Novatek CFO Mark Gyetvay sat down with LNG World Shipping correspondent Susan L. Sakmar to discuss the successful start-up of Yamal LNG and plans for a second LNG project – Arctic 2 LNG
Susan L. Sakmar: Mark, can you first give us some insight into what it took to bring Yamal LNG online on time and on budget?
Mark Gyetvay: I believe this philosophy of project execution resides inside our corporate DNA. We are not burdened with multiple large-scale projects in multiple geographical areas; therefore, we can devote the appropriate managerial time to ensuring all elements of the projects are progressing according to our project timeline.
Equally important, I believe we assembled a top-notch team of consultants and contractors that were clearly incentivized to deliver on time, on budget. As well, all of the fabrication yards, especially those in China, delivered high quality modules according to our time schedule. This flawless execution combined with strict adherence to module logistics ensured the timely completion of this world-class project.
SLS: You mentioned that Yamal Train 2 and Train 3 actually came on early so the volumes are being sold into the spot market. Where have the cargos been going and when do the contracts start-up?
MG: The early start-ups of LNG T2 [by six months] and LNG T3 [by more than a year] gave the project sponsors the opportunity to procure and sell early cargos based on our respective equity interest in the project. I can’t speculate where our partners ultimately delivered their respective cargos but Novatek sold a fair portion of our cargos on the European and other markets based on maximizing our netback margins with the premium spreads eroding on the Pacific basin trade.
As for the contract starts, both T1 and T2 are now selling according to contractual arrangements, and T3 will begin sometime around April 2020, but we have been seeking early nomination of these volumes with off-takers. T4 is scheduled to launch by the end of 2019, but not later than first quarter 2020 these LNG volumes will primarily be sold via spot sales in proportion to our equity participation. We have about 96% of the 16.5 mpta sold via long-term contracts, with the remaining volumes – including volumes produced above the plant’s nameplate capacity – sold via the spot markets.
SLS: What’s the status of Yamal LNG T4?
MG: We are making good progress to complete T4 by the end of 2019, early first quarter 2020, according to our construction schedule. At the end of the recent first quarter 2019, we were approximately 27% complete, with the majority of equipment already procured and being transported to the construction site.
As you know, T4 will use Novatek’s patented proprietary Arctic Cascade liquefaction technology, with equipment manufactured and supplied by Russian contractors. Its target output is roughly 900 thousand tonnes of LNG per annum. We are very excited about Arctic Cascade as it takes advantage of the colder ambient temperature in the Arctic zone to liquefy our feedstock gas through a simple and efficient cascade process with ethane as the cooling agent. We will use this liquefaction process during the pilot phase on T4, with the aim of eventually scaling this technology for future use on our LNG projects.
SLS: Yamal is above the Arctic Circle, and ice poses a logistical challenge in the wintertime. Can you share some details about the type of ice-class carriers you are using and some of the issues involved in moving LNG cargoes in the Arctic?
MG: The colder temperatures pose both an opportunity and a challenge for us, but we have managed to demonstrate the efficacy of our operations, including shipping, in the Arctic zone of Russia. We designed a new ice-class LNG tanker – the ARC7 – with DSME building a fleet of 15 of these purposely built tankers to serve our Yamal LNG project. Presently, we have 10 ARC7 ice-class tankers in operations, with another five tankers to be delivered throughout 2019. Twelve conventional LNG tankers and some lower-designated ARC4 tankers supplement our fleet.
The ARC7 ice-class tankers have performed above design expectations and have navigated the Northern Sea Route without the assistance of nuclear icebreakers. The vessels are designed with a cargo capacity of 170,000 m3, a length of 299 m, a wide of 50 m and a height of 60 m. They are powered by 45 MWt and have a displacement of 144,000 tons. The vessel design allows for tanker to crush two-meter thick brine ice with azipod steering going forward and back as well as side-to-side laterally. They are incredible ice-class LNG tankers and the present fleet is sufficient to meet our shipping requirements.
SLS: Novatek has also had to manage a busy schedule of transhipment operations at four open-sea locations in Northern Norway. Can you give some more detail on these transhipments?
MG: One of the areas where we spend a lot of time is optimizing our logistical operations. As you can appreciate, optimizing our logistics entails more than just ensuring the efficient use of ARC7 tankers, as we need to also coordinate port operations, icebreaker requirements, and as you rightly mentioned our transhipment operations.
Last year, we created a wholly owned subsidiary Maritime Transport, or MART, which will eventually coordinate internally all of our logistical requirements. We felt this was the next logical evolutionary step since logistics will play a huge role in our future LNG platform.
When we announced our Corporate Strategy to 2030 in December 2017, we introduced the concept of constructing and operating a transhipment facility in Kamchatka in the far eastern part of Russia. From our perspective this was quite logical as we felt we could reduce the shipping time of the ARC7 ice-class tankers in non-ice areas and instead use conventional takers similarly to what we are presently doing at Zeebrugge with Fluxys LNG and other Northern European destinations. Again, this reduces overall transport costs and allows us to efficiently shuttle the present ARC7 fleet to optimize LNG transport.
