Gazprom fears Yamal LNG may hurt pipeline gas supply to Europe

First shipment of liquefied gas from Yamal LNG is scheduled for Friday. Gazprom warns: LNG supplies to Europe are not profitable to the federal state budget due to tax privileges for the project and will affect pipeline gas supplies. Addressing “Gas of Russia” Conference, Nikolay Kislenko, Deputy Head of Prospective Development Directorate at Gazprom, said every cubic meter of LNG supplied to the European market means minus one cubic meter of Russian pipeline gas.

“Speaking of our, Russian LNG, we should understand that Yamal LNG means no export tax, no MET (mineral extraction tax – editor’s note), whereas the gas it will replace is the very gas for which Gazprom would pay taxes to the Russian state budget. This an evident loss of budget effectiveness,” Nikolay Kislenko said. He recalled that the state budget revenues from export tax and MET of Gazprom’s export flows will exceed 4,1 thousand rubles per 1,000 cubic meters of gas.

Yamal LNG really enjoys significant tax preferences: exemption of export tax, MET, property tax for 12 years, and a 13.5% reduction of profit tax. Besides, the government is financing infrastructure construction: airport, sea port, ice-breaking and cargo fleet.

“The budget will receive nothing from Yamal LNG for 12 years starting from the recovery start-up,” says Alexey Grivach, Deputy Director of the National Energy Security Fund. Meantime, he says, the government receives about 900 rubles MET and a 30% export tax per 1,000 cubic meters of pipeline gas. “At present, it is about 3,500 rubles. Even 1 billion cubic meters will cost the budget 45 billion rubles. Nearly as much the Finance Ministry plans to receive in 2018 from Gazprom through increase of dividend payouts. Depending on the market situation in Asia and Europe, exports may fall by 3, 5 or even 10 billion cubic meters after Yamal LNG reaches its designed capacity (16.5 million tons of LNG or about 23 billion cubic meters of gas),” the expert says.

Head of Economic Department, Institute of Energy and Finance Marsel Salikhov, says the liquefied gas from Yamal LNG will be supplied also to Europe, since one of the project participants is Total, France. The company holds a 20% stake in Yamal LNG and made a contract for supply of 4 million tons of liquefied gas annually (5.5 billion cubic meters of gas). Besides, another 2.5 million tons (about 3.5 billion cubic meters of gas) will be supplied annually under the contract with Gas Natural Fenosa, Spain.

“Even for the markets, which our pipeline gas cannot reach physically, for instance Spain, Portugal or south of France, an increase of LNG supply amid unchangeable demand will change the flows inside Europe and reduce pumping from our pipeline,” Gryvach says.

“It was for a reason that during discussions of LNG export liberalization in 2012 Novatek assured everyone and promised the government that the entire gas from the project would be supplied to Asia not to compete with Russian pipeline gas export,” he continues.

The only chance for LNG to avoid competition with pipeline gas in EU countries, is that Europe’s demand for the Russian gas be at the maximum level of the contract and physical capacities, but still not sufficient to satisfy the total demand of the European market.

Of course, now it is hard for the liquefied gas from Yamal LNG to compete with the Russian pipeline gas due to the price. According to Index Mundi, average price of the Russian gas at the transshipment hubs in Europe totaled $215 in October. Besides, Gazprom made a contract on supply of 2.5 million tons of liquefied gas from Yamal LNG with a transshipment hub in Zeebrugge, Belgium. According to Kommersant’s calculations, it will buy it now to resell it to India for $280.

Since the fastest growing and most favorable market is in Asia now, experts say the lion’s share of the liquefied gas from Yamal LNG will be supplied there, including via European traders, such as Total and Gas Natural Fenosa.

Senior analyst at the National Energy Security Fund Igor Yushkov links the statement by Gazprom’s representative with the plans of Baltic LNG construction project, which has not been granted as many privileges as Yamal LNG, since the gas will be recovered from already operated fields and gas pipeline, the plant will be located in more favorable climatic conditions. “However, any company seeks privileges, and Shell, which is Gazprom’s partner in the Baltic LNG may demand Gazprom to get privileges from the Russian government,” the expert says.

As for the government support to Yamal LNG, the government has repeatedly said that other exploration projects in the Arctic should follow it and use already built infrastructures, Yushkov says.

"Yamal LNG is a key component in Russia's Northern Sea Route and Arctic strategies, as it provides a commercial justification for new infrastructure development," says James Henderson, Director of the Natural Gas Program at the Oxford Institute for Energy Studies (OIES). "The level of government support for Yamal LNG emphasizes that this project has a core role to play."

"Yamal LNG is one of the few current success stories in the Russian Arctic," explains Yekaterina Klimenko, Researcher at the Stockholm International Peace Research Institute. In her words, it also is a success story for international cooperation in the Arctic and one of the few cooperation projects that survived the sanctions.

“Gazprom has also spoken much about LNG projects, for instance, the third line Sakhalin-2. However, nothing has been done in practice,” says Head of Economic Department, Institute of Energy and Finance Marsel Salikhov. In his words, Yamal LNG has tax privileges, but Gazprom will also have some for supply of gas through Power of Siberia pipeline. “Gas supplied to China too will bring less revenue to the budget than export to Europe. Without the Yamal project Russia cannot increase gas supplies to the world market and the privileges granted to the project are temporary and after a definite period of time, they will start paying taxes. I’d like to say that reorientation towards the East and attraction of Chinese investors to Russia have been much spoken of recently. Yamal LNG is one of the few projects in which Chinese companies have invested in,” Salikhov says. CNPC acquired a 20% share in the project, and the Silk Road Fund – 9.9%.

$27 billion have been invested in Yamal LNG and the investments will have a positive impact on GDP, says Deputy Head of ACRA (Analytical Credit Rating Agency) Vasily Tanurkov. He outlined some pros of the project, including new jobs and some, not all, tax payments. Earlier, NOVATEK CEO Leonid Mikhelson said 22,000 new jobs were created within three years of construction activities.

Almost no Russian equipment has been utilized at Yamal project, Igor Yushkov says. “They have imported equipment mostly from China. However, in the next project Arctic LNG -2, Novatek promises to use Russian equipment and technologies. For instance, they plan to build gravity platforms in Murmansk region for a modular plant to produce liquefied gas,” says Yushkov.

He is sure that “evolution” with use of own and foreign technologies and equipment, localization of production is logical and necessary. “Practice shows that we should rely on our resources and tackle import-substitution,” Yushkov says. NOVATEK promised to run Russian technologies of gas liquefication already at Yamal LNG. The project participants weigh construction of additional, fourth line with a capacity of 1 million tons. Its design was ordered from Sibur affiliate, NIPIGAS. Technologies of small and medium-scale liquefication technologies are used in Russia, but no large-scale ones have been applied so far.