Dodging Sanctions, French Oil Major Seeks to Fund Russian LNG Project with Yuan & Euros
Western economic sanctions against Russian oil and energy interests are steadily playing out, this time affecting French oil major Total S.A.’s ability to finance part of the $27 billion Yamal liquefied natural gas (LNG) project in the Russian Arctic. Reports broke toward the end of last week that Total will seek as much as $15 billion worth of funding for the project in yuan and euros through Chinese banks to try to avoid Western sanctions that affect dollar-based fund raising. This is the first time that Beijing has issued credit on such a massive scale. Sanctions were imposed last year over Russia’s involvement in Crimea and Ukraine.
Though Total is not violating terms of the sanctions, one of its project partners OAO Novatek is a Russian energy firm in which Total has a minority stake. Gennady Timchenko, a Russian businessman and billionaire is also a Novatek shareholder who has been targeted by US sanctions.
The 16.5 million ton per year (mtpa) Yamal LNG project will be one of the largest industrial undertakings in the Arctic, eventually involving the drilling of more than 200 wells, the construction of three LNG trains, each with a capacity of 5.5 mtpa, and a vast gas plant, as well as the commissioning of 16 icebreaker tankers.
Novatek has a 60 percent equity stake in the project, while both Total and Chinese state owned oil major CNPC each hold 20 percent stakes. Novatek holds the license for exploration and production at the South-Tambeyskoye field. The license is valid until 2045.
Long-term contracts for LNG volumes for the project include CNPC, which was the first to announce an agreement, taking at least 3 mtpa from Yamal on behalf of its publically-listed arm PetroChina. Spain’s Gas Natural Fenosa (GNF) is also an offtaker at 2.5 mtpa. Other off-takers include an Indian consortium comprised of state-owned ONGC, Indian Oil Corp. and state-owned Petronet LNG at 2.5 mtpa. In late January, Gazprom signed a 20-year agreement to offtake 2.9 mtpa of Yamal LNG.
Novatek will be able to export gas from the Yamal project since the Russian government approved legislation on December 1, 2013 formally ending Gazprom’s monopoly on LNG exports. The project will sit on the northwestern end of Siberia, in the Arctic Circle, while the area is covered in permafrost, which is ice-bound around nine months of the year, according to Total’s estimations. However, that may be changing as permafrost melts due to global warming, causing difficulties for the project’s development.
Media reported earlier this year that holes have been appearing suddenly on the Yamal tundra — home to Russia’s largest sources of natural gas — and could complicate construction and development for proposed Russian gas projects in the area. Though recent scientific reports vary widely on how it could unfold, Dr. Alexey Portnov at the Centre for Arctic Gas Hydrate, Climate and Environment (CAGE) at the Arctic University of Norway said late last year that the thawing of permafrost on the ocean floor is an ongoing process, and is likely to be exaggerated by warming of the world’s oceans.
Permafrost notwithstanding, Yamal Peninsula gas development is integral for Russia’s hydrocarbon development since older Siberian fields are winding down. Yamal development will offset these declines. According to the US Energy Information Administration (EIA), production of oil and natural gas in West Siberia totaled 6.2 million barrels per day (b/d) of crude oil and 21.1 trillion cubic feet (Tcf) of natural gas in 2013, respectively, down significantly from peak production levels in the 1980s.
Total’s disclosure last week to partly fund the Yamal Project with yuan and euros is also significant and fits perfectly in China’s playbook of wanting to replace the US dollar as the world’s reserve currency. China has been advocating using a basket of currencies support by the International Monetary Fund (IMF). Total CEO Patrick Pouyanne said that “there is a big desire to finance the project on the part of Chinese financial institutions.”
The all-important final investment decision (FID) for the Yamal Project was reached in late 2013, while the planned commercial launch of the first LNG train in scheduled for sometime in 2017.