The cost of construction of Russia's second LNG plant has gone up some 50 to 60 percent against initial estimates, reaching the investment level of Gazprom's Shtokman gas condensate field development project, which the monopoly delayed indefinitely. The Yamal LNG joint venture's concept of a relationship with a foreign partner provides more opportunity for its participants to succeed than the one used for Shtokman.
On Dec. 18, 2013, Yamal LNG stakeholders - Russia's second largest gas producer NOVATEK (owner 80 percent in the venture at the time, sold a 20-percent stake to China's CNPC in early 2014) and Total (20 percent) - announced the final investment decision (FID) on the project. The project's cost had skyrocketed from the original estimate of $18-20 billion to $27 billion of which $2.6 billion has already been invested.
As a consequence, the project's total cost is closing in on the $30 billion mark, nearly replicating the price tag of the first phase of the giant Shtokman field development (the remainder Gazprom intended to fund on its own), which targeted almost the same volume of LNG production.
It needs to be said that the participants of the Yamal LNG project instantly received tax breaks, shifting at the same time some of the investment burden onto the government (some 47 billion roubles (SI.31 billion) will be allocated from the budget to build the port of Sabetta, which will be used to unload cargoes during LNG plant construction and for shipping LNG once the facility starts operating). On the eve of the FID approval deadline on Shtokman, Total and Statoil, Gazprom's foreign partners in the project's first phase publicly requested tax benefits and were immediately labeled greedy by Russian Gas Society chief Valery Yazev. As a result, the FID on Shtokman fell through and Statoil pulled out from the project, writing off its losses. Total has staved on board.
Interestingly, Total had entered both Russian LNG projects as a technical partner, while Statoil joined Shtokman at a later stage and didn't have the right of a technical veto granted to the French giant. Though Total is one of the biggest players in the global LNG market, Gazprom, which has historically traded in pipeline gas, had ambitions to develop its own LNG business. Gazprom has long been hooked via its pipelines to Europe, which is currently busy with building regasification terminals, but the main target of Shtokman gas sales was the North American market. Eventually, Gazprom said that foreign partners wouldn't be able to sell the Shtokman gas. The monopolist would very much like to trade LNG, but that would clearly hurt the interests of both Total and Statoil (the former is one of the largest LNG traders globally, the latter - Gazprom's direct competitor in the market of pipeline gas supply). In addition, both foreign majors are involved in shale gas production in the United States and offshore projects around the world. Shtokman Development AG, the company which had been specifically set up for the Shtokman project, didn't own the license to develop the giant Shtokman field holding almost 4 trillion cubic meters of gas (about 10 percent of all Russian gas reserves), stripping foreign partners of the opportunity to report reserves growth to its shareholders. Accordingly, the Shtokman deal for both Total and Statoil was in fact a services contract.
NOVATEK shareholders Leonid Mikhelson and Gennady Timchenko decided to take a different path: not only did they let Total enter a company which owns a production license to the Yuzhno-Tambeiskoye field, whose gas will feed the future LNG plant, but they also let the French company buy NOVATEK shares. By the way, the price of the stock package Total bought from NOVATEK'S key shareholders has grown by $400 million over the last three vears.
Undoubtedly, Yamal LNG's foreign partners were lured by the ability to buy LNG. Since Gazprom owns a monopoly on all gas exports, the companies penned an agency agreement with Gazprom Export specifying tentatively that Yamal LNG Trade would trade the gas produced at the Yuzhno-Tambeiskoye field. But even here, monopolist status played a trick on Gazprom - delaying the sale of Yamal LNG and Timchenko's lobbying talents resulted in cancelling the gas giant's monopoly on LNG exports from Russia.
A source with the knowledge of the situation told OGE that NOVATEK also wants to buy the maximum quantities of gas from Yamal LNG, but the problem is that the company has no target market for selling this gas, neither having the experience nor the contracted storage at the regasification terminals or shares in the terminals' ownership. Consequently, this creates problems for the banks from which Yamal LNG is seeking funds to finance the project. According to Mikhelson, approximately 75-78 percent of Yamal LNG gas (about 12-13 million tons of LNG) has already been contracted. However, the contracted volumes have almost entirely been sold to the shareholders - Total Gas & Power, Novatek Gas&Power and China's CNPC, which bought a 20-percent stake from NOVATEK after the FID was made. The only exception is Spain's Gas Natural Fenosa that inked a contract to buy 2.5 million tons of LNG (about 3-2 billion cubic meters of gas). Thus, the revenues and project costs are generated by the same companies and the funds are circulating in the same pot, which doesn't increase the bankers' confidence about getting their money back with a margin. It is clear that even if the shareholders buy gas at a high price to recover their own investments, their profit margin would be limited by the actual prices on the end markets.
Yamal LNG's ambitions largely rest on the project's logistics - the stakeholders have put their bets on the short shipping route linking Russia with today's most profitable markets in the Asia-Pacific region. Bearing this in mind, NOVATEK revived discussions to resume shipments via the Northern Sea Route (which halves the distance to China or South Korea compared to the route via the Suez Canal). And though this route will be open only during the summer, Shtokman has no such advantages, being much farther from the Asia-Pacific (the LNG plant was originally planned to be built in the Murmansk region).
As is known, the Shtokman project was dealt a key blow by the shale gas revolution in the United States, its target market. Diving gas prices in the U.S. market soon brought about a gas price crash in the European market, while cheap coal from the U.S. generally reduced demand for gas in Europe. Currently, gas prices are high in China and other Asian markets, but Gazprom has been in talks for several years regarding construction of a high-throughput pipeline from East Siberia to China and South Korea, and it still needs to find buyers first.
Total remains on board of Shtokman Development AG as its top managers claim they are still searching for the best technical solution. Meanwhile, Gazprom is making efforts to go ahead with the project independently But if the technical concept of Yamal LNG justifies itself (some experts still doubt this), it is likely that the project will eventually claim the title of Russia's second LNG plant.
DIAGRAM:
Shareholding breakdown in the Yamal LNG project
PHOTO: RIA NOVOSTI
Location of the South Tambei gas field
Vladimir Putin shakes hands with Total CEO Christophe de Margerie as NOVATEK head Leonid Mikhelson looks on after signing cooperation memorandums with Total on March 2,2011
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