lng in russia: a catalyst for change? · amme • eight lng projects have been proposed in russia,...
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LNG in Russia: A Catalyst for
Change?
James Henderson
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• Eight LNG projects have been proposed in Russia, with a total potential
capacity of over 100mtpa
• However, only one is producing while one is under construction
• The outlook for the remainder is uncertain at best
Russia’s LNG Projects – A Varied Set of Outcomes
Baltic LNG
- Gazprom
Pechora LNG –
Rosneft / Alltech
Yamal LNG
- Novatek
Gydan LNG
- Novatek
Far East LNG –
Rosneft / ExxonMobil
Sakhalin 2
- Gazprom
Vladivostok LNG
- Gazprom
Shtokman –
Gazprom & partners
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History of Russian LNG to 2015
3
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Initial Shtokman
bids from IOCs
All bids
rejected
Shtokman Devt.
AG formed –
Gazprom, Total,
Statoil
Shareholder
agreement expires
– Statoil write off
Shtokman
postponed
for 3 years
Shtokman
“for future
generations”
Baltic LNG
registered
Negotiations
with IOCs
Feasibility
study
Baltic LNG
postponed Shell to be
partner?
Baltic LNG
re-kindled
Vladivostok
feasibility
study begins
Gazprom
approves VLNG
investment plan
Gazprom delays
VLNG in favour
of pipelines
Gazprom
buys 51%
Sakhalin 2
first LNG
output
Sakhalin 2
peak LNG
output
Sakhalin 2
expansion
under
discussion
Novatek
buys Yamal
LNG
Total buys
20%
Yamal LNG
FID
CNPC buys
20%
Silk Road
Fund buys
9.9% - finance
agreed with
Chinese banks
Sakhalin 2
LNG devt.
starts in 2003
Gazprom Projects
Rosneft
announces Far
East LNG with
ExxonMobil
Far East LNG
delayed by at
least 2 years
LNG sales
MoUs signed
LNG exports
liberalised
Independent Projects
Gydan LNG
plans
announced
Pechora LNG
founded
Framework
agreement
with Rosneft
Rosneft buys
51% stake
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The future for Russian LNG
4
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Baltic LNG
scheduled
for start-up
Sakhalin 2
expansion
launched?
Project
finance
completed
Gazprom Projects
Far East LNG
onstream?
Independent Projects
Gydan LNG
FID planned
Pechora LNG awaits inclusion on
LNG export list
Train 1
first LNG
Sakhalin 2
expansion
FID planned
Train 2
first LNG Train 3
first LNG
Construction
starts?
First LNG
output?
Debate over pipeline
access on Sakhalin
Assess impact
of sanctions on
South
Kirinskoye
Discussions
with Shell on
Baltic
partnership
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• Plans for Russian to export LNG have also been delayed due to sanctions
and financing problems
• Gazprom has essentially deferred all its LNG projects in the East and re-
focussed on its pipeline plans
• Baltic LNG remains a “live” project in the west, although the 2020 planned
start-up seems unrealistic
• Competition has emerged from Novatek and Rosneft, but the latter has now
deferred its Far East LNG scheme well into the 2020s
Russia’s LNG plans look much less positive than even 12
months ago
0
10
20
30
40
50
60
70
80
2015 2020 2025 2030
mtp
a
Sakhalin 2 Yamal LNG Baltic LNG
Sakhalin 2 Expansion Vladivostok LNG Far East LNG
Arctic LNG Pechora LNG Shtokman
Estimate of Russian LNG output
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Key Themes in Russian LNG Debate
6
Gazprom
Novatek Rosneft
Russian LNG
Business
Competitive
Position
Strategic
Priorities
Sanctions
Risk
Gas Supply
Customer
Support
Foreign
Partners
Project
Economics
Government
Support
Financing
Capability
Operational
Capability
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Vladivostok LNG a casualty of China negotiations
7
Gazprom attempted to replicate Rosneft’s ESPO strategy
Liquefaction at Vladivostok was always a high cost alternative
Little interest from buyers or partners who were unclear about
source of gas or long term economics
Could it re-emerge as a plan in late 2020s in Sakhalin 3
development occurs?
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Can a rational solution be found on Sakhalin?
Could sanctions on South Kirinskoye and Rosneft’s financial difficulties
provide a catalyst for resolution of Sakhalin issues?
Expansion of Sakhalin 2 is clearly Russia’s most logical LNG development
Map of Sakhalin oil and gas fields and infrastructure
8
Sakhalin 1
Sakhalin 1
Sakhalin 2
Sakhalin 2 Kirinsky fields
(Sakhalin 3)
Possible
locations for Far
East LNG plant
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• Low gas price in NW Russia can boost economics of Baltic LNG
• However, key will be project cost – current total cost estimate of $18
billion would lead to a very high tolling fee
• A reasonable liquefaction cost could allow Baltic LNG to compete with US
LNG on a full cost basis
• Foreign partner needed to bring liquefaction expertise?
• Is there a big enough market for a full 10mt project?
