Novatek Eyes Big Role in Russian LNG Exports to China as Sechin Seeks Market Liberalization

By Benjamin Priddy, March 7, 2013

WEB EXCLUSIVE, Moscow. The new 400-pound gorilla in Russia's oil industry, Rosneft, is beginning to shake up the country's gas sector, spelling trouble for state-owned monster Gazprom and providing opportunity for Russia's second-largest domestic gas producer Novatek. Russian language reports over the past month have revealed important developments in the gas sector's push to build up LNG export capacity, receiving little attention in the Western press.

At a government committee meeting on the energy-fuel complex (ТЭК) in mid-February, Rosneft CEO Igor Sechin proposed "carrying out LNG export liberalization for gas produced at offshore fields, on Russia's continental shelf, and on the Yamal and Gydan peninsulas - and to install attractive tax and customs stimulations here," Russia's national business daily Vedomosti reported. The proposal came somewhat unexpectedly, as Sechin has adamantly opposed similar plans supported by independent producer Novatek throughout last year. Yet, several weeks after the Russian government granted permits to Rosneft and Gazprom to develop reserves on Russia's continental shelf, Sechin pointed out that natural gas makes up almost half of Rosneft's new offshore Arctic reserves (the company's total offshore gas reserves in these blocks amount to approximately 21 trillion cubic meters).

Since associated investment costs of sending these future gas supplies to the domestic market (e.g. building a gas transmission network through Arctic Siberia) are extremely high, Sechin proposed directing efforts at building up Arctic LNG capacity to deliver Russian gas to Asia-Pacific customers. And President Vladimir Putin seemed to agree. "If we don't carry out an active policy (in LNG exports), then we risk giving up practically the entire market for LNG to our competitors," Putin said at the meeting.

Since 2006, only Gazprom has been allowed to directly export Russian gas to international customers. This has caused legitimate concern among alternative producers like Novatek, which is looking for international supply contracts for the company's $20 billion Yamal LNG joint venture with Total, currently projected to come online in early 2017.

Novatek has risen over the past several years to become Russia's second-largest gas producer and a major domestic supplier, winning several huge supply contracts with former Gazprom customers in Russia last year. However, Novatek's efforts to win a government license for gas exports largely went unanswered. That is, until Sechin stepped in last month. Now the company stands to benefit if LNG export liberalization is granted, and all signs suggest that this is coming soon.

After announcing the proposal to liberalize LNG exports last month, Sechin traveled to China, where, in addition to negotiating the oil-for-loans deal with CNPC, he approached several other national Chinese energy companies, including CNOOC and Sinopec, to discuss investment in Russian LNG transportation projects, according to several Russian news sources. "We believe that the Asia-Pacific region could become very strategic for the company, as it begins to explore it's new large offshore fields," Nomos Bank told RBC Daily in late February. Moreover, "a strategic partnership (with Chinese companies) could open Rosneft up to new technologies and simplify access to Asia-Pacific markets,"