Russia wins in Arctic after US fails to kill giant gas project

Building the US$27-billion Yamal liquefied natural gas project meant shipping more than five million tons of materials to construct a forest of concrete and steel 600 kilometres north of the Arctic circle, where temperatures can drop to -50°C and the sun disappears for two months straight.

Yet those challenges were not as tough as the US sanctions imposed in 2014, forcing a complete refinancing just as construction was about to start. Jacques de Boisseson, head of the Moscow office of French energy giant Total, which has a 20% stake in Yamal LNG, said there were “various moments” when he thought the project may never happen.

“We were too much advanced to stop. We were in a deadlock: we had to go ahead and we didn’t know how,” Mr de Boisseson said.

Three years later, the first shipment of Yamal LNG’s gas represents a gargantuan effort from the Russian establishment to demonstrate that one of President Vladimir Putin’s flagship projects would not be derailed by sanctions.

The launch of the project in the face of sanctions has helped spur Moscow’s political pivot to China, which provided much of the financing. Novatek PJSC, which controls Yamal LNG, is already talking about its next LNG project.

London bound

The first cargo is on board a tanker headed for a port near London, helping the UK to cope with cold winter weather and an unplanned shutdown of a clutch of its own North Sea fields.

That the gas will end up in a European country that’s backed sanctions against Russia may please many in Moscow.

“We had a dream,” Mark Gyetvay, deputy chief executive officer of Novatek, said on the 13^th December. “Now we have realised that dream.”

For Yamal LNG, the timing of the US sanctions against Russian shareholders in the project in 2014 could not have been worse. It was just embarking on one of Russia’s largest-ever international financing packages, and planning to attract significant investment from western banks. In a further obstacle, the sanctions prevented Novatek’s Gyetvay from working on the financing deal as he is a US citizen.

“For Novatek, it’s a triumph over adversity,” said James Henderson, director of natural gas at the Oxford Institute for Energy Studies. “Russians have got it running and that is a bit of a triumph for them that underlines again that sanctions struggle to be effective.”

Tortured talks

Yamal’s partners hoped that non-US banks and companies would step into the breach and provide the necessary financial support.

But talks dragged on through 2014 and 2015 without a deal, as few were willing to risk the wrath of the US government by helping to fund the project, and a tumble in oil prices changed the economic calculus.

China was the only hope remaining besides Russia’s state banks. But those negotiations were just as tortuous. Novatek several times made predictions about when a deal would be signed, only to see the self-imposed deadlines pass without a result.

“Quite frankly, we are beginning to lose our patience with the excessive comments and a myopic focus on the single point,” Mr Gyetvay told analysts in October 2015, conceding that the process had been “painstakingly slow.”

Russia was forced to backstop the project, providing 150 billion roubles (US$2.5 billion) of funding from the National Welfare Fund, a rainy-day reserve built up to stabilise retirement provisions, in a high-stakes show of support.

Finally in April 2016, two Chinese state banks agreed to provide US$12 billion to the project in euros and roubles.

“There was a period of uncertainty,” Mr Gyetvay said. “And then when China came in that ended.”

Pretty impressive

Novatek’s achievement was not just one of political willpower and financial engineering. It was also technical.

President Putin, officially opening the plant in the harsh climate of northern Siberia last week, told an audience including Gazprom PJSC chief Alexey Miller that several people had come to him with a list of reasons why it could not work. “This is certainly a complex project, and we have good people here in this room, good professionals, who warned me at the beginning of this journey: ‘Do not do this’,” he said.

Gazprom had previously considered building an LNG plant in the same region but concluded it was too challenging. Other big LNG projects around the world have suffered large budget over-runs.

“It’s the only project I can think of in the last decade that actually is on time and on budget,” Mr Henderson said at the Oxford Institute. “It’s pretty impressive.”

That was not all the result of the engineering prowess of Novatek and partners Total and CNPC. The project was helped by a tumble in the rouble in late 2014 – cutting the cost of Russia-sourced equipment and labour at a key moment in the construction.

What is more, it received large amounts of Russian government support, not only in the form of financing. Yamal LNG also enjoys generous tax breaks, and the state has helped to build some of the necessary infrastructure.

For Novatek, the successful launch of the project means questions are now turning to the future. On the 13^th December, it outlined plans for some US$60 billion of investments together with partners in a second LNG plant, a trans-shipment terminal in the Far East and new domestic gas supplies.

“Today is a great moment for Novatek,” Mr Gyetvay said. “Our new strategy transforms Novatek into a global gas power.”