tons of LNG, the commercial department Novatek Gas & Power has sold one million ton per year to Engie for 23 years(24) and 900,000 tons per year to Shell International Trading Middle East for more than 20 years. (25)
Gazprom Marketing and Trading will get up to 2.9 million tons of LNG annually (26) for over 20 years, while Spanish Gas Natural Fenosa will buy 2.5 million tons.(27)
In spite of these long-term import contracts, weak demand and low prices could impact the Yamal LNG. However, this project has serious assets enabling it to take advantage of the current situation in the global LNG market.
8. The global LNG market
The LNG market remains promising, despite falling global prices, comments Valeri Nesterov, analyst at Sberbank CIB.(28) Asian countries such as China, India or Thailand are expected to increase their imports of natural gas to meet domestic demand.
Nevertheless, in its 2016 medium-term gas market report, the International Energy Agency estimates that weak global gas demand in Europe and Asia combined with LNG oversupplies in the markets will maintain the pressure on world prices over the period 2016-2021 and increase competition between gas producers.
The IEA reports that global LNG export capacity is forecast to increase by 45% between 2015 and 2021, 90% of which originates from the United States and Australia.(29) Almost all of this increase is due to investment decisions already taken. The IEA explains that a substantial amount of capital has already been allocated for these LNG production and export projects, many of which are at an advanced stage of development and backed by long-term contracts, such as « Yamal LNG ». The markets will absorb with difficulties these additional supplies due to weak growth of global gas demand.
Indeed, the slow economic growth in the advanced countries, the slowdown in China, the very low cost of coal and public policies support for renewable energy sources are reducing global demand for gas. The IEA reports that the combination of these factors will weigh on the growth of gas production in Russia and the Caspian Sea – the largest exporting region in the world.
The abundant supplies of LNG will generate high competition between producers. The United States and Qatar will struggle to gain access to European customers. Development plans for LNG projects in East Africa, Canada, Iran and Australia can threaten Russian production, forcing to adopt a more competitive pricing mechanism than in the past.
However, Russian LNG is produced at a lower cost than the one from the United States and Australia. Besides, the IEA reminds that gas demand in China could benefit from legislative and regulatory efforts by the authorities to reduce dependence on coal and increase air quality in cities across the country. Gas-fired electricity generation continues to expand in the country. An increased supply of LNG is expected to accelerate coal substitution by gas, supporting the growth of the market in the region.
Similarly, natural gas demand in India is expected to grow strongly, with an average annual rate of almost 6% between 2015 and 2021. In 2015, the IEA estimated that 240 million people in India still have no access to electricity.(30) This represents a big potential market for natural gas-fired electricity generation.
Low gas prices could facilitate energy transformation in Asia and the development of new import infrastructures in areas where access to supplies is limited or non-existent. The IEA estimates that by 2021, LNG imports among Asian developing economies (including China) are expected to increase by more than 100 billion cubic meters.(31)
Leonid Mikhelson is convinced that Southeast Asia and especially India are a promising market for the new Yamal LNG plant. By 2025, the Yamal region will need to produce an additional 120 million tons per year to supply countries such as China, India, Thailand, Pakistan and Singapore. As Thailand consumes today nearly 54 billion cubic meters of gas and as domestic production is expected to fall sharply by 2020-2022, opening up a large potential market, the Novatek CEO’s remains confident that gas demand from high-growth Asian countries such as Thailand and India will increase significantly.(32)
On May 18th, Novatek and PTT Exploration & Production of Thailand signed a Memorandum of Understanding (33) at a meeting between the Russian Prime Minister Dmitry Medvedev and the Prime Minister of Thailand Prayut Chan-o-cha. The parties intend notably to cooperate and study potential joint opportunities in the implementation of LNG projects, the supply and the development of LNG markets.
In Europe, the withdrawal of coal and the reduction of nuclear capacity counterbalance the deployment of renewable energies and reduce the pressure on gas-fired power plants. European demand for gas is expected to grow very modestly according to IEA forecasts.
Globally, the IEA predicts that till 2021, the LNG oversupply will maintain under pressure the gas spot prices and will accelerate the adoption of flexibility in the supply deals. The renegotiation of some deals will be inevitable according to the IEA. Last year, the indian state-run company Petronet had to renogotiate its gas supplies with Qatargas. The LNG producers will have to offer gas buyers more flexibility through options for shorter contract durations and alternative pricing indices to oil indexation.
Novatek may also have to adapt its prices for LNG produced on the Yamal peninsula, affecting the economy of the project. Nevertheless, the huge gas resources available, the low-cost extraction and the energy transformation in Asia should counterbalance these difficulties.
Moreover, Mark Gyetvay, the deputy chairman of Novatek’s management board and chief financial officer, said last September that the estimated cost for extraction, liquefaction and shipping of LNG amounted to nearly $ 3 per million tons of British thermal units(34) (US$3 per mmBtu) , including $ 2.5 spent on transportation. In Asia, spot prices for the LNG are $5.5 per million tons of Britishthermal units (mmBtu). Yamal LNG therefore has a clear advantage over its competitors and good prospects for returns.
Mark Gyetvay expects the global LNG market to experience a phase of supply reduction between 2023 and 2025 as no final investment decisions have been made for new LNG projects within the last two years and that none is expected by 2017. Such projects usually require a construction period of five to seven years.
