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CORPORATE STRATEGY

Total Walks Novatek Tightrope

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Courbevoie,,France,,November,12,,2020:,Exterior,View,Of,The,Tower
  • TotalEnergies’ equity interest in Russia’s largest LNG producer, Novatek, will be a key contributor to its low-carbon transition in the coming decade.
  • Novatek’s importance to Total has grown as other sources of future LNG supply have stalled in recent years.
  • Privately owned Novatek could be seen as less toxic than its state peers. But as the focus grows on Russia’s business elite, that distinction may no longer offer safe haven.

The Issue

Pressure on Western oil and gas firms to exit any dealings with Russia is growing. Exxon Mobil, BP, Shell and Equinor have all decided to withdraw from their Russian joint ventures. But Total has opted to buck the trend. The French major will freeze spending on new projects in Russia, but it will hang onto existing LNG investments with Novatek. Such a move underlines the strategic importance of Russia within Total’s portfolio and shows what’s at stake for the company if it walks away.

Stay or Go?

Total — and sources within other Western majors — have emphasized the difference between working with Russia’s state firms and privately held ones. But observers question how long that argument can hold, as widespread willingness to self-sanction dealings with Russian firms and individuals puts much more pressure on companies to fully disengage their business from the country. Moreover, the focus has grown on the role of Russia’s business elite within President Vladimir Putin’s government, putting pressure on its private giants, too.

Total’s Russian Assets

Russia is a core part of Total’s portfolio as both a pillar of its LNG strategy and accordingly its low-carbon energy transition planning.

  • Most of Total’s exposure to Russia comes through its ties to privately owned Novatek. The French major has a 19.4% minority holding in the Russian producer acquired through a series of transactions beginning in 2011, when it first bought a 12% interest for $4 billion.

  • Novatek’s vast hydrocarbon reserves underpin the feed gas needed for the existing Yamal LNG project and in-development Arctic LNG 2. Novatek’s fields around the Yamal Peninsula supply feedstock for the 19.6 million ton per year Yamal LNG project. Total holds a 20% stake in the Yamal facility and 49% in the giant Termokarstovoye gas field that feeds it. Total also owns 10% of the Arctic LNG 2 project now being built and due on line in 2024. And it has an option to buy 10%-15% of future Novatek LNG projects. The Russian giant is targeting total LNG capacity of up to 70 million tons/yr by 2030, up from just under 20 million tons now.

  • In addition to its direct stakes, Total has a variety of interests in LNG shipping and trading that help integrate the Novatek equity volumes into its broader LNG portfolio. Total’s only non-LNG related Russian asset is its 20% stake in the Kharyga oil field operated by state-controlled Zarubezhneft.
TotalEnergies Russian Assets
 Interest (%)Asset TypeOperator (State/Private)
Equity Stakes
Novatek19.4%LNG Liquefaction PlantPrivate
Arctic Transshipment (LNG)10.0LNG Shipping CompanyPrivate
Project Stakes
Yamal LNG20.0LNG Liquefaction PlantNovatek (Private)
Arctic LNG 210.0LNG Liquefaction PlantNovatek (Private)
Termokarstovoye49.0Natural Gas FieldNovatek (Private)
Kharyaga20.0%Oil FieldZarubezhneft (State)

Strategic Importance

Total depended on Russia for just 5% of its liquids production in 2020 but almost 30% of its gas production came from the country. Russia will also play a central role in Total’s future strategy. The company has an ambition to hoist its global LNG portfolio to around 50 million tons/yr by 2025, generated from equity stakes in projects and contracted offtake volumes. That’s up from nearly 40 million tons/yr in 2020. The expansion of its LNG portfolio is also key to Total’s goal to double its gas sales by 2030 over 2019 figures and take overall gas production to 50% of the company’s combined output.

The French major’s stake in Yamal LNG alone accounts for more than 22% of its current liquefaction capacity. Depending on the timing of other projects, Russia could account for more than one-third of Total’s liquefaction volumes when Arctic LNG 2 comes on line in 2024. These volumes become even more important given the delays seen at the Total’s other LNG projects in Mozambique and Papua New Guinea.

But expansion in Russia is not simply about LNG. Total is eyeing investments in less mature transition technologies through its Novatek partnership.

“We are looking at projects of either blue hydrogen and ammonia where you have very cost-competitive gas and huge capacity of CO2 storage,” CEO Patrick Pouyanne told analysts during a recent investor day presentation. “One perfect example is clearly Russia where we could be partnering with Novatek.”

What Next?

Pouyanne insists that Total has not been pressed by the French government to give up its Novatek assets and that the company will maintain its existing LNG investments. “We need gas,” he told the CERAWeek by S&P Global conference in Houston, pointing to Europe’s urgent demand for gas supplies. “We are heavily dependent on Russian gas.”

The company will, however, stop investing capital in new projects. That likely means it will retain its Arctic LNG 2 interest but not exercise options to take stakes in future Novatek LNG projects. Indeed, Pouyanne argued that Total was already bumping up against a self-imposed cap of not having more than 10% of its capital employed in any one country — and had been considering whether to continue to expand in Russia.

“We are reaching the limit and I think unfortunately Mr. Putin is giving us the answer,” Pouyanne told the Houston conference. “So no more new capital will be injected from the company into Russia.”

While Russian gas is not sanctioned, Novatek and its major shareholders are already subject to certain US sanctions stemming from Russia’s 2014 annexation of Crimea and its recent invasion of Ukraine. And with the role of Russia’s business elite within Putin’s government under growing scrutiny, that will put even more pressure on the private company.

In particular, two of Novatek’s board members are on a US Treasury blacklist — Gennady Timchenko and the deputy chairman of Gazprombank, Andrei Akimov.

Topics:
Corporate Strategy , Majors, Ukraine Crisis
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