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Russia's Arctic LNG 2 megaproject gets the greenlight, gears for 2023 startup

PAO Novatek and its partners are proceeding with the Arctic LNG 2 project on the Gydan Peninsula in Russia, the largest project to receive a final investment decision in the last 15 years, according to a Sept. 5 note from IHS Markit.

Capital expenditures are estimated at $21.3 billion to launch the project, which includes a natural gas liquefaction plant and the development of the Utrenneye onshore gas and condensate field, at full capacity, Novatek said in a news release on the same day. The project has very low upstream costs with the development of the field's resources, Total SA said in a separate release.

The project's operational cost is expected to be lower than other liquefaction plants around the world due to the freezing weather in the area throughout the year, according to IHS Markit Associate Director Chong Zhi Xin.

The LNG plant is designed to have three liquefaction trains with a total production capacity of 19.8 million tons per annum. Each train will have concrete gravity-based structures, which will help slash capital expenditures by more than 30% per ton of LNG, according to Total. The first train will be launched in 2023, followed by the second train in 2024 and the third train in 2026.

Chong said there will be minimal civil work on-site, as the trains would be assembled in the Murmansk Kola shipyard then shipped to the location, further driving down costs. Chong also expects long-run production cost to be as low as $3 to $4 per MMBtu on a free-on-board breakeven basis if the Russian government provides tax relief.

Novatek said the project has already started on the drilling of production wells and construction of roads and production infrastructure in the field.

Production will be delivered by a fleet of ice-class LNG carriers that will use the Northern Sea Route and the transshipment terminal in Kamchatka, Russia, for cargoes bound for Asia. The route will reduce travel time by about 20 days to Northeast Asia, but other areas such as South Asia and Southeast Asia will not benefit from the route, Chong said. Cargoes bound for Europe will use the transshipment terminal near Murmansk, Russia, Total said.

The project partners will have long-term LNG off-take based on their ownership interests. The project will add 12 mtpa to Novatek's portfolio and is expected to make the Russian company one of the biggest LNG suppliers in the market, Chong said.

A consortium of TechnipFMC PLC, Saipem SpA and NIPIGas were earlier awarded the engineering, procurement and construction contract of the LNG plant. SAREN, a joint venture between RHI Russia and Saipem, will design and build the gravity-based structures for the project.

Novatek serves as project operator with a 60% stake, while Total holds a 10% interest. Total also holds an 11.6% indirect participation in Arctic LNG 2 through a 19.4% stake in Novatek, resulting in a total economic interest of 21.6% in the project. CNOOC Ltd., China National Petroleum Corp. and Japan Arctic LNG, which is a joint venture between Mitsui & Co. Ltd. and Japan Oil Gas & Metals National Corp., also own 10% each.