• To Russia with energetic love
Chinese investment in a natural gas project in the resource-rich Arctic region promises to be a game-changer later this year
Amega overseas project for liquefied natural gas that will likely burnish China’s global profile, contribute to the country’s energy security, enhance its geopolitical strategy and bolster efforts for economic rejuvenation is scheduled to start production in the Russian Arctic late this year.
The Yamal project — its corporate entity is called Oao Yamal LNG — is located in north-central Russia and is expected to produce 16.5 million metric tons per annum.
In September 2013, China National Petroleum Corp, the country’s largest oil and gas producer by annual output, acting through its subsidiary, CNPC Russia, bought a 20 percent stake in Oao Novatek’s $27-billion (25 billion euros; £21.6 billion) Yamal project for $5.4 billion.
Oao Novatek holds a 50.1 percent stake in the Yamal project, while Total holds 20 percent and the Silk Road Fund, 9.9 percent. Novatek is Russia’s independent natural gas producer and the country’s second-biggest LNG company after state-owned Gazprom.
China’s investment will help the Russian gas supplier to complete the project, one of the largest industrial undertakings in the Russian Arctic. The new gas production center evolving in the Yamal Peninsula is expected to transform the Russian gas industry.
It is also expected to boost China’s oil and gas reserves substantially, ensuring a steady, long-term supply.
Much of Yamal’s output would be supplied to China and other Asian countries, according to Novatek. CNPC pledged to buy at least 3 million tons of LNG per year, said analysts.
According to Wang Lu, an Asia-Pacific oil and gas analyst from Bloomberg Intelligence, imports from Yamal may account for more than 1.6 percent of China’s gas demand, which is estimated to be 257 billion cubic meters in 2018, assuming a 10 percent compound annual growth rate during the 13th Five-Year Plan (2016-20).
“China’s LNG imports will continue to be an important contributor to its supply landscape in 2020,” she says.
“The project’s success and reliability will enhance CNPC’s investment return, so this aligns CNPC’s interests with Novatek’s.”
For CNPC, Yamal has strategic importance. It expects the project to foster greater cooperation between Beijing and Moscow in the Arctic, give a fillip to economic development and scientific research, and shape regional rules and norms relating to gas reserves in the region.
Li Li, energy research director at ICIS China, a consulting company that provides analysis of China’s energy market, says the country had arranged for the steady import of natural gas from Russia even before the Yamal investment.
Russia’s Gazprom has a 30-year contract with China to supply 38 billion cu m of natural gas annually beginning in 2018. CNPC’s participation in Yamal is part of Chinese companies’ global strategy and signifies the country’s intent to be a key player in the crucial Arctic region.
In the process, China will have also helped Russia with its shortage due to sanctions imposed by the US and Europe over the annexation of Crimea.
The deal represents a significant step in Russian President Vladimir Putin’s push to boost commercial ties with China.
China’s backing will ensure the project will roll, says an official from CNPC Russia. Elaborating, he says sanctions had rendered financing for the project in US dollars impossible.
Several US and European banks have pulled out of financing deals, leaving a void to be filled with China’s capital, technology and massive markets.
According to Evgeniy Kot, director-general of the Yamal project, the company has sold 96 percent of the project’s LNG production to European and Asian customers through 20- to 25-year contracts.
Benefiting from the vast natural gas reserves across the Yamal Peninsula, the company signed loan agreements with the Export-Import Bank of China and the China Development Bank Corp for 1.2 billion yuan ($173 million; 161 million euros; £138 million ) in all.
For its part, Russia will provide tax incentives to companies involved in the development of the Arctic region, including zero export duty on LNG and special tariffs for condensate oil.
CNPC Russia said it is confident Novatek’s rich experience in operating in Arctic weather conditions will help the Yamal project.