Here is How the Economics of Privately-Held LNG from Frigid Siberia are Shaping Up to Compete in European and Asian Natural Gas Markets
- March 21, 2014
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Here’s a peak at what might be the second most cost-effective natural gas resource in the world — and it doesn’t involve hydraulic fracturing. Technically, it is a conventional gas play in Russia but not in the customary use of the word, and it does not involve Gazprom.
It’s not conventional because it will take about $US27 billion and the industry’s best and brightest technologies and suppliers working for a joint venture led by NOVATEK to adequately monetize the 49 trillion cubic feet of producible natural gas in the South Tambeyskoye gas field on the Yamal Peninsula in western Siberia.
The Russian parliament, in a bid to elevate its role as the world’s premier supplier of natural gas, last year authorized rivals of Gazprom, including NOVATEK, to export liquefied natural gas (LNG). While Gazprom retains the right to handle of all Russia’s pipeline gas exports, this new transport medium has become the most closely-watched LNG project in the world.
Yamal LNG, as it’s come to be known, is the third largest natural gas production operation ever deployed above the Arctic Circle. (Alaska’s Northern Slope and Norway’s Shnovit are the other two).And it is the only LNG play in the world that begins onshore, not in deep waters offshore.
Huge deposits of natural gas have long been suspected under the permafrost in the South Tambeyskoye gas field. But not until DeGoyler and MacNaughton’s petroleum engineers appraised the available reserves of natural gas and gas condensate in 2010 did initial co-owners NOVATEK of Russia and Total of France secure the required environmental and construction permits to map a production timeline and start building the necessary self-contained infrastructure.
Today, with equipment suppliers including Siemens, Air Products, Technip/JGC, Hamon d’Hondt, Entrepose/Vinci and BASF, to name a few, NOVATEK andTotal are preparing to begin production. That is to be followed by liquefying it, moving it via pipelines to the three LNG trains and terminals under construction on the Yamal coastline. LNG can be shipped to markets in Europe year-around and to the Asia Pacific region from May to November via the Northern Sea route of the Arctic Ocean. End-to-end operations are expected to commence by 2017.
The Yamal Peninsula holds so much promise the Chinese National Petroleum Corporation – CNPC – has purchased a 20% stake in the project. NOVATEK owns 60% and Total the other 20%.
If the NOVATEK / Total / CNPC team can stay on schedule, the Yamal LNG project stands to become one of the most cost-effective LNG projects in the world, second only to the massive Qatargas complex in Qatar.
During interviews beginning at IHS Energy’s CERAWeek in Houston in early March, NOVATEK Chief Financial Officer Mark Gyetvay outlined the scale involved and the project’s economics.
By international standards, this gas is inexpensive to find and develop at about 40 to 50 US cents per million cubic feet ; it can fetch between $10 and $16US in parts of China and Europe. That no doubt has NOVATEK’s controlling owners, billionaires Leonid Mikhelson and Grennady Timchenko, pushing hard to begin operations as soon as possible.
Of course, a LOT has to happen to ensure the liquefied natural gas reaches its customers.
The routes to be taken by icebreakers have never been consistently traversed. The techniques of building on permafrost – while well known in Siberia – have never been deployed on such a large scale. To avoid transferring the heat and vibrations of the machines to the frozen subsoil, for example, the modules are to rest on 4,800 piles, according to Total.
Temperatures on the Yamal Peninsula during the coldest months of winter typically hover around minus 30 degrees Centigrade (minus 22 degrees Fahrenheit). The average annual temperature is minus 9 degrees Centigrade (about 16 degrees Fahrenheit). Wind speeds often reach 32 meters per second (about 71 miles per hour). Ice covers virtually all of the peninsula about 300 days a year.
This video about Yamal by Total and Novatek illustrates the enormity of their challenge.
“It’s a harsh climate to be sure. But there are ways the frigid ambient temperatures will actually help us improve the liquefaction and compression efficiency thus reducing the capital intensity of our liquefaction process,” Gyetvay said.
To earn their respective roles in the Yamal LNG project and elsewhere, suppliers have had to demonstrate how their equipment can hold up under the extremely cold weather but also help the owners drive down capital and operating costs.
“We’re bending the cost curve,” said Siemens Oil & Gas Vice President Daniel Duncan about the gas compression equipment and gas turbines its supplying to NOVATEK. “We’re achieving double-digit cost reductions and applying the lessons learned to other countries and regions like Yamal.”
The current $US27 billion estimated price tag compares to the reported $US54 billionprojected to monetize the Gorgon LNG joint venture in Western Australia headed by Chevron. Gorgon is expected to produce about 35.3 trillion cubic feet (tcf) of gas over its lifetime (versus 49 tcf at Yamal). In each case, both cost estimates could rise before operators begin shipping LNG. The startup date for Gorgon is mid-2016 (compared to 2017). The original budget for Gorgon was $US37 billion when it was authorized to proceed in 2009.
According to this report in the Financial Times, about 70 percent of production from the Yamal LNG project has been pre-sold under long-term contracts linked to world oil prices. How much of that gas is headed to China and other Asian buyers remains to be seen.
The industry also is watching how NOVATEK could be affected by Russia’s annexation of Crimea from the Ukraine. Might efforts to undermine Gazprom’s natural gas market dominance in Europe benefit the NOVATEK joint venture? Will dealings with NOVATEK become too risky if Russian companies are blacklisted by foreign buyers?