Obviously, we evolved from this initial concept and announced the Murmansk Transhipment project as well as the temporary ship-to-ship transfers we are presently performing in Northern Norway. Essentially, this allows us to fully utilize our present tanker fleet to ensure all LNG cargo deliveries are maintained as we effectively launched LNG trains 2 and 3 ahead of the planned tanker delivery schedule. These required us to think and act quickly to overcome some potential logistical bottlenecks.
SLS: In terms of being able to compete in the global LNG market, what sets Yamal LNG apart?
MG: Yamal LNG is distinctive because of its geographical location in the Arctic zone of Russia, with vast natural gas resources and the colder ambient temperature to maximize liquefaction through the whole process chain. It is also geographically located to serve customer needs both eastbound and westbound with its relative proximity to European and Asian Pacific markets.
Novatek has consistently demonstrated its ability to develop our resource base at one of the lowest costs in the global oil and gas industry, and our production costs (or lifting costs) at Yamal LNG is low compared to our industry peers. This distinction combined with the colder ambient temperature ensures that operationally we will be one of the lowest-cost sources of LNG in the market. Moreover, we have demonstrated that by optimizing our logistics model we can further reduce transport costs; thus delivering competitively priced LNG to all major importing countries.
Many people initially assumed that we were at a competitive disadvantage in the Arctic region, but actual results materially differ from this incorrect assumption. As a fully integrated project we are able to deliver one of the lowest-priced feedstock gasses to the liquefaction plants – approximately US$0.10 per mmbtu, which differs dramatically from the US Gulf Coast LNG plants that generally purchase their gas feedstock at Henry Hub plus a mark-up. Our gas stream is also wet so we are able to extract unstable gas condensate, stabilize it at the plant and market this product, thus further generating revenues for the project, or conversely reducing the facilities operating costs.
Yamal LNG has clearly demonstrated that it can compete successfully in the global LNG market in its first full year of operations, and this same competitively priced LNG will extend to our future LNG platform … and I believe this represents a positive step forward in the transition from coal to natural gas.
SLS: You noted that Novatek also exports condensate. How much does this help the economics of Yamal LNG?
MG: The South-Tambeyskoye field is a wet gas field so it produces liquids, mainly unstable gas condensate, in the gas stream. We forecast about 1.2 million per annum of gas condensate based on the production flow of 28 billion cubic m, so gas condensate sales improve the overall economics of Yamal LNG by contributing another revenue stream to the project. The actual economics depend on the underlying benchmark crude oil price, plus premiums, which should contribute approximately $650 million to $700 million annually to revenues. As I mentioned previously, you can consider this revenue as essentially offsetting the operating costs of the facility.
SLS: Novatek is also developing a second LNG project on the Gydan Peninsula, across the Gulf of Ob from Yamal LNG called Arctic LNG 2. Can you tell us more about his project and how it differs from Yamal?
MG: We are very excited about the prospects of our new project – Arctic LNG 2*. This new LNG project is based on gravity-based structures (“GBS”) and will have an annual capacity of 19.8 mtpa, based on three GBS platforms with natural gas feedstock from our prolific Utrenneye field.
Conceptually, the idea was to use technology and innovation to reduce liquefaction per ton as well as to reduce our environmental footprint on permafrost. Instead of driving approximately 38 thousand pilings and placing all of the equipment above ground, the GBS platform will allow us to build a scalable LNG platform on the self-contained GBS units and significantly reduce both our cost by roughly 30% and our footprint by approximately one-quarter the size of Yamal LNG for each train.
We believe by using the GBS concept we can reduce our liquefaction cost per ton to around US$650M to US$750M range and combined with our low upstream development cost we should be at around US$1Bn per ton of output. This makes the project extremely attractive with strong returns on invested capital. Arctic LNG will also produce roughly 1.5 million tonnes of gas condensate from the field, and presently has approximately 2 trillion m3 of natural gas with further upside to the resource base by targeting the lower producing Jurassic horizons.
We estimate capital cost of approximately US$20-21Bn, and plan to make our formal FID (“final investment decision”) sometime in the early second half of 2019. The first GBS will be towed out to the Utrenneye Terminal towards the latter part of 2022, with full project completion around 2024 or 2025. This time schedule is consistent with our expectation that the market will require the “second wave” of LNG projects to meet growing demand.
Mark Gyetvay is the Chief Financial Officer and Deputy Chairman of the Management Board of Novatek, Russia’s largest independent natural gas producer.
*In mid-May 2019, Novatek signed a deal with TechnipFMC for its Arctic LNG 2 project covering engineering, procurement, supply, construction and commissioning of an integrated liquefied natural gas facility with an annual liquefaction capacity of 19.8 million tons under the Arctic LNG 2 project. The contract's terms provide for the launch of the first train of the project in 2023.