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INTERVIEW: Novatek eyes mid-2020s benefit of recent LNG project deferrals

Highlights

CFO welcomes low LNG prices as demand stimulus

No longer term demand hit in COVID-19 aftermath

Yamal LNG costs just $0.60/MMBtu to produce

London — Russian LNG producer Novatek will be in a good position to exploit any tightening of the global market in the mid-2020s, following the recent string of new project deferrals and cancellations, as it positions itself to bring on significant new LNG production capacity in the coming years, CFO Mark Gyetvay said in an exclusive interview this week.

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Novatek -- operator of the 16.5 million mt/year Yamal LNG plant in northern Russia -- also sees the current low prices as potentially having a positive effect for the industry as they stimulate new demand for the fuel, Gyetvay said.

Numerous LNG project approvals have been put back due to low prices, the demand slump and companies slashing spending, including several in the US and a number of projects in Africa.

But Novatek is on schedule for a 2023 startup for the first train of its 19.8 million mt/year Arctic LNG 2 project and also plans to start up the planned 5 million mt/year Obskiy LNG project in 2024.

"We believe with the recent wave of project cancellations and FID delays, we are in a good position to capture this growing LNG market in the second half of this decade," Gyetvay said.

Novatek has plans to reach a total of up to 70 million mt/year of LNG production capacity by 2030 as new projects come online over the coming years.

But while the medium-term prospects for the industry remain positive, recent global events have seen spot LNG prices plunge.

The JKM benchmark Asian spot price fell to a record low of $1.825/MMBtu in late April due to oversupply and the demand impact from the COVID-19 outbreak, while oil-indexed long-term LNG prices will also dip later in the year as the oil price fall filters through to those contracts.

Gyetvay said, however, that there were benefits to lower LNG prices for producers.

"We actually welcome a relative period of lower global gas prices as this will stimulate demand in price sensitive regions," he said.

"This fact is key to further implement the energy transition from coal to gas, as well as to support infrastructure build in developing markets."

Novatek's long-term sales contracts from Yamal LNG are typically oil-linked, meaning the recent collapse in oil prices will eventually impact those oil-indexed contracts.

"But in our case, we are somewhat protected on the downside by the S-curves embedded in our long-term contracts, similar to the protection accorded the buyers if we had a significant upward spike in oil prices. So, it works to the mutual benefit of both parties," Gyetvay said.

The spot market is also increasing in importance, he said, representing about one-third of the global LNG market. "This segment provides liquidity to the market as buyers want a matrix of options to fit their particular consuming needs," he said.

Demand recovery

Gyetvay said demand for LNG in the longer term would remain strong despite the current consumption hit from COVID-19, saying he did not expect a structural shift in demand in the aftermath of the virus.

"We do not see this present pandemic as a destruction to structural demand, as the energy transition is underway supporting a shift toward clean-burning fuels like gas," he said.

In the shorter term, Gyetvay said he expected a slow recovery in demand in 2020 post-COVID-19, but that the global gas market was still under pressure from other factors.

"The market was already oversupplied as new plants were commissioned in the US, and we had another year of unseasonably warm winter weather. Then, COVID-19 emerged and the economic damage [...] is unprecedented," Gyetvay said.

While there are already signs of demand recovery, especially in China, Gyetvay said the gas industry also needed a return to normal winter weather, the shutting-in of marginal production and a reduction in high storage volumes to recover.

"Easy said, but this will require many factors to come into alignment, which unfortunately is not within control of management," he said.

Yamal LNG efficiency

In the meantime, the Yamal LNG project continues to operate at above its nameplate capacity, Gyetvay said.

Last year, the plant operated at around 111% of its technical 16.5 million mt/year capacity, delivering an additional 1.9 million mt of LNG, and beat that run rate again in Q1 at an annualized rate of roughly 122%.

"Although this run rate is not sustainable, it clearly demonstrates the operational efficiency of the liquefaction process in the colder ambient temperatures of the Arctic zone," Gyetvay said.

