NOVATEK: FROM RUSSIA WITH LOVE
OAO Novatek is the largest independent producer of natural gas in Russia, producing a total of 57.32 billion cubic meters of natural gas and 4,287 thousand tons of liquids in 2012. The company produced 16.3% of the natural gas consumed inside of the Russian Federation in the same year. Unfortunately, the company has not been able to export gas outside of Russia because of the presence of a state-sanctioned export monopoly held by Gazprom. However, that situation is about to change. This ban on gas exports by companies other than Gazprom is scheduled to be lifted in 2014. The end of this export monopoly could prove to be a game changer for Novatek.
One of the most significant and expensive projects that Novatek has been involved with in recent years is the Yamal LNG plant. This plant is a liquefied natural gas plant that is to be built at Sabetta, located at the northeast corner of Russia's Yamal Peninsula. The project is expected to cost $15-$20 billion and to be completed in 2018. Novatek owns a 60% stake in the project. The Yamal LNG plant has also likely been one of the biggest drags on Novatek's stock price. One reason for this is that the project continues to suffer from delays. Novatek and Total, two of the partners on the project, decided to postpone the start up liquefied natural gas production at Yamal to early 2017 from its previously planned start-up date in the fourth quarter of 2016. Unfortunately, many investors have begun to believe that the construction and start-up this plant will be indefinitely delayed. As this project is very important to the company's ambitions to begin exporting natural gas to Asia, the company's growth prospects would be greatly stunted should the construction of this plant be indefinitely delayed.
Another concern that investors have with the Yamal LNG project are the potential costs of it. The project was originally expected to cost $15 to $20 billion but there were concerns about whether a liquefied natural gas plant can really be constructed in such a harsh area for that price. These concerns were revealed to have some grounding in reality as the project partners increased their estimate of the plant's construction costs to $26.9 billion in December. The Yamal plant is going to be a particularly large one, boasting three trains. The scale of this project further raises concerns about its ability to be completed within that budget. In fact, the complete project including the construction of the required infrastructure will cost considerably more than $26.9 billion - this $26.9 billion is simply the high end of the amount of private money that has been budgeted for the project. The Russian government will be covering half of the total cost of the project by providing debt financing (the Russian government will have no equity stake) from one of the state controlled banks that will be used to construction the necessary infrastructure at the Sabetta port and two LNG carriers, meaning that the project itself will cost an estimated $40 billion. However, there are still some concerns that even this will not be enough.
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