Oil and Gas - Novatek to Remain Leader in LNG

Earlier this week, the government finally approved the long-discussed LNG development program for Russia. This did not provide any major surprises, though a lot of useful details were revealed. The strategy goals, excluding speculative projects, are fully in line with our estimates with regard to Russian LNG's global cost position and capacity addition targets. Novatek is well positioned to contribute more than 60% of overall planned Russian LNG capacity by 2030-33 and will remain the leader and main driver of LNG development in the country. > The government's now-approved long-term program on the development of LNG projects targets LNG capacity increasing from the current 27 mln tonnes up to 137 mln tonnes by 2030 (a fivefold increase) based on projects that are already under construction, as well as those classified as "probable" and "possible." This raises the total number of LNG plants from three to 12. The document also includes eight projects as "potential" (speculative), meaning their realization is more uncertain. The total capacity of these projects could reach 147 mln tonnes, raising overall Russian LNG capacity to 285 mln tonnes by 2040.> While the government has again reiterated the strong cost-competitive position of Russian LNG projects, estimating their total cost at $3.7-7.0/MMBtu ($0.2-1.0/MMBtu upstream, $2.0-4.0/MMBtu liquefaction and $1.5-2.0/MMBtu transportation costs), versus $2.8-11/MMBtu for key competitors (Qatar, Australia and the US), it will consider potential additional support for them in terms of tax incentives and infrastructure. Total investment for the projects (excluding the speculative ones) is estimated at $150 bln by 2030 (or $1.4k per tonne of additional capacity). The government program states that Russian pipeline gas and LNG deliveries should avoid competing with each other but it avoids providing too strict a definition of competition (as had been previously suggested by certain market participants).> Novatek will make a major contribution to the pipeline of LNG projects with up to 83.5 mln tonnes in total capacity by 2030. This includes the existing Yamal LNG and Vysotsk, Arctic LNG-2 (under construction), Ob LNG and Arctic LNG-1 ("probable"), and Arctic LNG-3 ("possible"). This represents 61% of Russia's total planned capacity by 2030.> Gazprom's share (including PSAs) of 2030 capacity is estimated at 29.8 mln tonnes, including the existing Sakhalin-2 LNG plant, Portovaya (under construction), Ust-Luga ("probable") and the third train at Sakhalin-2 ("possible").> Rosneft projects dominate the pipeline of "potential" (speculative) projects with a 61% share. This comes mainly from Taimyr LNG, Kara LNG and Far East LNG-2.> The program also contains some important small-scale LNG development plans for domestic gasification and export purposes, as well as a regional gas resources utilization breakdown. It is worth highlighting that in its optimistic scenario the government does not expect Gazprom's Power of Siberia-2 and Altai pipeline projects to reach full capacity before 2032-35, according to our calculations, suggesting relatively low chances of them being constructed in the medium term, in our view.