Vladimir Putin officially launched on Friday the Yamal LNG project in the Arctic—Russia’s second LNG plant and its push to challenge the dominance of Qatar and Australia, and the U.S. in the future, on the global LNG market.
The first tanker from the US$27-billion project will be shipped to China’s CNPC, in what the majority holder of the project, Russia’s Novatek, said in October is “in recognition for their overall contribution to the project and the importance the Asian Pacific market represents as a key-consuming region.”
Novatek is the majority shareholder of Yamal LNG with 50.1 percent, France’s oil and gas supermajor Total has 20 percent, CNPC holds another 20 percent, and China’s Silk Road Fund owns the remaining 9.9 percent. All LNG production will be sold to customers in Europe and Asia under 15- to 20-year contracts, Total says.
Novatek, which has been on the U.S. list of sanctions since 2014, has turned to Chinese partners for financing to complete the multi-billion-dollar project. The Russian natural gas producer sold the 9.9-percent stake to the Silk Road Fund in early 2016, after having received a 15-year loan of around US$860 million (730 million euro) by the fund for the financing of the project.
Earlier this year, Putin said that Russia not only can—but will—become the world’s biggest LNG producer.
At a meeting with Russia’s top oil and gas industry officials in Yamal on Friday, Putin said that the project “contributes to strengthening economic cooperation with the countries of the Asia-Pacific region, primarily, our key partners in this region, including Chinese companies.”
Asia is the key LNG import demand region in the world, and China’s push to have millions of consumers switch from coal to gas has resulted in gas shortages in the country and in companies stashing emergency LNG supplies ahead of the winter.
Putin was quick to say that LNG exports would not weaken Russia’s pipeline gas market positions that Moscow should keep and strengthen.
At full capacity, the Yamal LNG facility is expected to supply 16.5 million tons of LNG per year to Asian and European markets.
“With remarkably low upstream costs, Yamal LNG is one of the world’s most competitive LNG projects and it will contribute to the Group’s gas production for many years,” Patrick Pouyanné, chairman and CEO of the European partner in the project—Total—said in a statement.
Yamal LNG shipments will test the viability of a new LNG shipping route— the Northern Sea Route—through icy waters navigable between May and November. According to Total, the Northern Sea Route will allow vessels to reach Asia in 15 days via the Bering Strait, compared with 30 days using the conventional route through the Suez Canal.
The shipping costs using ice-breaker tankers will be high, but Russia has granted the Yamal project a 12-year tax holiday from its mineral extraction tax, and Russia’s LNG exports will not incur export taxes.
“The plant’s first operating months will show whether the plant can operate smoothly in the harsh Arctic environment. Also, the Northern Sea Route transportation is in its early stages of development, and its feasibility as a major LNG delivery route is unclear,” Samuel Lussac, Senior Research Manager, Russia Upstream Oil & Gas at Wood Mackenzie, commented on the Yamal LNG start-up.
The Yamal launch was attended by Saudi Energy Minister Khalid al-Falih, alongside other oil and gas industry officials.
“Buy our gas,” Putin told al-Falih in a friendly conversation with the Saudi minister. “You will save some of your oil,” Putin added.
With Yamal LNG, Novatek has turned from a solely domestic gas supplier to a global LNG player, Wood Mackenzie says, but adds that the key question now is how to ramp up production and how it will impact the global LNG market.
According to the International Energy Agency (IEA), the LNG player that will be on course to challenge Qatar and Australia for global leadership in LNG exports by 2022 is the United States.