Arctic ice escort of NOVATEK

26.09.2011 — Analysis

The Russian government has allotted NOVATEK, OJSC, four new mine fields not far from Yamal Peninsula where the company is planning to build a liquid natural gas plant (an LNG plant). The rapidly increasing resource base and vigorous government support of NOVATEK are expected to bring Yamal LNG foreign investors who will share risks with Russian producers. However, experts have told the RusBusinessNews columnist that the profitability of the project is highly doubtful. So far, all the fuss about gas production and transportation from Yamal to Asia looks like an attempt to inflate the company capitalization before selling shares to outside investors.

By decision of the Russian government, NOVATEK, OJSC, was granted the right to explore and develop the Geofizichenskoye, Salmanovskoye, Severo-Obskoye and Vostochno-Tambeiskoye fields with gas reserves totaling 3 trillion cubic meters. All the four fields are located not far from the Yuzhno-Tambeiskoye field, which is expected to become the main source of hydrocarbons for the Yamal LNG project.

The investment decision is not ready, but the experts think that there are billions of US dollars at stake, as the project covers not only construction of the LNG plant, but also development of the LNG transportation route to the Asian region. It has already been decided that gas will not be supplied through pipelines. NOVATEK pins its hopes on the Northern Sea Route that in the Soviet times was used to deliver cargoes from Murmansk to Pevek, which is no distance to Japan. Last summer the Rossiya icebreaker cleared the way for the first tanker with gas condensate owned by NOVATEK. Due to sizeable reduction in time and cost of the delivery of hydrocarbons to China, Leonid Mikhelson, NOVATEK Chairman of the Board, emphasized viability of the route.

In the meantime, the time of project implementation is still not clear. At first, it was announced that the plant would start operating five years after the investment decision was approved, i.e. approximately in 2015-2016. However, the trial ice escort of the tanker along the Northern Sea Route must have caused new questions; therefore, the time scheduled for investment decision making was changed. L. Mikhelson has informed that the negotiations with foreign investors regarding purchasing of 49% shares of Yamal LNG are being rolled back, until the economics of the project becomes clear. At the same time, he promised that the plant will be commissioned on schedule; however, the experts have strong doubts about this.

Alexei Belogoriev, head of the Expert and Analytical Department for Fuel and Energy Complex, the Institute of Energy Strategy, notes that question arise concerning economics of almost all undertakings of NOVATEK. The experts doubt about profitability of the Yamal LNG project. The company does not give any reliable estimations, but it is clear that the development will cause problems: There is no adequate infrastructure, issues pertaining to gas delivery to consumers are still unsolved - the situation is still shaky regarding the demand for liquefied hydrocarbons. Apparently, NOVATEK is interested in attraction of foreign companies to share substantial investment risks.

Foreign companies are lured by the taxation carrot: The companies that operate on Yamal are exempt from the mineral extraction tax, and there are promises for new benefits - exemption from duties, property tax and profit tax. The NOVATEK shareholders also expect that the government will take part in development of the required infrastructure. It is a strong argument in negotiations with investors. Foreign companies are expected to provide technologies that are not available to Gazprom (not to mention NOVATEK), money and serious marketing research that will be able to cast light on future profits.

Profits are the most unclear area. Igor Yushkov, an analyst of the National Energy Security Fund, thinks that the Yamal LNG project is difficult to implement. No one doubts its singularity, but delivery of liquefied gas using the shortest way to Asia requires restoration of the Northern Sea Route. The rehabilitation means a formidable task of building the icebreaker and tanker fleet. The government is ready to provide its assistance: Sovkomflot, OJSC, is intended to purchase ice-class liquefied-gas carriers that can crush ice, which is one meter and a half thick, requiring no icebreaker assistance in summer. In winter there still will be need in icebreakers, which are not available so far and which are not easy to build for a number of reasons. The summer period lasts only four months in the Arctic Region; therefore, there is a problem of delivery of liquefied gas to consumers during the rest two thirds of the year.

The experts understand that the August ice escort of the tanker with gas condensate is nothing but a promotional event aimed to demonstrate the world that Russia is returning to the ranks of Arctic nations. There is some advertising tint in the decision of the Russian government regarding allotment of new license areas in the Gulf of Ob to NOVATEK; these areas are supposedly meant to form the resource base for the Yamal LNG project. The experts state that, in fact, the liquefaction process will use the gas mostly from the Yuzhno- Tambeiskoye field, whereas the gas from the Geofizichenskoye and Salmanovskoye fields must be delivered to the plant. In other words, the new license areas are a very token resource, which will be able to be used only in distant future. Can it be that all the attempts are meant to cheat foreign investors?

By today, NOVATEK has been able to convince investors only in connection of the company with Russian politicians who support it. The Itera Oil and Gas Company, LLC, which tried to compete with the company for gas resources in Yamal, has no such lobbying support and is likely to be acquired by Gazprom or by NOVATEK. However, the government support alone is not sufficient for foreign investors. They are interested in Yamal LNG solely as in a long-term project; therefore, they will bring money only when they see clearly economic benefits. At the moment, they see that the NOVATEK capitalization is being actively inflated to increase the selling price for the share in the project.

Foreign investors are shrewd in business; it was long ago that they stopped investing money in the projects where they do not act a general contractors, i.e. where they have no control over design and estimate documentation. Therefore, the most probable investors on the Arctic coast in the near future will be Russian taxpayers, who due to excessive lobbying resources of NOVATEK can face reductions in social programs.

Vladimir Terletsky