The Yamal LNG project, which will start production in 2017 and supply the European and Asian markets would take advantage of low-cost production and transport associated with the huge resources of the South Tambey gas field and the current energy transformation in Asian emerging countries. Markets such as China, India or Thailand could indeed ensure a good financial return for the Yamal LNG project despite of the weak global gas demand. In addition, LNG shipping reduces costs and increases the flexibility and the network of customers. These assets have enabled to mobilize Russian, Chinese, Japanese and Italian banks to finance “Yamal LNG”, despite the difficult context of the adoption of western financial sanctions in 2014.
Long-term contracts covering 96% of the planned LNG production have been already signed with major players of the energy sector.
As natural gas appears to be a less polluting transition resource than coal and oil, helping governments, businesses and individuals to move towards full conversion to renewable energies (wind, solar, geothermal, hydro), the entry into force of the Paris Climate Agreement on 4 November could increase interest in LNG in the context of energy transformation and boost aggregate demand for gas.
A financial success of Yamal LNG would ease the launch and the financing of the Novatek’s second project in the neighboring peninsula of Gydan, “Arctic LNG-2”.
2Novatek, « About us », viewed November 10th, 2016: http://www.novatek.ru/en/about/general/printable.php?print=1 ;
3 Novatek, «Yamal LNG infrastructure », viewed November 8th, 2016 : http://www.novatek.ru/en/business/yamal-lng/yamal_infrastructure/ ;
4 Ibid ;
5 Novatek, « List of Licenses », viewed November 8th, 2016 : http://www.novatek.ru/en/business/assets/Licenses/ ;
10 Ibid ;
12 «DSME: first Arctic LNG carrier to test icebreaking capabilities during sea trials», LNG World News, November 7, 2016 :http://www.lngworldnews.com/dsme-first-arctic-lng-carrier-to-test-icebreaking-capabilities-during-sea-trials/ ;
13« DSME to Build 1st Arc7 Ice-Class Tanker for Yamal », World Maritime News, March 17th, 2014, viewed November 11, 2016: http://worldmaritimenews.com/archives/106699/dsme-to-build-1st-arc7-ice-class-tanker-for-yamal/ ;
14 Sovcomflot Press office, « SCF Group and VTB Bank sign USD 260 million long-term loan agreement », June 17, 2016, viewed Nov. 11, 2016 : http://www.scf-group.ru/en/press_office/press_releases/item70026.html ;
15 Guimard Emmanuel, « Le terminal de Montoir va accueillir des méthaniers brise-glaces russes », Les Echos, 24.03.2016, consulté le 05.11.2016 : http://www.lesechos.fr/24/03/2016/LesEchos/22157-114-ECH_le-terminal-de-montoir-va-accueillir-des-methaniers-brise-glaces-russes.htm ;
17 Интерфакс, «Сбербанк и Газпромбанк подписали кредитные договоры с “Ямал СПГ” », 11/04/2016 : http://www.interfax.ru/business/503181 ; Ведомости, ««Ямал СПГ» получил китайские деньги», 03/05/2016 : https://www.vedomosti.ru/business/articles/2016/05/04/639838-yamal-spg ;
18 Алена Махнева, « Японский банк предоставит кредит на «Ямал СПГ», Ведомости, 02.09.2016 : https://www.vedomosti.ru/business/articles/2016/09/02/655533-yaponskii-bank-predostavit (viewed Nov.3, 2016) ;
20 RBC, « Итальянские банки профинансируют «Ямал СПГ» на сумму более €400 млн », 08/11/2016 : http://www.rbc.ru/rbcfreenews/5821fc839a7947d6ff2dc506 ;
21 Алена Махнева, Александра Терентьева, « CNPC, Total и другие интересуются проектом «Арктик СПГ-2» «Новатэка», Ведомости, 19.06.2016 : https://www.vedomosti.ru/business/articles/2016/06/20/645921-cnpc-total-drugie-interesuyutsya-proektom-arktik-spg-2-novateka ;
22 Алена Махнева, ««Новатэк» не исключил увеличения мощности «Ямал СПГ», Ведомости, 28.07.2016, https://www.vedomosti.ru/business/articles/2016/07/29/650985-novatek-isklyuchil-uvelicheniya-moschnosti-yamal-spg ;
23 Ibid ;
24 Novatek Press Center, « NOVATEK concludes long-term LNG contract with ENGIE », June 2, 2015 : http://www.novatek.ru/en/press/releases/index.php?id_4=970 ;
25Novatek Press Center, « NOVATEK signs long-term LNG contract with Shell », June 4, 2015 : http://www.novatek.ru/en/press/releases/index.php?id_4=972 ;
26 Gazprom News, « Gazprom Marketing & Trading Singapore and Yamal Trade sign long-term contract for LNG supply », January 23, 2015 : http://www.gazprom.com/press/news/2015/january/article213452/ ;
27 Gas Natural Fenosa Press Room, « Yamal LNG and Gas Natural Fenosa sign long-term LNG supply contract », October 31, 2013 : http://www.gasnaturalfenosa.com/en/home/press+room/news/1285338473668/1297159852041/yamal+lng+and+gas+natural+fenosa+sign+long-term+lng+supply+contract.html ;
28 Алена Махнева, ««Новатэк» не исключил увеличения мощности «Ямал СПГ», Ведомости, 28.07.2016, https://www.vedomosti.ru/business/articles/2016/07/29/650985-novatek-isklyuchil-uvelicheniya-moschnosti-yamal-spg ;
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