Yamal LNG May Begin Operations Below Break-Even

Port of Sabetta (file image courtesy MRTS)

By MarEx 2016-03-14 21:01:52

Last Thursday, Stanislav Shevkunov, a department head at Russian gas firm Novatek, told reporters that the company still plans to launch its first 5.5 million tonnes per annum LNG train at its Yamal facility in 2017, with no additional outside financing required. The firm says that its capacity is already subscribed under long-term contracts.

Even so, if the first train opens on time, analysts suggest that it may begin operations at a loss. Aleksandr Kurdin of the Russian Federation's Analytical Center recently said that the break-even for Russian LNG sales to Europe would be in the range of $300 per thousand cubic meters, a price attainable only if oil reaches $60 a barrel (gas prices are generally pegged to oil). The U.S. Energy Information Administration forecasts crude futures in the range of $40 throughout 2017, or a third below the project's break-even.

And natural gas competition is heating up. This week alone, U.S firm Cheniere is about to ship its second cargo to Europe, and in the Asia-Pacific market, Chevron's 15 mtpa Gorgon facility in Australia is due to load its first shipment. Chevron once estimated that Australia could rival Qatar as the world's largest producer by as early as 2017, bringing online a total of as much as 70 mtpa of LNG capacity. With so much available gas, and with oil trading so low, Asian LNG prices have plummeted about 75 percent over the past two years. Yamal also intends to market its product to Asia, at least during the warmer months, via icebreaking LNG tankers on the Northern Sea Route.

Novatek is still trying to raise another $10 billion for Yamal, substantially from Chinese sources, for an additional two trains and a planned total output of 16.5 mtpa. Western sanctions on Russia over the crisis in Ukraine mean that many investors are unable to participate – but the ban has also turned the project into a symbol of national defiance, drawing personal support from President Vladimir Putin.

Despite auspicious beginnings and state backing, PortNews suggests that expert opinion in Russia may be turning away from capital-intensive Arctic projects like Yamal, focusing instead on Northern Sea Route shipping as a means to develop Russia's far north. Among the proposals is to leverage Yamal's Sabetta seaport for commercial cargo shipments.

In late December, President Putin personally emphasized this point. “[Yamal's Sabetta seaport] is an extremely important project, as with a huge terminal . . . and shipment operations, it would be desirable to have a universal port there. This way, not just LNG products could transit through this port, but all kinds of goods that can be rerouted from the Trans-Siberian Railway or Baikal-Amur Mainline. This is a very convenient location with great logistics. This could be all sorts of goods - bulk shipments, or anything else,” he said.