Novatek plans unusual winter shipments of LNG to Japan

A cold winter in Asia means the Russian gas company could benefit from high LNG spot prices — if it can make the difficult winter voyage east along the Northern Sea Route.

Russian energy company Novatek is planning to send LNG shipments to Asia via the Northern Sea Route to take advantage of record natural gas prices following a cold snap in the region. Traditionally the company only ships LNG to Asia during the summer months when the route is mostly free from ice.

However, a natural gas shortage as a result of a cold winter and ongoing maritime congestion at the Panama Canal has resulted in LNG spot prices in Northern Asia to increase 18-fold in the past nine months.

Now Novatek hopes to deliver its LNG to Japan where spot market prices are several times higher than in Europe, Russian newspaper Kommersant reports.

The company plans to cooperate with Atomflot, operator of Russia’s nuclear icebreakers, to begin shipping the cargo starting in February. Novatek and its shipping partners use specialized ice-capable Arc7 LNG carriers.

During certain ice conditions these ships can navigate the route independently but during the heart of winter, when sea ice is thickest, they require icebreaker escorts. For this reason the company so far has only shipped LNG to Asia during the summer and fall months, as early as May and as late as December.

The company’s first shipment of LNG to Japan via the NSR only came in July of 2020.

Trial transit may be followed by more winter deliveries

Last week Novatek sent two Arc7 carriers on a trial voyage to see if the ships can make the trip safely and expediently. However, ice conditions will be substantially more challenging in February and March compared to January as sea ice continues to build throughout the winter months.

Across the global shipping industry the shortage of natural gas in North Asia and especially Japan has led to efforts to divert shipments to the region to reap the benefits of record-high natural gas spot prices.

Shipments of LNG from North America to Asia traditionally pass through the Panama Canal. But congestion at the Canal has led to wait times of several weeks prompting vessels to take the much longer route either through the Suez Canal or even around the Cape of Good Hope at the southern tip of Africa.

Novatek’s shipments to Asia face none of these logistical challenges — apart from the obvious Arctic winter conditions. The market for natural gas is so tight that Novatek stands to reap substantial economic rewards for each shipment it can divert to Japan.

Finding enough natural gas to divert to Japan

One challenge, however, is that the company has sold most of its natural gas on long-term contracts and has very little LNG available to sell on short notice on the sport market where it can benefit disproportionately from the high prices.

The company will have to negotiate with existing customers to receive permission to reroute deliveries to Asia. Novatek will likely have to offer monetary incentives to the holders of long-term contracts splitting the large profits it stands to gain by shipping LNG to Asia.

The scheme may also involve another Russian natural gas company, Gazprom, which could supply natural gas to Novatek’s customers in Europe making up the shortfall as a result of Novatek delivering gas to Japan instead of Europe.

Additionally, Novatek may be able to accelerate the start of production of its fourth train at Yamal LNG. Unlike the first three trains, or production lines, whose production is mostly sold under long-term contracts deliveries from the smaller fourth train will be sold on the spot market.

This production line is already expected to come online during the first quarter of 2021 and advancing the beginning of production by even a few weeks could mean millions of dollars in additional profits for the company.

Originally Novatek had not planned to increase the number of LNG deliveries to Asia this year. In 2019 the company sent 17 shipments of LNG to Asia which increased to 36 deliveries last year.

It remains to be seen if this high-risk, high-reward strategy of diverting cargo to Asia and sending it to Japan during the middle of winter with the assistance of nuclear icebreaker escorts pays off for the company.