After more than five years of construction, Novatek's $27 billion Yamal LNG project has received state permission to commission the first liquefaction train, 58 gas wells, and the respective infrastructure. The first shipment of liquefied natural gas, expected before the end of the year, will be destined for China in a symbolic move previously announced by Novatek.

Yamal LNG constitutes Russia's second LNG plant, after Sakhalin II, and its first in the Arctic. The facility will receive natural gas from the Yuzhno-Tambeyskoye field and other fields on the Yamal Peninsula. In its final configuration the plant will consist of three production lines, or trains, and have an annual capacity of 16.5 million tons of LNG. The completed first production line has a capacity of 5.5 million tons and trains 2-3 are expected to open by 2021.

The Yamal LNG facility in Russia’s Arctic. (Courtesy of Yamal LNG via High North News)
The Yamal LNG facility in Russia’s Arctic. (Courtesy of Yamal LNG via High North News)

"Yamal LNG is a key component in Russia's Northern Sea Route and Arctic strategies, as it provides a commercial justification for new infrastructure development," says James Henderson Director of the Natural Gas Programme at the Oxford Institute for Energy Studies (OIES).

"The level of government support for Yamal LNG emphasizes that this project has a core role to play […] and the project now appears to have a very robust commercial outlook, and so has an economic justification in its own right."

The impact of sanctions

The plan for a large-scale LNG production facility on the Yamal Peninsula was initially approved by the Russian government in 2010 and construction on the Port of Sabetta, which will be used for the shipment of LNG, began in July 2012. While other Russian Arctic oil and gas projects, such as the cooperation between Rosneft and Exxon, were affected by EU and US sanctions, Yamal's onshore nature allowed Novatek's cooperation with French multinational Total to continue.

"Yamal LNG is one of the few current success stories in the Russian Arctic," explains Ekaterina Klimenko, Researcher at the Stockholm International Peace Research Institute.

"It also is a success story for international cooperation in the Arctic [and] one of the few cooperation projects that survived the sanctions."

In addition to Novatek's 50.1 percent share and Total's 20 percent stake in the joint venture, the China National Petroleum Cooperation entered the project with a 20 percent stake in 2013, and China's Silk Road Fund obtained a 9.9 percent stake in 2016.

New era for Russian gas

Yamal LNG represents a milestone for Russia's natural gas industry as it was planned, constructed and will be operated by an independently owned company — albeit with close ties to the Russian government.

"The year 2017 will be a momentous year for Russia's LNG business and could mark a turning point in the development of the Russian gas sector. Yamal LNG may well be the start of a trend which could see Novatek become the country's major LNG player," Henderson discusses in a recent paper.

In addition to Yamal's capacity of 16.5 million tons of LNG — nearly twice that of Sakhalin II — Novatek aims to further and rapidly expand its operation on the shoulders of its initial success. Arctic LNG II, planned for 18 million tons, could open as early 2023 and with future expansions of Yamal LNG the company could produce close to 80 millions tons of LNG by 2035 making it a major player.

Northern Sea Route strategy

Part of this grand strategy to export Arctic-produced LNG to markets in Asia and Europe is Novatek's ambitious plan to use icebreaking LNG carriers on the NSR year-round. The Arc7 class vessels with dual directional hulls are capable of breaking ice up to 2.1 meters and have a capacity of 172,600 cubic meters of LNG.

In total 15 vessels will be constructed by early 2020 by Daewoo Shipbuilding & Marine Engineering for shipowners Sovcomflot, Teekay, Dynagas, and Mitsui OSK. The first vessel, the Christophe de Margerie was delivered to Sovcomflot in November 2016. Two more vessels, the Boris Vilkitsky and the Eduard Toll followed in 2017. Eight vessels will follow in 2018, with three alone in January, three in 2019 and one in 2020.

The Christophe de Margerie conducted its maiden commercial voyage in August 2017 traversing the NSR in a record 6.5 days. It delivered Norwegian LNG from Statoil's Melkøya gas terminal to South Korea in 19 days. A rare occurrence up until now — only two such shipments have been transported along the route — LNG shipments will soon become routine, with around 200 voyages per year once Yamal operates at full capacity. "Development of the hydrocarbons in the Arctic is critical for the development of the Northern Sea Route," explains Klimenko.

"The statistics of shipping for the past three years have confirmed that transit shipping is not going to be the main source of shipping at the NSR. Destination shipping, shipping of resources from different ports of the NSR and from the ports of the NSR to Asia/Europe etc. will determine the future success of this sea route. Natural resources (including hydrocarbons) are already a significant share of cargo shipping through the NSR. With the development of oil and gas in the Arctic the share is only going to increase. When the Yamal LNG reaches its maximum production capacity of 16.5 mln ton, this will give the boost to the NSR shipping."

A growing cooperation

Novatek's cooperation with China's CNPC and the country's development bank has been crucial to develop Yamal LNG.

"The cooperation with the Chinese companies and economic institutions allowed it to stay afloat despite financial sanctions", states Klimenko.

Looking beyond Yamal LNG, Novatek and China's CNPC inked a deal earlier this month about cooperation on the Arctic LNG II project.

"China is very keen to develop a role in the Arctic and to secure hydrocarbon resources to fuel its growing economy. As a result, Yamal LNG and Arctic LNG-2 provide ideal opportunities to address both these issues. The fact that Novatek has been placed under sanctions by the US has provided the chance for Chinese institutions to step in and support the projects financially, providing extra leverage," adds Henderson.

Next steps in the Arctic

Moving forward technical and financial challenges to exploring oil and gas resources in the Russian Arctic remain.

"Sanctions are certainly one of the biggest challenges at the moment," states Klimenko.

Similarly, Henderson explains:

"Russian companies have very little experience offshore, never mind offshore Arctic, and therefore sanctions have removed a key element of technical support that would have come from western IOCs."

The high costs of these type of projects also raise questions of their commercial profitability at current prices.

"Indeed, it is questionable whether Arctic oilfields would ever make a decent return, given the uncertain outlook for hydrocarbons over the longer term. It is possible that Chinese companies might again make a strategic decision to invest, but then the technical issues would still be a problem as Chinese companies cannot provide the technical resources required. As a result, it is in this region that the real impact of US sanctions can be seen."