Gazprom’s Baltic LNG scheme could be competitive if
costs can be controlled
Possible cost of supply from Baltic LNG
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Baltic (Low) Baltic (High) US LNG
US$
/mm
btu
Gas Input Liquefaction Transport Re-gas
Liquefaction Fee
$4-6/mmbtu
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Yamal LNG economics robust thanks to state support
$10 billion of sunk costs already invested by partners
Point forward economics suggest an IRR from 2015 of 19%
State support has been vital, especially tax breaks and financing of port
and LNG tankers
Breakeven oil price is around $50 per barrel, assuming a 13% slope to
the gas price
Yamal LNG cashflow
10
-8000
-6000
-4000
-2000
0
2000
4000
6000
8000
10000
US$
mm
Capex Revenues Net Cashflow
Oil price – 2015, $55; 2016, $57; 2017, $63; 2018 on, $70 real
Exchange Rate (US$1=RR) – 2015, 60; 2016, 61.5; 2017, 59.5; 2018 on, 57.5
Assumptions:
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A new project (e.g. Gydan LNG) would not work at
current prices
Assumes same costs and production as Yamal LNG
Capex assumed to start in 2018, production in 2022
Implied IRR from 2015 is 8%, so does not recover cost of capital
Breakeven long-term oil price is $75-80 per barrel
Will Novatek take FID in 2016? A delay would seem likely.
Gydan LNG cashflow
11
Oil price – 2015, $55; 2016, $57; 2017, $63; 2018 on, $70 real
Exchange Rate (US$1=RR) – 2015, 60; 2016, 61.5; 2017, 59.5; 2018 on, 57.5
Assumptions:
-8000
-6000
-4000
-2000
0
2000
4000
6000
8000
10000
US$
mm
Capex Revenues Net Cashflow
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0.0
20.0
40.0
60.0
80.0
100.0
120.0
2008 2009 2010 2011 2012 2015 2020 2025 2030
Pro
du
ctio
n (
bcm
)
East Tarkosalin Khancheyskoye Yurkharovskoye
Termokarstovoye (51%) SeverEnergia (59.8%) North Gas (51%)
South Tambeyskoye (60%) Gydan Fields Other
• Novatek’s gas output continues to grow rapidly, although its
100bcm target by 2020 is likely to be missed
• Sales into the domestic market will peak by the end of the decade,
with LNG exports becoming a core source of revenue
• The successful completion of the Yamal LNG project is vital to the
company, and has been strongly supported by the state
• Future plans for a second Arctic LNG project have a scheduled FID
of 2016, but will depend on Yamal success
Novatek’s entire growth strategy now focussed on LNG
Novatek’s gas production to become more export focussed
Export
sales
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Is LNG part of a logical progression in the
Russian gas sector?
Planned or accidental shift towards a more competitive outlook for
Russian gas, involving gradual introduction of new players 13
Gazprom dominant, 3rd
party gas is all
associated from oil cos.
Emergence of ITERA
as useful 3rd party
Novatek and Rosneft win
many new contracts with
domestic customers
Possible resolution at
Sakhalin based on
netback gas prices for
Sakhalin 1 gas
Higher domestic gas price
allows Independents to
compete
Novatek “co-operates”
with Gazprom to free
up gas for export
Gazprom seeks higher
prices to justify Yamal
development
Rosneft pushes for
changes in gas sector –
especially access to
export pipelines
Yamal LNG the most
successful new project
– but with significant
government support
LNG exports liberalised
for specific projects –
but sales with
government oversight
Domestic market
saturated – look for
new export sales
Discussion over full
Gazprom break-up
dismissed, but for how
long?
Discussion over
netback prices for
Independents
State company
needs to control
exports – but need it
be Gazprom?*
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Russian LNG Projects – Detail and Status
Gazprom dominates in terms of potential projects but has a poor record for
implementation
Shell is a key partner, but will sanctions interfere with progress?
Rosneft has the involvement of Exxon, but its project is hardly a priority
Only Novatek has the key involvement of China, the core market for gas in
the East 15
Russian
Operator
Partners Volume
(mtpa)
Status
Sakhalin 2 Existing Gazprom Shell, Mitsubishi,
Mitsui
10 Producing since 2009
Yamal LNG Novatek Total, CNPC, Silk
Road Fund
16.5 Under construction; first output
planned 2017/18
Baltic LNG Gazprom Shell ? 5-10 Start-up planned for 2020, but still in
planning stages
Sakhalin 2 Expansion Gazprom Shell, Mitsubishi,
Mitsui
5 FID planned for 2017, but now
uncertain due to Sakhalin 3 sanctions
Far East LNG (Sakhalin 1) Rosneft Exxon, Sodeco,
ONGC
5-10 Initially planned for 2019, but now
postponed to early 2020s
Vladivostok LNG Gazprom 10-15 Postponed until beyond 2020
Arctic LNG Novatek 16.5 New LNG concept based on Gydan
peninsula fields. Possible start-up in
mid-2020s
Pechora LNG Rosneft Alltech 4 Concept outlined, but no firm plans
yet
Schtokman (Phase 1) Gazprom Previously Total &
Statoil
15 Postponed indefinitely