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Putin Frees Russian Gas Chilled Amid Permafrost: Energy Markets

Ice sits on a valve control wheel connected to pipe work at a natural gas field near Bovanenkovskoye on the Yamal Peninsula. Photographer: Alexander Zemlianichenko Jr./Bloomberg
Ice sits on a valve control wheel connected to pipe work at a natural gas field near Bovanenkovskoye on the Yamal Peninsula. Photographer: Alexander Zemlianichenko Jr./Bloomberg

Dec. 6 (Bloomberg) -- Liquefied natural gas from Russia’s Yamal plant, built on pylons driven into northern Siberia’s permafrost, will reach Europe just as global output is predicted to expand by a record amount.

President Vladimir Putin ended state-owned OAO Gazprom’s monopoly on LNG exports on Dec. 1, allowing OAO Novatek, built by Russian billionaire Leonid Mikhelson, to sell fuel from Yamal. The plant will help boost annual global capacity in 2018 by an unprecedented 75 million metric tons, a quarter of the current level, according to Energy Aspects Ltd., a London-based consultant.

While the Yamal project, valued by the company at $20 billion, will have costs that are about a third of those at competing Australian plants, it will have to ship to Asian markets via northwest Europe for eight months of the year when the sea route freezes over. LNG prices are close to a record as buyers in northeast Asia and South America compete for cargoes, spurring new projects globally that will also add to supply in the next several years.

“It isn’t the best time to start new projects,” said Valery Nesterov, an analyst at Sberbank Investment Research in Moscow who has four decades of experience in oil and gas. “Russia is a bit late and now we have to take full advantage of the strong points of our projects, such as low upstream costs at Yamal LNG.”

Asian Prices

LNG for delivery to northeast Asia climbed 10 percent this year to $19 a million British thermal units, according to World Gas Intelligence assessments of cargoes for delivery in four to eight weeks. Prices in southwest Europe gained 24 percent to $13.80, while U.S. natural-gas futures rose 19 percent to $3.98 on the New York Mercantile Exchange.

Global LNG capacity will reach 468 million tons in 2018, from 295 million this year, according to Energy Aspects. That includes the expansion of output from Russia and excludes projects in East Africa and Cyprus that will probably be delayed into the next decade, said Trevor Sikorski, the consultant’s head of natural gas, coal and carbon.

There will be “enough room for everyone” in the LNG market and those with more competitive costs will benefit, Denis Solovev, a Novatek spokesman based in Moscow, said today by e-mail, citing earlier remarks by Mikhelson.

Putin pushed for the gas export law to increase the clout of Russia in global LNG markets. The nation is the world’s biggest gas exporter. It accounts for about 5 percent of LNG supply and 30 percent of pipeline deliveries, according to data from BP Plc.

Spanish Demand

Yamal LNG, the Novatek-led venture whose other partners are Total SA and China National Petroleum Corp., signed in October a contract to sell 2.5 million tons a year from the 16.5 million-ton project to Gas Natural SDG SA, which will meet 10 percent of Spain’s annual gas demand. The 25-year deal is the first for direct LNG supplies from Russia to Europe.

Novatek plans to build three units of 5.5 million tons each on the Yamal peninsula, where temperatures drop to minus 50 degrees Celsius (minus 58 degrees Fahrenheit) in winter, according to Gazprom. That compares with Chevron Corp.’s 15.6 million-ton Gorgon project, a three-unit plant and the largest resource development in Australia’s history. It will ship its first cargo in 2015.

Gorgon is the cheapest of seven Australian LNG projects, with upstream capital expenditure and pipeline costs of $1 billion per billion cubic meters of gas produced, compared with Yamal’s $300 million, according to Sberbank.

Finding Buyers

“As long as Yamal LNG is to supply gas at competitive pricing conditions relative to the current market they will find buyers in Europe willing to buy their LNG,” said Massimo Di-Odoardo, a gas and power analyst at Wood Mackenzie Ltd. in London. “So far it’s been Gas Natural, but there might be some other buyers lined up to bring gas into northwest Europe.”

