Full exclusive interview: Russia’s Novatek aiming for top LNG exporters club
Russia’s largest independent natural gas producer, Novatek is working on expanding its annual liquefied natural gas (LNG) export capacity up to 60 million tonnes by 2030, which would place Novatek in a group of world’s largest producers of the fuel as a single company, according to the company’s finance chief.
“In the period from 2018 to 2030, our plan is to produce about 57-60 million tonnes of LNG per year,” Mark Gyetvay told LNG World News last week during an exclusive interview in Amsterdam.
Russia was late to the LNG game but is on way to become a leading exporter
“We have a resource base in Yamal and Gydan peninsula that clearly supports our ability to be a large producer of LNG,” Gyetvay said.
This also provides Russia with a platform to be a major exporter of LNG also as a country, he noted.
To remind, President Vladimir Putin said in March last year that “Russia, without any doubt, not only can, but will become the largest producer of liquefied natural gas in the world.”
For example, Qatar, the world’s largest LNG exporter currently produces around 77 million tonnes per year and has plans to raise that capacity to 100 million tonnes per year by 2024.
“When you look at the resource base within Russia, as a large natural gas basin, one of the largest in the world, it only makes sense that in a due course we would start developing the export routes outside of the pipeline infrastructure. Because, what we see today, a pipeline gives you a very direct A to B regional market,” Gyetvay said.
Russian gas giant Gazprom has been very successful in monetizing its resources from Yamal to European markets but “LNG gives us a global diversification and allows us to take the gas portfolio and ship it around the world based on its needs,” he said.
Gyetvay noted that Russia was clearly absent from that market.
“For the matter of fact, Russia was late to the game so I think that President Putin’s strategy of making Russia 15-20 percent of global LNG world correlates more or less to the resources within the country and Novatek will be the leading company to move this strategy forward,” he said.
Yamal LNG fourth train approval
Yamal LNG is Novatek’s first and currently Russia’s second LNG export facility beside the Gazprom-operated Sakhalin LNG plant.
Initial Yamal LNG project’s capacity is 16.5 million tonnes from three trains with a 5.5 million tonnes capacity, each.
The project is currently producing the chilled fuel only from the first train at about 109 percent capacity or close to 6 million tonnes per annum, according to Gyetvay.
Novatek expects to start the second production unit in September-October and the third train in December this year or January 2019.
Yamal LNG’s fourth train, which is based on a technology developed by Novatek called “Arctic Cascade”, will have a capacity of 900,000 tonnes per year.
The fourth train had been approved by Yamal LNG’s shareholders which besides Novatek include France’s Total, China’s CNPC and Silk Road Fund.
The shareholders will finance the production unit “but as agreed in the financing agreement for Yamal LNG – we have to get the bank’s approval to expand the project,” Gyetvay said.
“So, that is just a technical question that we have to resolve with the banks who provided the financing for Yamal LNG,” he added while explaining when the company expects the construction to start on the fourth train.
Yamal LNG cargoes via Northern Sea Route expected soon
The $27 billion Yamal LNG project ships cargoes onboard special ice-class tankers that are able to break ice up to 2.1 m thick. In total, there will be fifteen ice-class carriers servicing the Yamal LNG project but they are not all delivered yet.
Gyetvay said that the LNG project should have at least ten of these carriers in operation and servicing the project by the end of the year.
Currently, these tankers carry the fuel from the Yamal LNG plant to European terminals such as Belgium’s Zeebrugge or the Dutch Gate terminal from where the chilled gas is being transshipped or reloaded onto conventional tankers for delivery to other markets.
However, during Arctic summer, Yamal LNG will be delivering the chilled fuel under long-term contracts, which started in April this year, to Asian-Pacific markets via the Northern Sea Route.
“The traditional period would be May-June until October-November. This year it may be extended out to the latter part of May,” Gyetvay said.
