Sanctions Strengthen Novatek's LNG Role in Russia

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  • Novatek's LNG expansion plans tie in well with Moscow's strategic energy objectives as Europe looks to wean itself off Russian pipeline gas supplies.
  • Independent Novatek aims to establish almost as much liquefaction capacity in the Russian Arctic as there currently is in LNG powerhouse Qatar.
  • TotalEnergies, which remains committed to its investment in Novatek and its flagship Yamal LNG plant, has stakes in other Novatek projects due to start up next year.

The Issue

Western sanctions and the exodus of foreign investors from Russia in the wake of the Ukraine conflict have prompted Moscow to rely even more heavily on its LNG export champion, Novatek. An independent company which is nonetheless believed to be close to Kremlin, Novatek may replace Shell in Russia’s first LNG plant, Sakhalin-2, and will focus on developing domestic liquefaction equipment to help Russia catch up with the world’s largest LNG exporters.

Homegrown Technology

Moscow- and London-listed Novatek took the crown as Russia’s LNG export champion in late 2017 when its flagship Yamal LNG plant in the Arctic came on line. At the same time, it approved a long-term strategy to build up 57 million tons per year of liquefaction capacity in the region by 2030, later increasing that target to up to 70 million tons/yr — almost as much as LNG powerhouse Qatar currently has operating. Novatek's Arctic projects have enjoyed strong support from the Kremlin, which offered preferential terms at upstream auctions won by Novatek, as well as tax breaks and even direct financial aid, with the state funding infrastructure such as roads, an airport and seaport.

With EU sanctions banning exports of key equipment for Russian LNG plants, leaving many new projects facing delays or even cancellation, Novatek's own liquefaction technology will be in greater demand, as will the experience it has acquired since taking the lead on Yamal LNG in 2009. It retains 50.1% in the project, having been joined by Total (20%), China National Petroleum Corp. (20%) and China's Silk Road Fund (9.9%).

Novatek last year launched a 900,000 ton/yr train at Yamal LNG based on its own Arctic Cascade technology and is now scaling up for larger 2.5 million ton/yr trains at the proposed Obsky LNG plant at the nearby port of Sabetta, which might see a final investment decision next year. The company plans to spend almost $500 million on research and development for domestic liquefaction equipment, Novatek CEO Leonid Mikhelson said this month.

Kremlin Connection

The Kremlin’s support for Novatek is often attributed to Russian President Vladimir Putin’s alleged longstanding links to Gennady Timchenko, the billionaire co-founder of Gunvor who divested his stake in the commodity trader in 2014. Timchenko bought into Novatek in 2008 when it was a modest upstream oil and gas producer in West Siberia. It soon started posing a greater challenge to state-controlled Gazprom. Timchenko quit Novatek's board of directors in March this year, shortly after being blacklisted by the EU over Russia's invasion of Ukraine, but retains a 23.49% stake in the company, making him the second-biggest shareholder after Mikhelson.

Novatek's LNG ambitions and development of the Arctic match the Kremlin's strategic energy objectives. Historically, Novatek's LNG expansion plans have irritated Gazprom, which considers them to pose unnecessary competition to its pipeline exports and believes the tax breaks they have been granted undermine Russia's budget revenue. But that may be an irrelevance if the EU phases out Russian pipeline gas imports by 2027.

And unlike Gazprom, which has been reluctant to involve foreign partners in its key upstream projects in Russia, Novatek has built up its LNG credentials largely through a long-term partnership with France’s Total, the world's second-largest LNG portfolio player. Total's decision to stop investing in new projects in Russia potentially presents risks for Novatek’s Arctic expansion, but the French major is — at least for now — not divesting its 19.4% in Novatek. The same goes for its 20% in Yamal LNG, its 10% in Novatek’s 19.8 million ton/yr Arctic LNG 2 project, scheduled to start up in late 2023, and its 10% in Novatek’s Murmansk and Kamchatka LNG transshipment terminals, which are likewise slated to come on line next year. Total also retains two representatives on Novatek’s board.

Welcome to Sakhalin

The Kremlin also appears to be pinning its hopes on Novatek stepping in to fill the void left at Sakhalin-2 by Shell, which is not keeping its 27.5% stake following the change of operator at the LNG project in the Russian Far East. Novatek is the sole company that meets the criteria set by the government for bidders for the stake, although Mikhelson says Novatek will only make a decision once it has finished an audit of the project.

If Novatek joins, it will be involved in Russia’s two largest LNG plants and have export capacity in all three of its proposed LNG production hubs: Yamal, Sakhalin and Vysotsk on the Baltic Sea. A role at Sakhalin-2 may mitigate the risk of delay at Arctic projects for Novatek and give it a decent foothold on the doorstep of key LNG markets in Asia. It has hitherto made long-haul LNG shipments from Yamal to customers in China, Japan and South Korea, using the Northern Sea Route shortcut in the summer months.

Russia's LNG Projects


Sakhalin-2 shareholders Mitsui and Mitsubishi, which are retaining their stakes in the project, will likely welcome Novatek's participation. Mitsui and Japan's state-owned Jogmec have together acquired a 10% stake in Novatek's Arctic LNG 2 project and signed up for 2 million tons/yr of offtake. And even Gazprom — itself a 9.99% shareholder in Novatek — may benefit from having an experienced partner on board to replace Shell, which is understood to have been supervising the plant’s operations.

Offtake Options

Novatek is understood to have a strong enough financial position to buy the Sakhalin-2 stake. Like many other Russian companies, it stopped publishing quarterly financial reports this year but its board last month recommended paying 136.6 billion rubles ($2.3 billion) in dividends for the first half of 2022, up 63% from a year earlier as high energy prices boost profitability.

Less than half of Novatek’s revenues come from gas sales at this stage and it sold 67.9 billion cubic meters of pipeline gas domestically last year, versus just 7.9 Bcm in LNG exports. It has a direct offtake contract at Yamal LNG of some 3 million tons/yr and sells 60% of Yamal’s spot cargoes. From Arctic LNG 2 it will offtake some 12 million tons/yr into its portfolio, of which it has already resold some 3 million-4 million tons/yr under long-term deals, according to Mikhelson.

It is not clear whether Novatek will sign a long-term offtake deal with the new Sakhalin-2 operator. Sakhalin Energy LLC may look for buyers for the 1 million tons/yr the project can no longer ship to Moscow-blacklisted Gazprom Marketing & Trading, which was taken over by Germany in April, and possibly the 1 million tons/yr of offtake currently going to Shell.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >

Corporate Strategy , LNG Projects, M&A, Sanctions, Ukraine Crisis
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