Novatek Readies More LNG Sales After China Accord on Yamal Plant

OAO Novatek (NVTK) plans to secure more deals to supply liquefied natural gas to Asia this year after signing an accord with China last week, bolstering its challenge to OAO Gazprom (GAZP)’s export monopoly.

Novatek agreed after less than four months of talks to sell LNG to China National Petroleum Corp. at a price linked to oil, according to Chief Executive Officer Leonid Mikhelson, who with fellow billionaire Gennady Timchenko, a co-founder of Gunvor Group, controls the Tarko-Sale, Siberia-based company.

Now limited to Russia’s domestic market, Novatek is awaiting the government’s decision on loosening Gazprom’s control over LNG shipments abroad. President Vladimir Putin favors partial liberalization of gas exports to boost energy supplies to Asia, where demand is growing faster than in Europe, which Gazprom supplies by pipelines.

“There may be more such agreements this year,” Mikhelson said in a joint interview with Interfax in St. Petersburg on June 21. “Also Asian companies.”

Gazprom, which supplies a quarter of Europe’s gas, has spent a decade discussing supplies with CNPC via a pipeline without reaching a deal because of differences on prices. The world’s biggest producer of the fuel is searching for new markets as European demand slows.

Presidential Support

“The government has heard our arguments and if the president discusses it in a speech, then I think the issue will be decided,” Mikhelson said, referring to Putin’s address to the St. Petersburg International Economic Forum on June 21.

Novatek invited CNPC to acquire 20 percent of the planned $20 billion Yamal LNG project and agreed to supply at least 3 million tons of the chilled fuel by tanker to the Beijing-based company. CNPC’s entry will be completed in the next three months, and a long-term supply contract will be signed, Mikhelson said. The price will be open to periodic review, he said.

CNPC will pay “a little more” than Total SA (FP), which bought 20 percent in Yamal LNG for $800 million and may pay an additional $500 million depending on the final capital expenditure. CNPC will compensate for investments made since the creation of the joint venture, in proportion to its stake, Mikhelson said.

Yamal Financing

The CNPC deal creates “favorable conditions” for securing external financing of the Yamal LNG project, Mikhelson said. Novatek expects a decision on LNG export rights to be made this year, which will open the way to raise project financing in the first half of 2014, he said.

Everything will be ready for a final investment decision on Yamal LNG at the end of September or beginning of October, after talks with contractors and equipment supplies, the executive said.

While some Yamal LNG volumes may flow to Europe when the project starts at the end of 2016, Novatek is targeting China, where, according to the International Energy Agency, demand rose 13 percent last year. Europe’s gas use fell 1.6 percent.

Demand in China will grow by 12 percent a year over the next five years as it absorbs one-third of new LNG supplies worldwide over that period, the IEA said in its Medium-Term Gas Market Report on June 20.

Detailed talks with CNPC started after February, when Mikhelson traveled to China at that time to hold talks with potential Yamal LNG partners and buyers.

Novatek is figuring out how much LNG it can sell in Indian, Chinese and other Asian markets, Mikhelson said. “Our vision is that there will be a little more for the Chinese market.”

To contact the reporter on this story: Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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