China is set to expand its role in Novatek’s Arctic gas development

By Malte Humpert, High North News November 3, 2017
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Novatek’s Yamal LNG development in the Arctic (Courtesy of Novatek via High North News)
Novatek’s Yamal LNG development in the Arctic (Courtesy of Novatek via High North News)

Russian natural gas giant Novatek will cooperate with the China National Petroleum Corporation and the China Development Bank in the implementation of the Arctic LNG 2 project. This partnership follows an already-existing cooperation between the two countries on Novatek’s Yamal LNG project.

The company signed a strategic cooperation agreement with CNPC with the aim to jointly develop the large-scale Arctic LNG 2 project and collaborate in various segments of natural gas and liquefied natural gas markets, including the trading of LNG and gas infrastructure. In addition a memorandum of understanding was signed under which the China Development Bank will provide for up to $3 billion in financing for the project under a framework between Vnesheconombank and the Export-Import Bank of China.

Growing cooperation with China

The agreements signal a continuation of Novatek’s strategy to use international financing sources to rapidly expand its LNG operations and may be a significant step in securing the needed funds for the project.

“Our companies already have a history of effective cooperation, including the successful implementation of the Yamal LNG project,” said Chairman of NOVATEK’s Management Board Leonid Mikhelson.

CNPC holds a 20 percent stake in the Yamal project and Novatek had received a $12 billion loan from the China Development Bank. In addition the Chinese Silk Road Fund holds a 9.9 percent stake. Mikhelson stressed that the strategic cooperation on Arctic LNG 2 will further strengthen the existing relationship and create new opportunities for both companies. Here he highlighted the importance of the enormous opportunities of the Chinese market, which is bound to become the largest individual gas market in the coming decade.

Location of Yamal LNG and Arctic LNG 2 and proposed export routes via the Northern Sea Route during summer and winter (Malte Humpert / High North News)
Location of Yamal LNG and Arctic LNG 2 and proposed export routes via the Northern Sea Route during summer and winter
(Malte Humpert / High North News)

Efforts to find investors

Although less expensive than the $27 billion price tag of the Yamal development – which saw a number of delays and was hampered by European and US sanctions – Arctic LNG 2 is still estimated to come in at around $10 billion. In an effort to find funds “Russia has recently been wooing everyone from the Saudi government to the Japanese utilities,” says Karen Thomas, of LNG World Shipping, a trade publication.

While Novatek received $2.4 billion in state funding for Yamal, it does not expect to do so for this new development, further highlighting the importance of this new cooperation with the Chinese. Talks with Saudi investors are also said to be ongoing and French partner Total, holding a 20 percent stake in Yamal LNG, is contemplating an investment in the new project as well.

Looking beyond Yamal LNG

Novatek expects construction to begin in 2019 and aims to open the first of three LNG trains by 2023. As with Yamal, natural gas will be exported via the Northern Sea Route including a planned transshipment hub at Kamchatka announced last week.

Once fully operational Arctic LNG 2 is set to have a production capacity of 18 million tons compared to Yamal LNG’s 16.5 million tons. The latter is expected to begin production before the end of 2017 with the second and third production lines coming online and 2018 and 2019 according to Novatek. Whether the company can stick to its ambitious timeline will serve as an early indicator for how quickly it can bring future projects to fruition.