Mark Gyetvay is the Deputy Chairman of the Management Board of Russia’s largest independent natural gas producer, Novatek. We spoke to him about the company’s plans for expansion in Yamal through the Arctic LNG 2 project, the proposed transshipment facility on the Kamchatka Peninsula, and the unhealthy effects of over-politicisation on the natural gas industry.
"We can now honestly say to ourselves that gas has become a political weapon of the United States."
I’m going to start straight in with the American political situation between the US and Russia. How do you assess the situation?
I think it’s gotten a little hysterical today. If we look at the reality of the marketplace, it kind of ignores the geography. And they’re only concerned about security of supply, affordability of supply, etc. I think there’s room in the marketplace for both US producers as well as Russian producers, so I don’t really understand today the hysteria behind some of this politics.
But the impact and the effect that it is having – how would you characterise that?
I don’t know if I would say that it has had a dramatic impact. I think people would like to characterise it as having had a dramatic impact. But look, we delivered the Yamal LNG project on time, on budget, even though Novatek was sanctioned in 2014. So I think it disrupts, and makes the partners, suppliers and buyers have to do a little more due diligence, but it really doesn’t ultimately affect the project. I think at the end of the day people want a secure supply of natural gas.
This year you’ve moved on, and with the sanctions in place, a lot of the technology is coming from within Russia. Tell me how the next project is going.
The next project we’re in the process of doing what we call a feed study right now. We’re working with a couple of major contractors, which are TechnipFMC and Linde out of Russia, and Saipem out of Italy. We’re working with all these contractors to try to come up with a concept where at least 70% of the content will be sourced out of Russia. We’re not saying that 100% of all the goods and services will be procured in Russia, but the idea is that we’ll ultimately get a situation where a centre of excellence is developed in the territory of the Russian federation, so we don’t have to worry about any potential disruption if sanctions do come in (where they decide to sanction some of the technological aspects of the project). We want to build that technical centre of excellence inside of Russia.
But there’s still that 30%. Would that come from outside Russia?
A part of it will come from outside of Russia, a part of it will come most likely from Asian markets. But the idea is to bring these contractors into the LNG construction centre. So if we can eventually source 100% of the project in that territory we’re okay, but we’re somewhat pragmatic about it, and we realise some of the technology still does not exist within the country of Russia, so we’ll have to source some of it out. But we’ve worked very closely with the partners on Yamal LNG, and we found that most of these businesses want to continue working with Russia, and Novatek, even post sanctions.
Okay, so Arctic LNG 2 – where’s it going, where’s the market going to be?
It’s a little early, but I would say that if we look at the trends in the marketplace today, we believe that most of the buy-ins (I would say probably over 90%), will probably be earmarked for the Asian-Pacific market. But that also functions based on whether or not we can open up the Northern sea route to beyond the 5 – 7 months to 9 – 12 months. So in conjunction with Arctic LNG we’re going to build a transhipment facility at Kamchatka. And if we can do that, that will clearly give us an edge on delivery to an FOB price in Russia. Absent that we’ll have to go through the traditional routes. But Europe was a very good market for us in the first quarter of 2018 for the Yamal project – so we still see Europe as a potential market for us. But I think if we look forward and understand where the dynamics and demand are growing, we think that the Asian Pacific market is the next market for Arctic LNG 2.
And opening up the Northern Sea Route for 12 months of the year – what difference in time would that mean?
Well today we’re generally at 5 – 7 months. So we’re generally looking from May to October / November. So during that particular period in time, what that means is that in order to go through the Northern Sea Route to the Chinese market as an example, it takes us about 18 days. And if we do the traditional Mediterranean, Suez Canal, through the Strait of Malacca route, it’s about 36 days. So it’s about 50%. Both 50% in time, and 50% in Nautical distance.
But what about the extra cost in doing that?
There is an extra cost. It’s about an 80 cents per mmbc difference today between the Northern Sea Route and the traditional Mediterranean Route. So I think to get us there roughly about a dollar fifty, a dollar eighty through the Northern Sea Route, versus roughly two fifty with the traditional Suez canal through the Strait of Malacca route.
And the idea is that there’s a stop in Kamchatka, is that right? And it’s literally moving from one shipment method to another, and a second ship taking it for the rest of the journey?
Yup, that is correct. And the reason we want to do that is largely because we built a fleet of what are called Arc 7 Ice Class Tankers. And the idea is that they have the capabilities of crushing through 2m deep ice. And we don’t need that kind of vessel to take it to end market if you’re out of the ice conditions. So the idea is picking a facility in the Russian far east where we border between ice water and non-ice water. This allows us to then offload to conventional tankers. At the end of the day that lowers the costs of transport to the end consumer. It also means we can shuttle back and forth to Yamal and Arctic LNG 2, because I think Arctic LNG 2 will be mostly for the Kamchatka facility right now. So you don’t need as many of these Arc 7 tankers.
Nevertheless, that is a lot of investment in all that infrastructure for the Asian market. Will it all start to be tied up in contracts?
