the RUSSIA oil & gas competitive intelligence report - Report Buyer

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Russia Oil and Gas Competitive Intelligence Report 2010 As the company aims to expand its share of the domestic gas market, it is beginning to clash with Gazprom, which is keen to protect its quasi-monopoly on distribution. Novatek, however, is a formidable competitor, boasting the support of Genadiy Timchenko, a former secret service official with close connections to Vladimir Putin. In June 2009 Timchenko raised his direct stake in the company to 20.8%. Novatek scored a major victory in November 2009, when Gazprom conceded the independent a right of access to the national pipeline, in return for an 18% net-back transit fee. This enabled Novatek to continue with the deal to supply subsidiaries of Russia’s largest power provider, Inter RAO UES, with 65bcm from 2010 to 2015 at a cost of about RUB177.3bn (US$6bn). Although Inter RAO is already contracted to buy that gas from Gazprom, Novatek was able to woo the utility with lower prices, to the ire of the state gas giant. Through its controlling stake in the Yamal LNG operating vehicle, Novatek is the operator of the South (Yuzhno)-Tambeyskoe gas field onshore the Yamal-Nenets region, which is expected to begin exporting gas by about 2018. The project is known as Yamal LNG. Although no firm project timetable has been set, Gazprom previously said it aims to start producing the first 15bcm of gas in Yamal by 2011 and then to gradually boost volumes to an ambitious 250bcm per year. Strategy The company is pursuing a two-pronged strategy – boosting supplies to the domestic market while developing LNG export projects in Yamal. To advance Yamal LNG, Novatek will need a well-heeled foreign partner but the company has given conflicting indications about when this will happen and who will be joining it. A number of IOCs, as well as Qatar government, have made overtures to Novatek about joining the Yamal LNG scheme. Latest Developments In May 2009, Novatek paid US$650mn in cash to acquire a 51% stake in Yamal LNG, denying rumours of a planned share offer. Gazprom holds another 25.1% in Yamal LNG through a subsidiary as well as directly controlling a 19% stake in Novatek. Gazprom previously announced its intention to begin feasibility studies on an LNG plant on the peninsula in early 2010, although the financial crisis is likely to delay this. The chief executive officers of the two companies agreed to begin third-party negotiations on the project following a meeting in August 2009. Yamal LNG is the operator of the South-Tambeyskoe gas field in the Yamal-Nenets region. In June 2009, Gazprom shortlisted Total and Shell for participation in Yamal LNG, adding that Mitsui and Mitsubishi were also expected to obtain minority rights in the project. Conoco has also previously expressed interest. Amid much fanfare, in August 2010 Novatek shipped its first cargo of condensate using the Northern Sea Route (known as the Northeast Passage) to demonstrate the feasibility of selling its resources in the © Business Monitor International Ltd Page 51

Russia Oil and Gas Competitive Intelligence Report 2010 Barents Sea region directly to Asia. A cargo of condensate was dispatched to China in Sovcomflot's hightonnage tanker Baltica with support from a nuclear icebreaker. By using the Northeast Passage, Novatek can reduce its normal journey to China and Japan of about 20,400km around the Suez Canal to about 12,500km, which would significantly reduce transit time, fuel costs and the risk of pirate attacks. © Business Monitor International Ltd Page 52

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