The preliminary cost estimate for the construction of the Arctic LNG-2 LNG plant increased by 17%, to about $25 billion

According to Kommersant, the cost of NOVATEK’s Arctic LNG-2 project has risen to about $25 billion from the originally announced $21.3 billion. The increase in costs is due to the transition to the use of electric drives on the second and third lines of the project and the increase in electricity needs. The increase in value will be covered by shareholders’ investments, however, probably without the participation of the French TotalEnergies, which announced the termination of investments in projects in the Russian Federation. According to analysts, the increase in the cost of Arctic LNG-2 is not critical, since in terms of unit costs the project will still be cheaper than the existing Yamal LNG.

The preliminary cost estimate for the construction of the Arctic LNG-2 LNG plant has increased by 17%, to about $25 billion. The increase in costs will be covered by the funds of the project’s shareholders, Kommersant’s sources say. The initial estimate was $21.3 billion.

The fact that the cost of Arctic LNG-2 will be more than $22 billion due to the transition to the use of electric drives, the head of the company, Leonid Mikhelson, told reporters at SPIEF-2023. “Due to the fact that we switched to electric drives, we need power plants, which slightly increases the cost of the project. Capital investments will be more than the $22 billion announced earlier. But, on the other hand, now the operating costs will definitely be less,” he said. NOVATEK declined to comment further.

NOVATEK is in the process of constructing its second project, Arctic LNG-2, with a capacity of 19.8 million tons per year, the launch of the first line is scheduled for late 2023-early 2024. NOVATEK owns 60% in Arctic LNG-2. The rest of the shareholders – French TotalEnergies (due to hostilities in Ukraine stopped investments in projects in the Russian Federation), Chinese CNPC and CNOOC, as well as a consortium of Japanese Mitsui and JOGMEC – 10% each. The volume of external project financing in the form of loans was supposed to be €9.5 billion, the rest should be financed by the project shareholders.

It is likely that TotalEnergies will not take part in additional financing after the increase in the cost of the project to $25 billion, although the company has funds in the Russian Federation that it still cannot withdraw – NOVATEK dividends placed in a type C account. The French company did not respond to a request “b”.

After the outbreak of hostilities in Ukraine, European and American equipment suppliers refused to supply NOVATEK with critical equipment. Including the American Baker Hughes was supposed to supply gas turbines for the LNG process and power supply for the project, but stopped shipments. The company managed to deliver only four turbines, which NOVATEK will use for the LNG process on the first line. For the rest of the work, NOVATEK had to look for suppliers in China.

For example, to supply power to Arctic LNG-2, NOVATEK intends to build a 1.5 GW gas turbine onshore power plant based on Chinese Wison technology with 25 MW Harbin Guanghan Gas Turbine gas turbines. For the LNG process on the second line, Chinese electric drives with a capacity of 70–80 MW will be used. A contract for electric drives for the third line is being prepared, but, according to Kommersant’s information, has not yet been closed.

Commenting on why the power plants were purchased in China, although gas turbines of this capacity are also produced in Russia, Mr. Mikhelson noted at SPIEF that Russian plants are already loaded for the coming years. “All capacities of Russian manufacturers have already been contracted. For example, in Perm (“UEC-Perm motors.”— “b”) it is possible to order a turbine beyond the horizon of 2030,” he said (quote from Interfax).

Independent expert Alexander Sobko considers the increase in the cost of Arctic LNG-2 to be moderate, “not unique and not critical.” For example, a situation of significant cost overruns has been a feature of many Australian LNG projects. “It is more important here whether the project will remain profitable after the rise in price. In the case of Arctic LNG-2, suffice it to say that even after the expected increase in investments, the amount of capex per unit of capacity still remains lower than for the quite successful Yamal LNG,” he notes.

At the same time, in the case of Arctic LNG-2, uncertainty remains due to the fact that TotalEnergies announced last year that it had stopped financing the project, having invested $ 2.5 billion at that time, says Mr. Sobko. “It is not clear how this conflict will be resolved both at the current stage with the possible need to seek compensation for this financing against the backdrop of an increase in total capital costs, and in the future,” the expert explains. not fully financed its obligations”.

Tatyana Dyatel