Yamal LNG is the only project under construction to pump onshore conventional resources and will require $400 million per million tons of capacity in upstream and pipeline spending, compared with as much as $2.3 billion for Australia’s Ichthys project or $1.5 billion for Sakhalin-2, Russia’s only operational LNG plant led by Gazprom, Sberbank said.

Yamal expects to complete an international airport capable of accepting Boeing Co. 737 aircraft by June, Gabriel Brecque, director of marketing and shipping, said at a conference in Paris last month. The nearest airport is currently a three-hour helicopter ride away.

Six Icebreakers

The plant will be built on 4,800 pylons, raising it 1.5 meters (5 feet) off the 500 meters of permafrost beneath and protecting it from soil movements during summer thaws. Two anti-ice barriers and six icebreakers will keep access to the Sabetta seaport free of ice.

LNG sales into Europe slumped 24 percent last year, according to BP. Supplies will again reach the peak seen in 2010-2011 by around 2018, Graeme Wildgoose, a natural gas and LNG consultant at Poten & Partners Inc., said Oct. 30 at a conference in Amsterdam.

Demand increased in Japan and South Korea, the two biggest LNG importers, as the former shut nuclear reactors after the March 2011 Fukushima disaster and the latter halted units after discovering the facilities were using components with fake quality warranties. Latin American countries including Brazil bought more for power generation after the worst drought in 50 years depleted hydro reservoirs.

Europe offers more profitable terms for contracting and the transport cost is also a factor, Mikhelson, the company’s chief executive officer, said last year.

Gunvor Group

He built Novatek together with fellow billionaire Gennady Timchenko, a co-founder of Gunvor Group Ltd. They own about 48 percent of the Yamalo Nenets, Siberia-based company. Novatek pumps more oil and gas than BG Group Plc and aims to double gas production to about 113 billion cubic meters a year by 2020, according to a strategy presentation in 2011. That would be enough to supply France and Germany.

Yamal will use Europe to transfer its LNG from November through June, when the so-called Northern Sea Route to Asia becomes inaccessible even for the project’s 16 specially commissioned ice-breaking tankers.

The tender for the so-called transshipment services, which will mean reloading into conventional LNG tankers at a European terminal, is at the final stages, Novatek Chief Financial Officer Mark Gyetvay said on a conference call on Nov. 8.

France’s Montoir terminal has carried out three ship-to-ship LNG transfers since becoming the first port to offer the service in August.

Border Gas

Europe buys most of its gas under long-term contracts linked to the price of Brent crude, which is more expensive than buying the fuel on traded markets such as the U.K.’s National Balancing Point.

Russian gas at the German border cost an average of $11.27 a million Btu in the first 10 months of this year, compared with $10.33 on the NBP, according to data from the World Bank and ICE Futures Europe.

Novatek will base its European supply contracts on a combination of NBP and Brent pricing, according to Gyetvay, who also said that Yamal has contracted 70 percent of its output. The company signed a 15-year supply accord with CNPC in October.

Yamal LNG should use swaps rather than physical transshipments, keeping the cargoes in Europe and meeting Asian commitments by sourcing shipments nearer that region, according to Julian Lee, an analyst at the Centre for Global Energy Studies in London.

‘Practical People’

“LNG portfolio players are usually practical people,” Frederic Deybach, vice president for prospection at GDF Suez SA’s LNG unit, said at a conference in London in September. “Maybe at the end of the day some of the LNG will not end up where it was contracted and stop on the way where it’s actually maximizing benefit for everyone.”

Russia’s OAO Rosneft plans in 2018 to start a liquefaction plant on Sakhalin Island, north of Japan, while Gazprom seeks to build facilities on the Baltic Sea coast and in Vladivostok, in the nation’s Far East.

Yamal’s target to start output at the end of 2016 is “very ambitious,” Lee said. Commercial supplies will start in the first half of 2017, Brecque said in Paris.

“The challenge remains to undertake the project on time and on budget, in extreme weather conditions within the Arctic,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein, said in a September report.

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

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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