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Gastech 2018: Novatek aims for top slot in LNG production

Thu 20 Sep 2018 by Craig Jallal, reporting from Gastech Barcelona

Gastech 2018: Novatek aims for top slot in LNG production
Novatek’s exploitation of LNG from the Arctic is not being deterred by US sanctions

In a frank exchange during the Open Russia LNG Debate at Gastech 2018, Novatek outlined its plans for LNG production and the politics that it must overcome along the way

“Our stated goal is to be the largest producer of LNG in the world,” explained Novatek deputy chairman of the management board Mark Gyetvay.

According to Mr Gyetvay, the feed gas produced from the Yamal field costs US$0.10 (10 cents) per MMBtu, one of the lowest prices in the world.

“We are a mass producer of LNG,” he told the Vostok Capital-organised event. As such, he explained, there is no incentive to see a high LNG price, or spikes in pricing.

“We wish LNG to be affordable. We want steady growth and regular demand,” said Mr Gyetvay, highlighting that his team had run a series of scenarios.

“We started with the question: “What did Japan look like before the boom in LNG imports?” and moved forward to “What is the world going to look like in 2050?” From this analysis, we came to certain conclusions,” he said.

The main conclusion was that Novatek is not going to compete on a geographical basis. That is, it is not a Russian gas versus US gas approach, although that is not how Russian LNG is perceived in some quarters.

“Our business model is based on where can be converted from coal to gas,” said Mr Gyetvay, listing targets as China, Bangladesh, Pakistan and India.

But China continues to be seen as a problem when it comes to data.

“We still do not have good data from China. China is price sensitive, but they are hiding the (import/demand) data,” he said.

The need for price transparency was discussed in relation to the oil price, in that the crude oil price is transparent and easily discoverable. One aim is to encourage this level of transparency in the LNG market, which will be music to the ears of the commodity exchanges that are working towards a similar goal.

Mr Gyetvay went on to explain the rationale behind the news that the company was developing a fleet of LNG-powered ice breakers. There is a need to use ice breakers, but the Russian government, which supplies the vessels, only provides nuclear-powered craft. And only the Russian government can operate nuclear-powered ice breakers in Russian waters. To enable the company to operate its own ice breakers in Russian waters, it is creating LNG-powered vessels.

Mr Gyetvay also discussed the transhipment facilities the company was planning to build. Instead of an expensive ice-breaking LNG carrier completing the whole voyage from the Arctic to Europe, during which a substantial portion is ice free, the vessel would only complete the ice-laden part of the voyage. The LNG would be transferred to a non-ice-breaking LNG carrier for completion of the non-ice voyage to Europe.

Mr Gyetvay then moved onto to discuss Novatek's LNG transhipment project in Murmansk, Arctic II. US sanctions were imposed during the building of phase one and the workaround in phase two is relatively simple – avoid any financing or operational requirement that passes through the US, especially the finance centre of New York.

“Train two is financed by 70% equity and 30% debt,” Mr Gyetvay told the audience. A substantial portion of the financing (US$12Bn) has come from China, where several cities have been ordered to close coal-powered plants and switch to gas-powered electricity generation.

All the assembly of the Arctic phase two modules will take place in Russia and Novatek expects around 5,000 engineers to be employed building the modules, with another 10,000 construction workers on site in Murmansk. In total, 800 Russian companies will experience some level of technology transfer from there Asian and European partners in the project. Under the workaround of US sanctions, no equipment will be sourced or financed from entities that can be sanctioned by the US.

Mr Gyetvay explained that Yamal was developed under sanctions, and as a US citizen, he feels a “certain amount of pressure” when he goes home.

The problem, he feels, lies with the attitude of the US. He told the debate of a meeting with US officials regarding the forthcoming re-imposition of sanctions on Iran. The officials appeared to have no idea what the impact would be on the gas trade from the re-imposition of the US sanctions on Iran. One senior official told him that there was no need to examine the issue as the USA was self-sufficient in gas, which ignored the global impact on the LNG trade.

Mr Gyetvay felt that this was not the correct way to look at the LNG market. He pointed out that the US is unable to deliver its LNG to its own people, highlighting that when the US North West needed gas last winter “We (Novatek) delivered two cargoes of LNG to Boston during”.

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