Authored by Tim Daiss via Oilprice.com,
Russia’s second largest natural gas producer, independent player Novatek, has signed up key participation from two state-owned Chinese oil majors in its massive Arctic LNG 2 project. The deals were inked last week at the Second Belt and Road Forum for International Co-operationheld in China. This cements Novatek’s position as Russia’s leading liquefied natural gas (LNG) developer, moving it a step ahead of the country’s two state-backed companies, Rosneft and Gazprom. China National Offshore Oil Corp. (CNOOC) and China National Oil and Gas Development Co. (CNODC), a unit of China National Petroleum Corp. (CNPC), signed up to acquire 10 percent each in the project. CNOOC is also China’s largest offshore oil and gas producer and developer.
Novatek’s chairman, Leonid Mikhelson, welcomed CNOOC’s involvement, saying China was “one of the key consuming markets for our LNG sales.” He added that Arctic LNG 2 would be a “game-changer” in the global gas market and noted the company’s experience from its Yamal LNG project as a demonstration of its ability to carry out operations in the Arctic.
The entry of the CNPC unit, meanwhile, was described by Mikhelson as an “important milestone” for Arctic LNG 2, while he noted the Chinese company’s participation in Yamal LNG. “The accumulated experience of working together is a solid basis for the successful implementation of our new LNG project,” he said. No details have been given yet for the price the Chinese companies paid. French oil major Total also invested in Arctic LNG 2 in March. Novatek, in its first-quarter results, said the sale of a 10 percent stake in the project had resulted in a net gain of $4.8 billion.
China was instrumental in making the Yamal LNG work. In addition to the participation of CNPC, which acquired a 20 percent stake in 2013, the Silk Road Fund (SRF) purchased a 9.9 percent stake for $1.21 billion in March 2016. SRF also provided a 15-year loan worth some $813 million. Additionally, CNPC signed up to a 20-year off-take agreement, covering 3 million tons per annum (mtpa) of Yamal LNG’s production, indexed to the Japanese Crude Cocktail (JCC) price, the leading LNG pricing benchmark in Asia. The Export-Import Bank of China (China Eximbank) and the China Development Bank (CDB) also provided loans, of $10.4 billion and $151 million in 2016. This came on top of a $4 billion loan from Russian funding.
Massive gas project
The Arctic LNG 2 project will cover three production trains, each with 6.6 mtpa worth of capacity. An all-important final investment decision (FID) on the project is anticipated later this year, with the first LNG delivery slated for the end of 2023, around the time when most analysts forecast that global LNG markets will pivot from its current overhang to a possible shortage of the super-cooled fuel.
Insatiable gas demand
Chinese LNG demand could reach 80-100 mtpa by 2025, according to various industry forecasts, up from 53.7 million tonnes in 2018. Rising demand for the fuel is part of Beijing’s drive to clean up the air quality of the country’s largest cities, which have been plagued by high air pollution levels for years. This drive has seen an explosion of demand in recent years that has been increasingly met by imports, including U.S.-sourced geopolitically charged gas imports that have also been embroiled in the ongoing trade war between Washington and Beijing. Overall demand for gas is expected to climb to 620 bcm by 2035, according to CNPC, up from at 280.3 bcm in 2018. The oil major has also predicted that domestic production will amount to 300 bcm by 2035, up from 161 bcm last year. This will mean an expansion in imports from 124.7 bcm in 2018 to 320 bcm in 2035.
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