“We had that extreme cold weather at the end of the year, we had that Arctic blast that kind of affected March and April, across most of Europe also,” he said adding that the ice is still there along the Northern Sea Route.
“But soon enough, I would say no later than the beginning of June, we should be using the Nothern Sea Route,” Gyetvay said.
Condensate cargoes cover plant’s operational costs
One month following the first LNG shipment in December, the plant near Sabetta in the Yamal peninsula also exported its first cargo of condensate.
Once in full operation, Yamal LNG is expected to produce up to 1.2 million tonnes per annum of gas condensate.
The South-Tambeyskoye gas and condensate field, from which Yamal LNG sources its feedstock, is estimated to hold about at 926 billion cubic meters of natural gas and 30 mmt of liquid hydrocarbons.
“We are very fortunate that these are conventional gas fields or so-called wet gas,” Gyetvay said adding that the company produces condensate from gas strains.
“Given the attraction of that particular product on the market, its lightness and value, when we sell condensate cargoes in the market – that more or less covers the costs of operating the Yamal LNG plant,” he noted.
About $9 billion savings on Arctic LNG 2
Novatek is building the second project called Arctic LNG 2 based on gravity-based structures developed by the company itself.
The units are technically just large barges that are basically sunk and equipped with liquefaction, power plant, storage and loading facilities, Gyetvay explained.
Saipem of Italy will be responsible for building the gravity-based structures.
Cost-wise, the project could save the company about $9 billion from moving all the infrastructure that had to be built onshore to offshore.
“We estimate that we would save around at least 30 percent of the costs of Yamal LNG as per the Arctic LNG 2 project from moving all that infrastructure that had to be built onshore, such as piling work, precision drilling, heat exchangers as well as the fact that we don’t need to build an airport again, loading and storage facilities etc.,” Gyetvay said.
Arctic LNG 2 was originally planned as a three-train facility with each train having a capacity of 6.1 million tonnes per annum.
“Through the process of engineering, we have been able to increase the capacity to 6.6 million tonnes per train or in total to 19.8 million tonnes,” Gyetvay said.
He went on to say that the company plans to launch Arctic LNG 2 in 2022 or 2023 depending on when the company starts the actual work on the construction of the gravity-based platforms.
“Post that, in our strategy, we outlined that we plan to launch an additional three trains in the period from 2025-2030 and they will be also based on the gravity-based concept,” he added.
Finance boss not involved in company financing due to US sanctions
Novatek is also changing its strategy for the financing of Arctic LNG 2 when compared to the Yamal project.
To remind, back in July 2014, the US issued a package of sanctions against Russian companies including the energy and financing sector due to Russia’s involvement in Ukraine.
The original measures prohibited entities in the US from providing financing to Novatek and its Yamal LNG project.
“The initial financing structure that was envisioned for Yamal LNG was project financing and that is the track we were headed towards up to the point of US sanctions,” Gyetvay said.
“When the sanctions were issued in 2014, it obviously changed the whole perspective of the financing structure. It impacted me personally as a US citizen as I had to step away as I could no longer be responsible for financing. I am no longer involved in the financing of these particular deals,” he said.
Chief financial officer of the company is not involved in the financial aspects of the company’s business, Gyetvay said and smiled.
“How it changed now is that we are looking for partners that were not just interested in purely coming in and providing debt finance in the project,” he said.
He added that Novatek wants its partners to come in and make an equity contribution to the project and “that’s probably what’s going to change between Yamal and Arctic LNG.”
“I think if we look at the structure that we would actually like to achieve it would be a higher proportion of equity finance rather then debt finance,” Gyetvay said.
Kamchatka LNG hub and expanding NSR usage
In order to optimize its logistical model to cut costs and save shipping time, Novatek aims to invest up to $1.5 billion to build a liquefied natural gas transshipment terminal on Kamchatka peninsula in the Russian Far East.
The company was previously looking into two options for the location of the LNG hub, namely the Avacha Bay and the Bechevinskaya Bay.
