Tax breaks ease development of LNG projects on Yamal Peninsula

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, July 22 -- Russian natural gas producer Novatek, taking advantage of newly announced tax breaks, plans to construct an LNG facility on the northern Yamal Peninsula in 2016.

“Synergized efforts of federal and regional authorities and investors will create on Yamal a major world center for the production of [LNG],” said Yamal Gov. Dmitry Kobylkin.

Novatek expects to build the Yamal LNG project in three phases: the first is to be completed in late 2016, while construction of the second and third is to take place in 2013-17 and 2014-18.

Word of the new facility follows approval by the Russian government of the acquisition of a 20.5% stake by Total SA in the northern Yamal LNG project from Novatek.

The acquisition follows Total’s purchase of a 12.09% stake in Novatek for around $4 billion in early April. In March, the two sides agreed to that purchase as well as to the acquisition of a further 20% stake in Novatek's Yamal LNG project.

Russia’s Prime Minister Vladimir Putin said Total's entry into the Yamal LNG project "creates the necessary platform to implement jointly a major program to develop Yamal gas fields and produce LNG."

According to Putin, the cost of the Yamal project is expected to reach at least $36 billion, with construction to include the 15 million tonne/year plant, a port, and LNG carriers along with regional networks.

Putin, who claimed that the first tankers at the port are expected to be loaded in 2018, said the Yamal project aims to help Russia diversify its export routes and raise the country's share of the global LNG market.

New tax law
The decision to develop Yamal has been made easier after Russia’s President Dmitry Medvedev signed into law various oil and gas tax breaks including scrapping the extraction tax for gas produced in the Yamal peninsula for conversion to LNG.

The exemption is considered especially crucial for Total, which now owns a substantial stake in Novatek, and for Novatek’s greenfield project to produce and liquefy gas in the Yamal Peninsula.

The tax breaks will apply to gas fields in Yamal until production at a field reaches 250 billion cu m of gas and 20 million tonnes of gas condensate. The tax break applies only to fields that produce gas for liquefaction.

Medvedev also cancelled the extraction tax for all oil fields that are north of the 65th parallel in the Yamal peninsula and Yamal Nenets region until production at a field reaches 25 million tonnes.

According to Andrew Neff, analyst with IHS Global Insight, “The zero-rate gas extraction tax for the Yamal Peninsula is geared to help spur investment in an area that is expected to serve as the foundation for the next generation of gas development in Russia.”

More succinctly, one industry observer told OGJ that, “This makes Yamal production and LNG plant a lot more attractive and economical.”

Contact Eric Watkins at hippalus@yahoo.com.

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