To Russia with energetic love

Workers calibrate sensitive systems on board an oil exploration project of CNOOC in Shanxi province. [Photo by Chen Yuanzi/For China Daily]

A mega overseas project for liquefied natural gas or LNG that will likely burnish China's global profile, contribute toward the country's energy security, enhance its geopolitical strategy and bolster efforts for economic rejuvenation, is scheduled to start production in the Russian Arctic late this year.

The 16.5 million metric tons per annum Yamal project－its corporate entity is called Oao Yamal LNG－is located in north-central Russia (or north western Siberia).

In September 2013, China National Petroleum Corp, the country's largest oil and gas producer by annual output, acting through its subsidiary CNPC Russia, bought a 20 percent stake for $5.4 billion in Oao Novatek's $27 billion Yamal project.

Oao Novatek holds a 50.1 percent stake in the Yamal project, while Total holds 20 percent and Silk Road Fund 9.9 percent. Novatek is Russia's independent natural gas producer and the country's second-biggest LNG company after state-owned Gazprom.

China's investment will help the Russian gas supplier to complete the project, one of the largest industrial undertakings in the Russian Arctic. It is reasonable to say a new gas production center is evolving in the Yamal Peninsula, which is expected to transform the Russian gas industry.

It is also expected to boost China's oil and gas reserves substantially, ensuring steady long-term supply.

Much of Yamal's output would to be supplied to China and other Asian countries, according to Novatek. CNPC had pledged to buy at least 3 million tons of LNG a year, said analysts.

According to Wang Lu, an Asia-Pacific oil and gas analyst from Bloomberg Intelligence, imports from Yamal may account for at least 1.6 percent of China's gas demand, which is estimated to be 257 billion cubic meters in 2018, assuming a 10 percent compound annual growth rate during the 13th Five-Year Plan (2016-20).

"China's LNG imports will continue to be an important contributor to its supply landscape by 2020," she said.

"The project's success and reliability will enhance CNPC's investment return, so this aligns CNPC's interests with Novatek's."

For CNPC, Yamal has strategic importance. It expects the project to foster greater cooperation between Beijing and Moscow in the Arctic, give a fillip to economic development and scientific research, and shape regional rules and norms relating to gas reserves in the region.

Li Li, energy research director at ICIS China, a consulting company that provides analysis of China's energy market, said the country had arranged for steady import of natural gas from Russia even before the Yamal investment.

For instance, Russia's Gazprom has a 30-year contract with China to supply 38 billion cu m of natural gas annually from 2018. CNPC's participation in Yamal is part of Chinese companies' going global strategy and signifies the country's intent to be a key player in the crucial Arctic region.

In the process, China will have also helped Russia that has been facing capital shortage due to sanctions imposed by the US and Europe over the annexation of Crimea.

The deal represents a significant step in Russian President Vladimir Putin's push to boost commercial ties with China.

China's backing will ensure the project will roll, said an official from CNPC Russia. Elaborating, he said sanctions had rendered financing for the project in US dollars impossible.

Several US and European banks had pulled out of financing deals. So, China's capital, technology and massive markets are exactly what an Arctic country like Russia needs now.

According to Evgeniy Kot, director general of the Yamal project, the company has sold 96 percent of the project's LNG production to European and Asian customers through 20- to 25-year contracts.

Benefiting from the vast natural gas reserves situated across the Yamal Peninsula, the company signed loan agreements with the Export-Import Bank of China and the China Development Bank Corp for 1.2 billion yuan ($173 million) in all.

For its part, Russia will provide tax incentives to companies involved in the development of the Arctic region, including zero export duty on LNG and special tariffs for condensate oil.

CNPC Russia said it is confident Novatek's rich experience in operating in Arctic weather conditions will help the Yamal project.