“The location of the facility may slightly change. We are doing technical reviews how to optimize the location,” Gyetvay said.
It is expected that the facility would be able to handle up to 20 million tonnes per year.
“When you talk about 20 million tonnes, that is the throughput, not the physical storage of the facility and it is being built to correspond to the launch of the Arctic LNG 2 facility,” he said.
Novatek is considering building another transshipment facility in Murmansk, depending on the market requirements, Gyetvay said.
He added that one of the things the company has also been working on is how to extend the shipping season via the Northern Sea Route
“The initial idea was to use the route 5-7 months a year and that has been our experience. People often forget that Novatek was the first company to launch hydrocarbons through the Northern Sea Route when we launched in 2010 our cargoes of condensate. We subsequently demonstrated the viability of this route both in terms of cost savings, time as well as nautical miles,” he said.
According to Gyetvay, the company would like to discuss with the Russian government whether it is possible to extend the use of the Arctic nuclear ice-breaking fleet, that operates along the Northern Sea Route, from 5-7 to 7-9 months.
“Maybe sometime in the future, post-2025, this fleet would be able to expand up to full 12 months. And that changes the complete logistics of the LNG model,” he said.
“Because if you look at the way the Nothern Sea Route is operating today, you also understand that China has come out with this new Polar route and it makes sense to have both transshipments from Russia to Europe to Asia as well as Asia back out to the European market,” Gyetvay said.
He added that it would be a very big interest for the Russian government to open this facility for transshipment as well as the fact that the market wants it because of the savings in time and distance.
The Kamchatka LNG hub allows Novatek’s costly icebreaking vessels to offload their cargo early and return to the Yamal LNG and Arctic 2 facilities, shaving thousands of kilometers of the round trip.
“Once we build this facility there, then it means that we can either establish a Russian FOB (Free On Board) price which more or less correlates in line with the evolution of the pricing model and the marketing of LNG, but it also means that we can deliver to key Asia Pacific consumers like Japan and South Korea in three days, China maybe six days,” Gyetvay said.
It reduces the transportation model significantly and Novatek would not need to send these ice-class carriers all the way to the end consumer market.
“Instead, we would take these carriers from Sabetta to Kamchatka and from Kamchatka they would be offloaded to conventional tankers saving costs and time for both ourselves and the buyers,” he said.
That also means that Novatek would then optimize the number of actual ice-class tankers that the company would need for the LNG projects.
“So, what we are doing right now is essentially studying how to optimize the logistical model to reduce the cost of transport and reduce the cost of having to build more ice-class tankers,” Gyetvay said.
Small-scale LNG push
Besides large LNG export projects, Novatek is developing several small-scale projects and plans to launch its first such facility by the beginning of next year.
The small-scale LNG project located on the northern part of the Gulf of Finland near Russia’s Port of Vysotsk is owned 51 percent by Novatek and 49 percent by Gazprom.
The project called Cryogas Vysotsk includes two trains with the first production unit having a capacity of 660,000 tons per year.
Novatek expects to launch the first train either towards the latter part of this year or early next year, Gyetvay said.
“The project is essentially targeting bunker fuel markets in the Baltic region, Scandinavia, northern Poland, maybe even parts of Germany,” he said.
“This project is important for Novatek,” Gyetvay said adding that it gives the company the first opportunity to respond to IMO’s stricter rules on bunker fuels.
Additionally, Novatek has also recently completed a pilot program by converting mining trucks to run on LNG instead of diesel.
The company is working with Russian steel producer and mining company MMK to convert some of the latter’s Kamaz trucks to run on LNG.
“We ran a pilot program where we were doing truck-to-truck transfer of LNG and now we are going to build a series of stations so these trucks can use LNG rather than diesel,” Gyetvay said.
He added that the pilot program was successful and the company sees an opportunity to further expand the domestic market by doing these type of projects.
By Mirza Duran