Novatek May Be Carving Out a Bigger Role in Russian Energy Diplomacy
Publication: Eurasia Daily Monitor
By: Rauf Mammadov
The Jamestown Foundation
Russia’s second-largest natural gas producer, Novatek, which captured the largest share of the liquefied natural gas (LNG) market in Europe in the first quarter of 2019, has sold 20 percent of its planned Arctic 2 LNG project to China (Novatek.ru, April 25). The stake went to China National Offshore Oil Corporation (CNOOC) and China Exploration and Development Company (CNODC), both subsidiaries of China’s state-owned oil and gas producer China National Petroleum Corporation (CNPC). Construction on the project is expected to start this year. When completed in 2023, the $25 billion Arctic 2 promises to boost Novatek’s LNG export capacity to a total of 37 million tons a year.
Along with China, a number of other countries are also participating in the project. France’s Total acquired 10 percent of the export terminal in March 2019, while Novatek will retain 60 percent. Saudi Aramco and Mitsui are among the potential buyers for the remaining 10 percent (Neftegaz.ru, March 18).
Total and CNPC also have stakes in Novatek’s first project: the Yamal LNG terminal in northeast Russia. Although the original idea was for the Yamal terminal to boost Russian gas exports to Asia, it has become a formidable competitor of the United States and Qatar for Europe’s LNG market.
One of Yamal’s first shipments was to the United States. But in 2018, Novatek sent most of its LNG to northwestern Europe (see EDM, March 20, 2018). It used medium-sized Arc7 LNG tankers with ice-breaking capabilities to grab the top market share in Europe during the first quarter (see EDM, April 16, 2019). Novatek has ten Arc7 tankers, with five more to be delivered by the end of 2019 (Arctic.ru, April 15).
Another signal that Novatek sees Europe as a crucial market is that it has been adding export infrastructure at ports on Russia’s European side. In April 2019, Russia commissioned the Cryogaz-Vysotsk terminal in the Baltic Sea basin—a small facility in Leningrad Oblast with a capacity of 660,000 tons (Neftegaz.ru September 24, 2018). The terminal gives Novatek the flexibility to unload LNG from Arc7s to smaller vessels for transshipment to Europe.
Ironically, one of Cryogaz-Vysotsk’s first shipments sparked a political controversy in Lithuania. That is because the purchaser was Lithuanian state-owned Lietuvos Energijos Tiekimas. Several lawmakers in the country, which has been trying to end its energy dependence on Russia, demanded an investigation (Baltic Times, April 21, 2019).
Novatek also plans to complete a terminal in Russia’s Arctic province of Murmansk (near Finland), by 2022 (1prime.ru, April 29). The terminal will help Novatek reduce its transportation costs to Europe and allow more ship-to-ship LNG transfers in Russian waters. Novatek has been using a facility at Norway’s port of Honningsvag since 2017 for ship-to-ship transfers. To date, it has made 77 such LNG transfers at said port (Arctic Today, April 18).
Though an LNG-only company, Novatek is a growing Russian gas player. One reason is that it is publicly traded, with shares available in both Moscow and London. Another is that most of its shares are owned by two friends of Russian President Vladimir Putin: Leonid Michelson and Gennadiy Timchenko. The fact that both are under US sanctions has not hurt the company’s share price. In addition, the Russian government has given Novatek sizable tax breaks and subsidies. The tax breaks have been for the production and export of products and the procurement of equipment. The subsidies have applied mostly to the Yamal LNG project. Novatek is hoping to obtain tax breaks for Arctic 2 LNG as well. The company is also taking full advantage of government incentives for developing Russia’s Far East (RBC, December 11, 2017). Novatek plans to build an Arctic 3 LNG terminal by 2030, which would increase its capacity to a total of 57 million tons per year. The company’s ultimate goal is 70 million tons, or about three-quarter of the 100 million tons that the Russian government expects from all producers (RIA Novosti, April 27).
Although most of Novatek’s recent shipments have thus far ended up in Europe, company officials say Asia will remain the top priority. This is because Chinese LNG imports account for most of the world’s growth. The focus on Asia will create additional competition for Gazprom, which will commission its Power of Siberia gas pipeline to China by the end of the year. Gazprom is also frustrated that it has failed to move the second Power of Siberia pipeline (also known as the Altai) out of its planning stage (Oilprice.com, September 17, 2018). Construction of the pipeline from Russia’s Yamal Peninsula to China’s Xinjiang Province will cost billions of dollars and take three to four years. When it finally opens, the project will face significant competition from gas flowing from Central Asia to the Far East.
Gazprom has been the key player in Russia’s energy diplomacy for some time. As Novatek’s role in the country’s energy picture grows, it will be interesting to see whether it becomes a more significant energy diplomacy player as well.
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Photo: (Source: Rosmoport.ru)