NOVATEK has no monopoly on the Arctic

The Ministry of Natural Resources did not want to impose the privileges of the LNG producer in the law.
NOVATEK, which intends to become the largest LNG producer in the world by 2030, is trying to strengthen its position in the key region, the Yamal-Nenets Autonomous District. Although the company as the only producer of LNG in the Arctic and so reserved the plots in the region, she asked to legislatively consolidate its monopoly on the subsoil. But the Ministry of Natural Resources did not support this idea: according to Kommersant's information, the agency preferred to leave the government room for maneuver.

The head of Novatek, Leonid Mikhelson, presented to the Ministry of Natural Resources, on December 31, a proposal to expedite the development of Arctic production ("Kommersant" is familiar with the content of correspondence) as part of the execution of the December order of Vladimir Putin. As one of the measures, introduction of a raising factor of 3.5 to the deducted expenses from the income tax base for exploration in Yamal, Taimyr and Gydan is indicated. Also NOVATEK wanted to determine the resource base for LNG projects in Yamal and Gydan from the target production level of 100 million tons per year. Finally, Mr. Mikhelson asked to legislatively fix the special mechanism of providing sites for exploration and production to companies that produce LNG at existing and planned capacities in the Yamal-Nenets Autonomous District. And when holding auctions on the Arctic sites in the region include the obligation to liquefy gas.

The liquefaction of gas in the Arctic is handled only by NOVATEK. It is implementing two LNG projects - Yamal LNG with a capacity of 16.5 million tons (first line launched in 2017) and Arctic LNG with a capacity of almost 20 million tons (it is planned to be launched in 2023 with full output by 2026) . By 2030, the company plans to bring LNG production up to 70 million tons, which will make NOVATEK the world's largest producer.

The Ministry of Natural Resources agreed with only a part of the proposals. On March 7, the ministry informed the company that it had prepared amendments to the Tax Code, raising the ratio to the costs of exploration, evaluation and exploration for new offshore fields to 3.5. But the Ministry of Natural Resources indicates that the resource base of NOVATEK in Yamal and Gydan (taking into account the deposits received in 2017) is C1 + C2 3.4 trillion cubic meters, which allows producing 101.7 million tons of LNG. In the undistributed fund, the Ministry of Natural Resources notes, there are sites with resources on C3 + D of about 3 trillion cubic meters. In 2016, at the request of NOVATEK, the ministry suspended their licensing.

The Ministry of Natural Resources did not support the idea of ​​legally securing the right to land in the Yamal-Nenets Autonomous District for LNG producers. As the sources of Kommersant, who are familiar with the ministry's position, explain, the government already has the opportunity to provide sites with a designated purpose (without the auction, only the shelf is given). A version of NOVATEK adversely affects competition, and bind themselves like a law to the Ministry of Natural Resources does not see the point, says the source "Kommersant." Also, the state loses the opportunity to register in the terms of bidding, for example, social obligations. In its letter, the Ministry of Natural Resources indicates that the order of auctions approved by the government already includes the condition for the direction of the gas produced for the LNGP for liquefaction and takes into account the availability of licenses for Yamal and Gydan under LNG. Novatek does not have competitors yet, the company will still get the plots, Kommersant sources say.

In NOVATEK and the Ministry of Natural Resources refused to comment on the correspondence. Earlier, Minister Sergei Donskoi called the LNG industry projects in Yamal and Gydan priority for the state, and in February said that the Ministry of Natural Resources is ready at any time for licensing under LNG projects of reserved sites in Yamal-Nenets Autonomous District and is waiting for offers from companies.

Daria Kozlova from Vygon Consulting agrees that NOVATEK's resources are sufficient to produce 100 million tonnes of LNG per year, but more than 55% of the reserves are the Geophysical and Salmanovskoye (Morning) deposits, which require additional exploration. Because of the remoteness from the infrastructure and the low level of exploration, exploration here is risky and costs two to three times more expensive than in the center of Yamal-Nenets Autonomous District, the expert says. She believes that the coefficient 3.5 looks quite reasonable, but the specific level of deduction should be calculated on a real sample of projects. According to Ms. Kozlova, the orientation of Yamal and Gydan on LNG exports looks logical, since the construction of an expensive pipe is not competitive with deliveries to the domestic market in comparison with traditional production regions. But, she believes, price risks remain on the LNG market, since with the introduction of factories in the US and Australia in the 2020s, an excess of capacities of 50-110 million tons is expected, which will reduce prices. If quotes in Asia fall below $ 6 for MBTU, then even additional state support may not help repay investment by NOVATEK, the expert believes.