The facility, he said, had proven to be commercially viable to develop -- despite skepticism from many about Novatek's ability to deliver a large-scale LNG plant in the Russian Arctic -- and has some of the world's lowest landed LNG costs to key importing markets.

Given its "prolific" resource base at the South Tambeyskoye field and the operational efficiencies achieved through the colder ambient temperatures, Novatek has shown it could competitively deliver LNG to key markets "even in a stress case scenario" like the current one with COVID-19 lockdowns and demand impact.

Based on the company's 2019 financial results, Novatek was able to deliver feed gas into the plant at less than $0.10/MMBtu, liquefy the gas at roughly $0.50/MMBtu for a Sabetta FOB price of under $0.60/MMBtu.

And it is working to bring down other associated costs, such as shipping, as well.

"We are now working to further reduce our transport costs and optimize our logistical model by building transshipment facilities in Murmansk and Kamchatka, as well as strategically utilize ship-to-ship transfers, when required," he said.

Shipping plans on track

Gyetvay said plans for the two transshipment facilities -- at Murmansk for westward shipping and Kamchatka for eastward shipping -- were progressing as planned.

"We are working on building the two transshipment facilities in Murmansk and Kamchatka to optimize our use of projected tanker fleet as well as to reduce overall transport costs to market," he said.

"The two transshipment complexes have garnered strong industry interest from potential partners who view them as a way to optimize deliveries to market and provide flexibility to offtake smaller volumes of LNG and shorter distances to market."

In the meantime, Novatek has used both transshipment options at Honningsvag in Norway and at Zeebrugge in Belgium.

The company had switched away from using Honningsvag to move LNG from its specialized icebreaker fleet onto conventional LNG tankers, and focused on just doing transshipments at Zeebrugge where it has a long-term contract with Fluxys.

"We recently restarted transshipments at Honningsvag in early April and we will continue to use this facility as needed to optimize our logistics," Gyetvay said.

"We will also continue to utilize the Zeebrugge facility as part of our logistical model as we have dedicated storage at this facility, and this facility is strategic to our LNG marketing efforts."

Additional projects

Gyetvay said Novatek remained "fully committed" to delivering its future LNG projects and increasing LNG production capacity to 70 million mt/year.

Novatek's next large-scale LNG project -- Arctic LNG 2, located on the Gydan peninsula in Russia's Far North -- remains on schedule for first train commissioning in 2023, he said.

The second train is expected to come online as planned in 2024, while the third train is now set to start in 2026.

Gyetvay also gave an update on the expecting timings of its other LNG projects.

A fourth "micro-train" at Yamal LNG with a capacity of 1 million mt/year is now scheduled to come online by the end of 2020, a delay from a previous target of the first half of this year.

The Obskiy LNG project on the Yamal peninsula has yet to reach final investment decision although all engineering work is proceeding as planned. Gyetvay said startup of the project is expected in 2024.

Novatek also has lined up two more LNG production projects -- Arctic LNG 1 and Arctic LNG 3.

Arctic LNG 1 will be based on the Soletsko-Khanaveyskoye field located on the Gydan peninsula as well as the recently acquired Bukharinskiy license area.

"Arctic LNG 1 will utilize the same gravity-based structures as used on the Arctic LNG 2 project and will be connected via a pipeline to the Utrenneye terminal," Gyetvay said.

"Arctic LNG 3 is still in early stage exploration works and is projected as a post-2030 project," he said.

Novatek's existing, planned LNG production capacity

Start date/expected start date
Capacity (million mt/year)
Yamal LNG
(Train 1)
Dec-17
5.5
(Train 2)
Aug-18
5.5
(Train 3)
Nov-18
5.5
(Train 4)
End-2020
1
Arctic LNG 2
(Train 1)
2023
6.6
(Train 2)
2024
6.6
(Train 3)
2026
6.6
Obskiy LNG
2024
5
Arctic LNG 1
N/A
N/A
Arctic LNG 3
N/A
N/A

Source: Novatek, S&P Global Platts