Yamal LNG: Success Has Many Fathers, Indeed

Russian oil refinery
Source: LNG World News
March 25, 2019

Novatek is the largest independent oil and gas company in Russia. But its size pales in comparison with its domestic, state-owned competitors: Gazprom and Rosneft, which have ten times the annual revenues of Novatek.

Nevertheless, it seems that Novatek is the company at the frontier of innovation in the Russian energy sector, particularly when it comes to liquefied natural gas (LNG).

Gazprom and Rosneft have not been keeping up with developments in LNG, the “new kid on the block” in the natural gas market. Even though Gazprom currently owns a majority stake in Sakhalin LNG, Shell is the company that provided technology and developed the terminal. And while Rosneft, pushed and succeeded in freeing LNG from a Gazprom gas export monopoly, its plans to develop an LNG export business have yet to materialize.

Instead, Novatek seized the opportunity. Relatively small, independent, and nimble Novatek was able to undertake the risks that large state-owned enterprises were not ready for.

In December 2017 the first LNG train within Novatek’s Yamal LNG became operational. The second and third trains were completed within budget and a whopping 6 and 12 months ahead of their respective schedules. Yamal LNG currently produces and ships LNG over its fully-contracted capacity. And Novatek is advancing in building the next LNG project, Arctic LNG 2, which the company hopes would become operational in 2022-2023.

Novatek is bullish on its ability to expand its market reach and competitiveness of the planned Arctic LNG2 project. The company advertises: 1) the low-cost of Arctic LNG ($0.1 for feedstock and $0.5 liquefaction per mm btu), 2) shorter and thus lower in cost of delivery to the growing LNG market in Asia via the Arctic Route; and 3) global market positioning with Yamal LNG and Arctic LNG 2 facilitating liquid pricing hubs and placing Novatek as an important portfolio player in the global LNG market

But while impressive, Novatek’s accomplishments haven’t exclusively relied on business acumen and/or cost competitiveness of its LNG. Here are several other factors that contributed to the success:

  1. The Russian government has been extremely supportive Novatek’s LNG ventures, including its engagement in Arctic infrastructure and a 12-year-long tax holiday.
     
  2. Gazprom and Rosneft have not been well suited to enter the LNG market: developing a new approach for LNG exports would take away their main focus, conventional piped gas and crude oil. In addition both companies have been openly feuding with each other for years, leaving Novatek a window of opportunity.
     
  3. Yes, sanctions made financing of the project a challenge (at first) but Novatek has also benefitted from the unintended consequences of sanctions, including the fall in the value of the Russian ruble, which aided the company’s profits, since LNG contracts are fulfilled in U.S. dollars. And sanctions have not necessarily deterred Western involvement. Even in the post-sanction Russia, many Western companies supported Novatek including financial institutions from Germany, Italy, Spain, or Sweden, which provided or guaranteed line of credit.

All in all, Novatek seems poised to become an important LNG player. This is in part due to a successful business strategy and low-cost environment, but also serendipity. 

Going forward it will be interesting to observe not only Novatek’s evolving position in the global LNG market but also its relation with Gazprom and Rosneft, which vow to engage in LNG projects in the near future. To what extent will the Russian government intervene, if at all, in Novatek’s business? A government intervention is not without a precedent. Profitable ventures are often tempting to governments, especially as they ail economically and need more revenue streams.

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