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№ 4 (April 2011)

Total’s New Stake in NOVATEK Gives French Access to Yamal LNG

   Late last year NOVATEK, a major gas producer, acquired a number of assets of interest to Gazprom, and Gazprom reduced its ownership in NOVATEK by half.  It became clear who was in for a surprise: after six years of waiting, Total’s desire to acquire a stake in NOVATEK came true. In addition, the French energy company now has one more project in Russia – Yamal LNG. 

By Svetlana Kristalinskaya

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   Though Total has had to pay big for these assets, now the French have a backup LNG project if the Shtokman project does not work out for them.
In late 2004 Total announced its intent to buy 25 percent plus one share in NOVATEK, Russia’s largest independent gas producer.  At that time NOVATEK already held 25 percent of Tambeyneftegaz, the company that owned license for developing the giant Yuzhno-Tambeyskoye field located at the Yamal peninsula.  Its С1+С2 (Russian classification) reserves are estimated at 1.3 trillion cubic meters, and 418 billion cubic meters by SEC definitions.  Proved plus probable reserves estimated under PRMS definitions totalled 802 billion cubic meters of natural gas and 31 million tons of gas condensate.

   However, the deal was not concluded.  Unofficially, the reason was Total’s failure to ask for the Russian government’s approval of the deal – the same mistake, as one of the explanations goes, that led to the end of Yukos.  But these are just rumors; it is more likely that NOVATEK believed the company was undervalued.  Total offered $850 billion, valuing one NOVATEK share at $1,120.  In February NOVATEK shareholders offered 3 percent of shares to institutional investors, who paid $100 million, placing a value of $1,098 on one share (not accounting for blocking shareholding premium); then in eight months, shares under the IPO were trading for $1,675 a piece.

   Next, NOVATEK listed its securities a month after transferring its blocking shareholder position in Tambeyneftegaz, the company that held the developing license for the Yuzhno-Tambeyskoye field. The shares in Tambeyneftegaz were sold for symbolic amount of 120 million rubles (about $30 million) to Gazprombank Group.

   Nonetheless, Total did not lose its interest in rapidly developing NOVATEK. In 2006, NOVATEK allied with Gazprom. NOVATEK shareholders sold 19.4 percent of the company’s shares to Gazprom.  It was a “win-win” deal. NOVATEK gained greater access to the gas pipeline and respectively increased its sales, and Gazprom increased its revenues due to the fact that NOVATEK had the right to sell gas at unregulated prices while Gazprom did not. In October 2007, Total and NOVATEK signed a cooperation agreement for joint development of gas assets in Russia and abroad. Two years later Total joined a project to develop the Termokarskoye field, which is significantly smaller than the Yuzhno-Tambeyskoye field. Recently Total announced that it was satisfied with the appraisal drilling and is planning to continue the project.

   Soon thereafter, NOVATEK gained a mysterious shareholder – Gennady Timchenko, the founder of the Gunvor oil trading company. With him joining the company, NOVATEK gained back the Yuzhno-Tambeyskoye field.  Four years later, NOVATEK acquired 51 percent stake in Yamal LNG. Yamal LNG purchased the license to develop the Yuzhno-Tambeyskoye field for $650 million, the price 20 times higher than had been previously paid for the asset.

   Total’s persistence was rewarded.  In early March Total signed an agreement to buy 12 percent of NOVATEK in the presence of the Russian Prime Minister Vladimir Putin.  The agreement has a provision for increasing Total’s holding to 15 percent and 19.4 percent within one and three years respectively.

   Total is paying about 4 billion to Gennady Timchenko and Leonid Mikhelson, major NOVATEK shareholders.  The price was estimated based on the average market quotations for the last three months.  Prior to this deal, the majority shareholder of NOVATEK was its chairman and founder Leonid Mikhelson, with a share of 27.2 percent, the second largest package was owned by Gennady Timchenko. Gazprom owns 10 percent of NOVATEK; a company founded by Mikhelson and Timchenko on a parity basis has an option to purchase 9.4 percent from the Gazprombank; about 30 percent of shares are traded at the market, mostly in the form of GDR.

