Novatek’s Yamal LNG will face logistical challenges during the coming winter months

Shipping — and icebreaking — capacity to carry Yamal LNG to market lags behind, even as production increases ahead of schedule.

By Malte Humpert, High North News - October 5, 2018
Arc7 LNG carriers loading liquefied natural gas from Yamal at the Port of Sabetta. (Novatek via High North News)

Russian natural gas major Novatek is bound to face logistical challenges at its Yamal LNG operation despite ongoing efforts to streamline shipping operations. The company aims to open the third production line or train at the end of 2018, more than six months ahead of schedule, while it won’t take delivery of the last batch of five ice-class Arc7 LNG carriers until later in 2019.

Novatek contends with an imbalance between production volume and shipping capacity, especially during the winter months when its ability to supplement its fleet of Arc7 carriers with less ice-capable Arc4 vessels is limited.

“The construction rate of the LNG tankers is not in line with production. The problem is that five ships are missing this winter with the three trains running,” Hervé Baudu explains Senior Lecturer in Nautical Science and a Member of the French Maritime Society. “Only 165 voyages will be possible — compared to 220 required trips — this next winter before the arrival of the third tranche of five new vessels.” This mismatch may further increase as Novatek plans to add a fourth, albeit smaller, train by 2020 to bring Yamal LNG’s capacity to 18 million tons per year.

Novatek’s Chairman of the Management Board Leonid Mikhelson on the other hand does not foresee a shortage in capacity and assured in a recent interview that the company “will not be handicapped in terms of shipping volumes,” even following the opening of the third train ahead of schedule. However, industry analysts remain skeptical calculating that it requires 14 LNG carriers to transport natural gas from Yamal’s first two trains, not even taking into account the third train.

Reducing distance for Arc7 LNG carriers is key

The company has announced several short-term measures to reduce the sailing distance of its Arc7 vessels and thus increase their utilization rate. Earlier this month Novatek detailed plans for ship-to-ship reloading in the Barents Sea in cooperation with Norwegian shipping company Tschudi. Such efforts would significantly reduce the sailing distance for these highly specialized and expensive-to-operate vessels cutting the round-trip time from the Yamal port of Sabetta to Europe by around a third.

Nonetheless, even with such efforts it remains unlikely that the nine or ten LNG carriers operational by the end of the year will be sufficient to transport Yamal LNG’s full nameplate output during the coming winter season from December until May. During this six-month period the facility can produce up to 8.25 million tons of LNG, above what 10 LNG carriers can transport during that period. During the summer months vessels on average required 20 days roundtrip between Sabetta and Europe. And such calculations do not take into account harsher-than-expected ice conditions or other unforeseen operational challenges which may reduce sailing speed behind icebreaker escorts or delay docking operations, for example.

Lack of icebreakers may become roadblock

Novatek’s cooperation with Tschudi only represents a short-term solution according to Mikhelson. Permanent transshipment hubs planned for the Kola and Kamchatka peninsulas by 2023 will be key elements of Novatek’s logistical puzzle. However, questions remain to what degree the company can operate at full capacity during the winter months in the near- to medium-term.

While Arctic sea ice has retreated significantly during the summer season, vessels still require icebreaker escorts during the winter and spring season. Here Novatek relies on Atomflot, the operator of Russia’s icebreaker fleet. A program to construct up to five new heavy nuclear icebreakers faces continuing delays putting the first three vessels of the new powerful LK60 class at least one year behind schedule, a development Mikhelson recently criticized. “Three LK-60 icebreakers were to be manufactured, but we have seen none so far though one icebreaker should have been commissioned already.”

To overcome such shortfalls in icebreaking capacity Novatek is considering the construction of 40MW LNG-powered icebreakers to deploy in the Gulf of Ob and in the Kara Sea, but such vessels are at least five years into the future.

Slow sailing behind icebreakers

Even if sufficient icebreaker capacity can be secured, vessels travel a lot slower in the wake of an icebreaker through heavy ice conditions. While Arc7 carriers average 15 knots on their journeys to Europe in open water, they often see less than half that speed when following an icebreaker. Mikhelson confirmed that such speed restrictions represent a challenge. “We are now negotiating with Atomflot to ensure that our tankers are able to travel at a speed of at least 8–9 knots even in heavy ice conditions. The number of Arc7 tankers will eventually depend on whether icebreaker assistance provides for such speed.”

Even during the late Spring varying ice conditions can restrict independent navigation of Novatek’s Arc7 carriers slowing down operations even outside the harshest winter months. In June and into July Atomflot had to extend icebreaking services as ice conditions in the Ob Bay were the most challenging in nearly a decade. Ice conditions are routinely the most dangerous in the East Siberian Sea which connects Yamal LNG to ports in Asia.

This combination of hard-to-come-by icebreaking services, a shortage of Arc7 carriers, and the significantly longer sailing time to Asia compared to Europe, may incentivize Novatek to prioritize faster and easier shipments of LNG to Europe and selling its product at a lower price there, rather than selling LNG at a higher price in Asia, at least until the transshipment hub in Kamchatka is completed. This was already evident during most of 2018 when most shipments went to Europe, although most of Yamal’s production is contractually destined for Asia under long-standing agreements.

However, the high level of Chinese investments in the Yamal LNG project is also a key factor in determining in which direction shipments are sent. “All Chinese investors, whether it is the partnership project with Novatek or investments in the ships force Novatek to ensure fair deliveries,” explains Baudu.

Arctic LNG 2 already on the horizon

And while Novatek has yet to operate at full capacity through its first winter season and fine-tune a careful ballet of loading up to 220 carriers per year — one ship every 40 hours — it is moving full steam ahead with its second Arctic LNG venture scheduled to open by 2023. An additional 15 Arc7 LNG carriers, to be built by Russian shipyards, will be required for this new operation.