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Moscow fuels Artic LNG race with billions of dollars

Novatek, Russia’s largest private natural gas company, will receive a tax deduction of about $600 million (40 billion RUB) from the regional budget of Yamal-Nenets and $1.5 billion (100 billion RUB) from the federal budget to build an LNG export terminal in the autonomous region in northwestern Siberia, Oilprice reported.

Moscow fuels Artic LNG race with billions of dollars

The information, which was confirmed by Novatek, is the latest indication that Moscow is doubling down on LNG at a time of growing demand for the commodity that will inevitably displace a portion of demand for one of Russia’s top export commodities, oil.

Novatek, which last year overtook Gazprom in market capitalization, operates the Yamal LNG plant, which has a nameplate capacity of 17.4 million tons annually, and is building the Arctic LNG plant, which will add another 19.8 million tons when completed. Eventually, Novatek plans to operate total annual liquefaction capacity of 60 million tons.

The Russia company is not going it alone. Its partners in Arctic LNG 2 include Total, CNPC, Japan Arctic LNG, and CNOOC. There were many reports that Saudi Aramco would buy into the project, but with 60 % for Novatek and 10 % for each of the minority partners, all the stakes have been divided - and Novatek has said it would not reduce its 60 % holding in the project.

Novatek is widely seen as the spearhead of Russia’s international LNG expansion. Gazprom also produces LNG but on a smaller scale than the private company, for the time being. Earlier this year, in an interview with Bloomberg, Novatek’s CFO Mark Gyetvay said Russia could emerge as one of the top 4 global LNG producers over the next few years.

Bloomberg estimates that from April this year, the U.S. and Qatar could both have installed capacity of 100 million tons annually by 2030, sharing the top spot, with Australia following with 95 million tons annually and Russia coming 4rth with 75 million tons of LNG capacity.

Estimates are an uncertain thing, however. Low gas prices, especially in the key Asian markets, have stalled a lot of private LNG projects, notably in the U.S. This is where government support for Novatek becomes essential. With it, the company could stick to its plans and schedules and add production capacity before competitors who struggle with project delays and cost overruns. And there is another factor working for Novatek: climate change.

As the weather warms, parts of the Arctic are melting, opening up the Northern Sea Route for longer periods than before. The route, which incidentally plays an important Part in China’s Belt and Silk Road initiative, cuts shipping times from Western Europe to China by as much as 15 days. This naturally has important implications for pricing and, consequently, competitiveness.

It is no coincidence Chinese companies hold stakes in both of Novatek’s LNG facilities. In the Yamal LNG plant, these include CNPC with a 20 % interest, and the state Silk Road Fund, with another 9.9 %, bringing the total Chinese participation to almost 40 %.

China will emerge as the world’s largest LNG importer in the coming years and it is making sure to secure supply early on, led by purely economic considerations. This means other suppliers would need to find ways to make their LNG more competitive, at least while the gas glut lasts, pressuring prices and turning the market into a buyers’ market.