   Leonid Mikhelson said that the agreement for purchasing 12 percent of NOVATEK is binding upon the parties and in the transaction to be closed in April he and Gennady Timchenko will sell their shares, rather than use the option. The agreement to raise the stake up to 19.4 percent is not binding, and it is still not clear where the rest of the shares will come from.  It is rumoured on the market that Gazprom might shed its interest, but the NOVATEK CEO expressed doubt that Gazprom would in fact make good on that rumor.  However, it must be noted that Mikhelson was just as skeptical on the eve of Gazprom’s sale of 9.4 percent to Gazprombank.  Mikhelson also said that he and Timchenko had no plans to reduce their ownership and they would certainly use their option to buy the shares.

   In addition to NOVATEK shares, Total has to pay for interest in Yamal LNG project.  Total could have a different role in this project from the one it plays in Shtokman.  In the Shtokman project, Total and Statoil, two foreign companies, are acting more like contractors.  Total holds 25 percent of Shtokman Development, a special purpose company, while Gazprom holds 51 percent, and Statoil 24 percent.  Neither of the foreign companies has actual ownership in the subsoil rights company and do not have the right to market the gas produced.  Statoil and Total in partnership with Gazprom are developing infrastructure of the project, including an LNG plant. All the produced gas goes to the subsoil user, a 100 percent affiliate of Gazprom, only a certain rate of return is accounted for.  Therefore, if Statoil or Total would like to purchase gas for their consumers, they would have to buy it from Gazprom.

   Gas sales and marketing procedures in Yamal LNG project have not yet been approved and Total may still negotiate better terms. A source in NOVATEK said that the company has already drafted procedures for gas sales and marketing, though they have not been approved yet since the agreement on Total purchase of interest in Yamal LNG has not been executed yet.  The agreement is expected to be executed in the second half of the year.

   Gazprom has a monopoly over gas exports in Russia; Yamal LNG managed to negotiate an agency agreement with Gazprom Export on exporting gas via Gazprom Export with a 1 percent fee.  Gazprom may buy up to 50 percent of Yamal LNG gas, if it offers a price competitive to that offered by other prospective buyers.

   The Shtokman and Yamal LNG projects have the same target markets for liquified natural gas, but investment decisions on Shtokman have been postponed yet again.

   Last year, Shtokman stakeholders decided to delay the project because of the financial turmoil followed by fall of the U.S.-imported LNG prices.  The investment decision was split into two steps: pipeline gas and LNG. The investment decision on pipeline gas was due in March, while the decision on LNG is expected towards the end of the year. Though in March Alexander Medvedev, Gazprom Chairman of Board, said that Gazprom and its partners will decide on whether to go ahead with pipeline gas and LNG simultaneously. It is rumored on the market that international participants may leave the project, if LNG component will be voted down. Based on the announced plans even if Shtokman project will start liquefying gas in 2017, NOVATEK could become the first Russian company (having international partners) with an LNG plant in 2016.  An LNG plant within the Sakhalin-2 project was built without Russian participation.
Recently, though Peter Mellbye, Statoil’s Head of International Development and Production, said that he does not believe that Yamal LNG would be the first to liquefy gas; he believes that Yamal LNG project will take shape after 2020.
Explaining the reasons for the delay of Shtokman, Mellbye said that the Shtokman Development is awaiting a decision on a tax break.  NOVATEK is already ahead of Shtokman on solving tax issues.  The RF Government has already promised Yamal LNG significant tax breaks: tax holidays on the Mineral Extraction Tax (MET), on liquefied gas and associated condensate, zero export duty on LNG, and benefits on local taxes.

   Mellbye said that Shtokman needs at least the same tax breaks as promised to Yamal LNG for the Yamal peninsula project, and Shtokaman also needs tax benefits for piped gas.

   The tragedy in Japan, the largest LNG consuming country, could benefit potential LNG producers in the world. Experts unanimously predict that the Fukushima nuclear plant accident will cause gas consumption to rise and increase demand for LNG demand. Maksim Moshkov, a UBS analyst, said he believes that high hydrocarbon prices could improve the profitability of the Yamal LNG project, making it profitable even without significant tax benefits.
Whatever scenario develops, even if the Shtokman project does not work out for Total, by acquiring interest in Yamal LNG the company has got a “safety cushion.”

   In the neare future NOVATEK plans to invite two to three partners to join the project selling them 29 percent of interest. UK-Dutch Shell, Japanese Mitsubishi, Korean Kogas and Statoil have expressed their interest in the project.
Moshkov said that Yamal LNG would be a great breakthrough for Novatek.  The project would start gas production at the Yamal peninsula and would reduce Novatek’s dependency on Gazprom for access to the gas transportation system.  Total’s participation would reduce financial and operational risks.

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