Biggest Arctic Gas Project Seeks Route Around U.S. Sanctions

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Yamal Peninsula
Employees walk between valve controls near the Ekaterina drilling rig at OAO Gazprom's Bovanenkovo deposit, a natural gas field near Bovanenkovskoye on the Yamal Peninsula in Russia. Photographer: Alexander Zemlianichenko Jr./Bloomberg

Total SA and its partners will use a record 16 ice-breaking tankers to smash through floes en route to and from the Arctic’s biggest liquefied natural-gas development.

They’re still looking for a way around a freeze in U.S. financing.

With 22 wells drilled, and a runway and harbor built for the $27 billion project in Russia’s Yamal Peninsula, where temperatures can reach 50 degrees below zero Celsius, Total, OAO Novatek and China National Petroleum Corp. have little choice but to push ahead.

The U.S. Export-Import Bank this year halted a study into funding the plans to ship gas from Yamal, or End of Earth in the native Nenets tongue, to buyers around the world as President Barack Obama’s administration imposed sanctions on Russia. The action by the bank, which offers credit assistance to companies buying the nation’s goods and services, effectively blocked the project from borrowing in the U.S. currency.

“The issue is in the financing because this can’t be done in dollars,” Arnaud Breuillac, Total’s president of exploration and production, said in an interview. “It’s more complex. We are working on it.”

European governments, reliant on gas from Russia, have had to tread a fine line in their relations with the country since its annexation of Ukrainian Crimea led to sanctions. The U.S. and Europe have mostly targeted the Russian oil industry and individuals with ties to President Vladimir Putin rather than impose measures that could strangle the nation’s gas exports.

Russian gas output will decline about 4 percent this year, and exports, excluding transit of Central Asian supplies to Europe, will fall 6.7 percent, Energy Minister Alexander Novak told reporters today.

Home Help

One option for Paris-based Total is to look for help from home. Coface SA is France’s answer to the U.S. Exim bank.

“We’ll get it in other currencies such as euros through credit agencies like Coface,” Breuillac said.

Coface referred queries to a finance ministry official, who didn’t respond to e-mail and phone messages seeking comment.

In the meantime, the project’s timetable has slipped. Total has said it’s no longer counting on output from Yamal LNG in its 2017 production target. Commissioning of the first LNG unit, or train, was to begin in 2016 and commercial production the following year.

“It’s moving at a normal pace after having started off very quickly,” Breuillac said in the Dec. 16 interview.

Former Chief Executive Officer Christophe de Margerie, a strong backer of Total’s expansion in Russia before he was killed in a plane crash there in October, first raised the possibility of Chinese funding for Yamal in May.

Sanctions List

Novatek executives including CEO Leonid Mikhelson and co-owner Gennady Timchenko, who is on a sanctions list, have since said they hope to receive more than $10 billion from Chinese banks in a deal that could be reached by the end of the year.

Total has also raised the possibility of backing from other European export-credit agencies, as well as ruble financing.

“We have to do this project,” de Margerie said Aug. 28 in an interview. “The reserves are there, the market is there and we need it. It is already almost half completed.” He had wanted funding secured by the end of this year. Total’s current goal is for the middle of 2015.

Novatek, Russia’s second-largest gas producer, has requested 150 billion rubles ($2.7 billion) to finance Yamal from the country’s rainy-day Wellbeing Fund.

That follows a pattern, as the Russian economy darkens and international capital markets are cut off, of local energy companies such as OAO Rosneft seeking state-backed funds.

Designed to produce as much as 16.5 million metric tons of LNG a year on the peninsula at the Ob River estuary, which is ice-bound nine months of the year, Yamal is central to Total’s plans to boost output and Russia’s bid to export more of the fuel.

Billed by Total on its website as one of the largest industrial projects in the Arctic, more than 200 wells are eventually planned. The country’s only other LNG plant is in the country’s Far East, and is controlled by OAO Gazprom.

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