* 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 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
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
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."