Novatek Shifts Focus to Liquids as Gas Market Changes Stumble

OAO Novatek, Russia’s second-biggest natural-gas producer, is switching its focus to more profitable liquids production after gaining control of Siberian resources as changes to the domestic gas market stall.

“Our main profitability in the next several years will come from increasing liquids production,” Novatek Chief Executive Officer and billionaire shareholder Leonid Mikhelson said in Davos, Switzerland.

Novatek is revamping its strategy after more than doubling its share of the domestic gas market in the past seven years and eating away at state-run OAO Gazprom’s dominance. Gas expansion is constrained by Gazprom’s monopoly on export pipelines, while Novatek, controlled by Mikhelson and Gennady Timchenko, an ally of President Vladimir Putin, profits from shipments of liquids and products abroad.

Novatek is seeking record growth in production of crude and gas condensate, which is similar to light oil, of about 40 percent to 50 percent, according to Mikhelson. Gas production growth is estimated at 7 percent to 8 percent, he said.

“This year, liquids will account for 12 percent of output, up from 9 percent, while contributing 50 percent of earnings, up from 40 percent,” Mikhelson said.

Gas output increased 8.5 percent to 62.2 billion cubic meters last year, and condensate and crude production rose 11 percent to 4.77 million metric tons.

Rosneft Swap

Novatek added crude and condensate reserves after agreeing last year to gain control of the SeverEnergia venture with Gazprom’s OAO Gazprom Neft unit. The company swapped its shares in a natural gas venture with OAO Rosneft for a stake in SeverEnergia that the state-controlled oil producer had acquired from Enel SpA. Novatek also bought out the fourth partner, Italy’s Eni SpA.

SeverEnergia’s reserves are 24 percent liquids, compared with Sibneftegas, the project that Novatek ceded to Rosneft, which has 98 percent gas reserves, according to Maxim Moshkov, an energy analyst at UBS AG in Moscow, said by phone.

The new strategy will be approved by the end of the year, Mikhelson said. Novatek estimated capital expenditures to 2020 at about $28 billion in the plan it presented in December 2011.

Novatek exports crude, stable gas condensate, liquefied petroleum gas and gas condensate products, benefiting from higher prices overseas. The company won the right to export liquefied natural gas in December 2013, with plans to start production in 2017, while still having no right to export gas though Gazprom’s pipelines under a 2006 law.

European Prices

To make the domestic market more attractive, the government needs to make decisions on transportation and storage costs and resume plans to increase Gazprom’s regulated gas prices, according to Mikhelson. In 2006, Russia planned within five years to raise local gas prices to European netback levels, that is, equalizing profitability, taking into account transportation costs and duties. The target year has been changed several times since then.

Novatek may increase its local gas market share to 21 percent in 2015 from 16 percent in 2012 and 8 percent in 2006, according to Sberbank CIB Jan. report.

Novatek and oil producers will continue to expand their presence in Russian gas sales, Mikhelson said, declining to elaborate.

To contact the reporter on this story: Elena Mazneva in Moscow at emazneva@bloomberg.net

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

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