Yamal Bests Shtokman in Race to Build Russia's 2nd LNG Plant

By Svetlana Kristalinskaya, April 20, 2014

The cost of construction of Russia’s second LNG plant has gone up some 50 to 60 percent against initial estimates, reaching the investment level of Gazprom’s Shtokman gas condensate field development project, which the monopoly delayed indefinitely. The Yamal LNG joint venture’s concept of a relationship with a foreign partner provides more opportunity for its participants to succeed than the one used for Shtokman.

On Dec. 18, 2013, Yamal LNG stakeholders – Russia’s second largest gas producer NOVATEK (owner 80 percent in the venture at the time, sold a 20-percent stake to China’s CNPC in early 2014) and Total (20 percent) – announced the final investment decision (FID) on the project. The project’s cost had skyrocketed from the original estimate of $18-20 billion to $27 billion of which $2.6 billion has already been invested.

As a consequence, the project’s total cost is closing in on the $30 billion mark, nearly replicating the price tag of the first phase of the giant Shtokman field development (the remainder Gazprom intended to fund on its own), which targeted almost the same volume of LNG production.

It needs to be said that the participants of the Yamal LNG project instantly received tax breaks, shifting at the same time some of the investment burden onto the government (some 47 billion roubles ($1.31 billion) will be allocated from the budget to build the port of Sabetta, which will be used to unload cargoes during LNG plant construction and for shipping LNG once the facility starts operating). On the eve of the FID approval deadline on Shtokman, Total and Statoil, Gazprom’s foreign partners in the project’s first phase publicly requested tax benefits and were immediately labeled greedy by Russian Gas Society chief Valery Yazev. As a result, the FID on Shtokman fell through and Statoil pulled out from the project, writing off its losses. Total has stayed on board.

Interestingly, Total had entered both Russian LNG projects as a technical partner, while Statoil joined Shtokman at a later stage and didn’t have the right of a technical veto granted to the French giant. Though Total is one of the biggest players in the global LNG market, Gazprom, which has historically traded in pipeline gas, had ambitions to develop its own LNG business. Gazprom has long been hooked via its pipelines to Europe, which is currently busy with building regasification terminals, but the main target of Shtokman gas sales was the North American market. Eventually, Gazprom said that foreign partners wouldn’t be able to sell the Shtokman gas. The monopolist would very much like to trade LNG, but that would clearly hurt the interests of both Total and Statoil (the former is one of the largest LNG traders globally, the latter – Gazprom’s direct competitor in the market of pipeline gas supply). In addition, both foreign majors are involved in shale gas production in the United States and offshore projects around the
world. Shtokman Development AG, the company which had been specifically set up for the Shtokman project,