Novatek Nears Funding for Yamal, Says Project is Profitable

Novatek CEO Leonid Mikhelson announced Friday that the firm was close to finalizing loans from Chinese and Russian banks for its Yamal LNG project. He did not indicate a precise timeline; the firm has missed several previously announced deadlines.

Mikhelson said that Novatek had loan guarantees of $4 billion from the Russian Export Insurance Agency, and was in talks over previously announced loans of $12 billion from Chinese state-owned banks. In September, he had suggested that negotiations over the Chinese loans would be concluded within four months.

The remaining issue in the talks is the currency in which the loans will be provided. Mikhelson told reporters that the majority of the funds would be in euros.

China's Silk Road Fund also has a stake in the project. In September, Novatek announced the sale of 10 percent of Yamal LNG to the fund. As part of the arrangement, the fund agreed to work with Chinese banks to facilitate the completion of fundraising.

Novatek has had to seek additional financing from Chinese institutions because of U.S.-imposed economic sanctions related to Russia's involvement in the conflict in Ukraine, which have prevented the firm from raising dollar-denominated funding or buying western technology. The sanctions have also forced the project partners – Novatek, France's Total and China National Petroleum Corporation – to put an additional $10 billion of their own funds into Yamal. The Russian government has stressed the national importance of the project, pledging to ensure its completion despite sanctions.

As global LNG prices have fallen and analysts predict little improvement in the short term, many analysts have questioned the profitability of further investment in LNG production trains amid forecasts of a global “glut” - especially given the high cost of shipping from the Kara Sea to markets in Europe and Asia.

The project is above the arctic circle, and sea ice is a serious consideration, so the firm's partners have commissioned the world's first icebreaking LNG carriers from Daewoo Shipbuilding (DSME) to transport its product. The first prototype of a planned class of 15 vessels was launched January 18. The vessels will reportedly cost a combined $5 billion to acquire and will be operated by Sovcomflot under 25-year time charters valued at $20 million per month per ship. Multiple shipowners, including Teekay and Sinotrans, have made investments in the vessels.

Mikhelson told media on Friday that the cost of Yamal's natural gas is so low that it will offset this high transportation cost, suggesting its LNG will still be cheaper than that sold by foreign competitors in milder climates.

Sberbank CEO German Gref agrees. "We believe it is an entirely reliable project. It will be profitable even with the most unfavorable oil and gas prices," he said.

The Yamal LNG project intends to start its first shipments in 2017, with a designed capacity of 16 million tons per annum.

A knock-on effect of its icebreaking tankers – capable of 2 meters of ice – may be the further development of Russia's Northern Sea Route. Mikhelson has suggested the ships will operate six months of the year eastbound to Asia and all year round to Europe, increasing traffic on the route by 250 round trips annually. "The Northern Sea Route will become more and more attractive for freight shipments," Mikhelson said.