Russia's Yamal LNG competitive despite rising costs -analysts

Fri Dec 20, 2013 7:12am EST

Related Topics

* Yamal LNG costs up a third to $27 billion

* First train of 5.5 million tonnes to hit market in 2017

* Still attractive project but needs to move fast - analysts

By Katya Golubkova and Oleg Vukmanovic

MOSCOW/LONDON, Dec 20 (Reuters) - Russia's Yamal LNG project should be able to offer consumers in Asia and Europe a competitive price despite a spike in costs, but the Arctic project will have to work fast to avoid a glut of super-cooled gas from North America, Australia and east Africa.

Analysts said Yamal, led by Novatek, Russia's No.2 gas producer, should achieve a production cost of $1,600 per tonne of LNG, undercutting rival Australian projects struggling to contain multi-billion-dollar cost overruns.

This week, Yamal LNG took a final investment decision (FID), with costs of $27 billion, up a third from an earlier $20 billion - the first non-U.S. FID in almost two years, since Australia's Ichthys project, showing that gas buyers are still betting on U.S. super-cooled fuel.

But at a project which cannot ship fuel eastwards to China and Japan all-year because severe weather, some now wonder whether a start in 2017 is over optimistic.

Bernstein Research said Yamal ranked much lower in terms of cost than Chevron's Gorgon LNG project, which is also targeting the Asian market.

"To put this into context, costs recently blew out again at Chevron's 15.6 million tonnes per annum Gorgon LNG project, to $54 billion for a similar-sized project ($3,500/T), hence Yamal LNG looks (around) 45 percent lower-cost," Bernstein said.

Yamal LNG, also owned by French Total and Chinese CNPC, is expected to produce 16.5 million tonnes of liquefied natural gas (LNG) per year from three trains, with the first one of 5.5 million tonnes to be launched in 2017.

Hoping to capitalise on a growing market for LNG in Japan and China, Yamal is going head-to-head with projects in Australia and those in the United States, which is experiencing a boom in shale gas output, yet to be transformed into LNG.

Two industry sources said the new cost was the product of a more detailed assessment of project expenditure conducted by the project's engineering, procurement and construction firms, France's Technip and Japan's JGC.

A Novatek spokesman did not return calls seeking comment.

But despite the higher cost, analysts said Yamal should still be more profitable than some Australian competitors, which are facing ballooning costs largely due to high wages and a strong currency.

At the Ichthys project, which plans to start production by the end of 2016 and ship 8.4 million tonnes of LNG a year, costs have risen by 70 percent to $34 billion.

RIGHT PRICING, FAST MOVE

Novatek initially planned to start first train in 2016 but this week moved the target to 2017, and some analysts said they were sceptical it would meet this goal, given severe Arctic conditions on Yamal.

"Analysis of all LNG projects implemented across the globe during the last five years shows that not one was launched faster than four years after FID," said Tatiana Mitrova, head of the oil and gas department at the Russian Academy of Sciences Energy Research Institute.

"On average, it (construction) takes five years. So even 2017 looks quite an optimistic (target)."

LNG is expensive in Asia. It now costs almost $19/MMBtu, largely due to Japan's need for fuel to run power stations after most of its nuclear plants were shut following the Fukushima disaster in 2011.

Asian prices are more than four times the cost of natural gas in the United States, which has a supply glut. The United States is expected to start LNG production later this decade.

Novatek has already sold 70 percent of Yamal output to Chinese and Spanish buyers, as well as to the trading arms of Novatek and Total. It is also looking for another minority partner to share costs and take volumes.

Alexander Kornilov, an analyst with Alfa Bank, estimates that Yamal is breaking even at $8.2/MMBtu versus $7.4/MMBtu under the old capex assumption.

Still, prices are expected to fall gradually after new projects from the United States, Australia, Russia and other destinations hit the market over the end of this decade, meaning all developments, including Yamal, need to move fast.

"With Russian projects facing a substantial price tag, there has to be sufficient market demand to justify the slough of planned projects," Eurasia Group said in a note last month.

"Buyers will prioritise the lowest cost projects first, particularly in the U.S."

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