Well I mean in terms of the vessels today, they’re not on Novatek’s balance sheet. So we’ve actually novated the contracts to shipowners, and the shipowning companies basically just lease back the vessels to Novatek under a long term contract. So they’re not essentially funded by Novatek. The transhipment facility at Kamchatka is probably estimated at between a billion and a billion and a half dollars, but for that investment obviously we will get partners to work with. The most important element of it is that the partners that we’re talking with today, that serve that geographical region, are really interested in this. Because this then ultimately meets their requirement for changing the evolution in the contract terms. Shorter duration flexibility clauses, spot prices - so non-oil linked prices - they’re interested in seeing more of a hybrid prize. And so this allows us to set a Russian FOB price, where I can take it to market in Japan in maybe three days. I can take it to Korea in three days. And so that’s very attractive when you’re looking at security of supply. Somebody who needs spot trading, short term, short duration type contracts, they find it very attractive. So I don’t think we’re going to have any problem finding partners to invest in that particular venture.
We started with politics, let’s end with politics. When you’re looking ahead, how much political consideration do you factor in?
Well I mean it’s a difficult question. Obviously I mentioned earlier this idea of good gas vs bad gas. And it seems like Russia is considered bad gas, and gas from the United States is considered good gas. And I never really understood that point because gas is fungible. So once it’s loaded on a ship it loses its DNA module. So I think this concept of political change – I don’t think it’s ultimately going to impact the marketplace because gas is a fungible product, and people are going to need it. And we saw that this year, when we saw a vessel of ours eventually made it to Boston.
Which caused a lot of political consternation.
Well it did, but is that really the right answer? I mean what we tried to do, and what I tried to say in some of the discussions, was that we did not sell directly to the United States. We sold it to Petroft, that was going to deliver to the UK market. But the trade has evolved beyond point a and point b. So Petronet then sold it to ENGIE, who then brought it ultimately into the Boston market. But as a trading mentality, they brought it to where the gas was needed. And I think that transcends political questions. Because as I mentioned in my presentation today, when we talk about these massive exports coming from the United States, they still have this issue of the Jones act to deal with. They cannot even deliver their own gas to the new England area. So why would we, as a Russian company, be penalised or criticised? That’s what I thought was unnecessary, that we were highly criticised for being a source to solve a problem. And we saw that not only in the United States – we saw that with Boris Johnson making comments when one of our cargoes made it to the UK.
Well why do you think then that there is that difference between what you characterise as good and bad gas?
That’s the 64,000 dollar question! We’re trying to solve that, because we’re trying to say it loses its fungibility. Because if you use that same argument - let’s assume that’s a valid consideration, right? Then I would say even on a pipeline basis, the gas that we deliver from our core domestic gas production ultimately makes it to the burner. So this whole time it would have been considered “sanctioned gas”, from 2014 onwards, but it becomes fungible. So nobody really understands why we’ve gone to this particular point of identifying this DNA marker between good and bad gas. Now I mean, politically I think we have to get beyond this current situation, and I think President Trump was actually trying to bring back diplomacy with Russia. Unfortunately the Democratic side of the table will not allow him to do that.
You’ve gone into an entirely different area now – from gas to internal politics.
I understand that, but you’re asking me what do I think of the future – will it mean a change in political party? I don’t know that answer. Will it mean the market will finally wake up one day and realise that we cannot have the US dictate global policy, because look at NordStream 2 – same situation. If you go back a couple of weeks ago, I remember energy secretary Rick Perry was in the marketplace in Europe basically saying for every molecule of Russian gas we replace in Europe with US gas, that means we help to liberalise and free our allies and neighbours from the stranglehold of Russia.
And how did that go down?
I mean you’re talking about politicising the gas right, and whether or not you use gas as a strategic tool – that’s clearly, to me from my perspective, that’s using gas as a strategy.
There will be so many people who will look back after years have gone by and talk about the situation with Ukraine and Crimea, and say well that was the crux of it. That’s why it’s labelled as this so called bad gas.
If we look at the Ukrainian situation as an example, and you look at 50 years of delivery even during the heights of the cold war, what we’re really talking about is maybe 19 days over 2 events – 2006 and roughly 2008-9 – we’re talking about 19 days. So what does that mean, in terms of reliability of supply? I mean if I was a consumer of a refrigerator, and I had 50 years of durability on that refrigerator, and somebody told me that it was going to be so many years that I would have the refrigerator up? I would buy it every time.
Yeah but 19 days in a short political cycle when things are changing…
Of course. But when you characterise it we have two situations. We have a situation where Russia was singled out as the guilty party. And the first stoppage, I think at the end of the day the European Union and the United States realises that it was probably caused on the Ukranian side through non-payments…
We could carry on about this –all that footage of the taps being turned off that was beamed right across Russia…
At the end of the day, what we see today is natural gas is very politicised.
Very, very much so.
And it’s now not only the same argument that President Putin uses natural gas as a political tool. We can now also honestly say to ourselves that gas has become a political weapon of the United States.