Novatek PAO Corporate Strategy Day 2017
Dec 12, 2017 AM CET
NVTK.MZ - Novatek PAO
Novatek PAO Corporate Strategy Day 2017
Dec 12, 2017 / 08:00AM GMT
==============================
Corporate Participants
==============================
* Alexander Fridman
* Leonid Viktorovich Mikhelson
PAO NOVATEK - CEO, Chairman of the Mgmt Board, General Director, Member of Mgmt Board & Executive Director
* Lev Feodosyev
* Mark Anthony Gyetvay
PAO NOVATEK - Deputy Chairman of the Management Board, CFO and Member of Management Board
==============================
Presentation
------------------------------
Leonid Viktorovich Mikhelson, PAO NOVATEK - CEO, Chairman of the Mgmt Board, General Director, Member of Mgmt Board & Executive Director [1]
------------------------------
I'm very happy to welcome you in this room for the presentation of Novatek's strategy. Some, maybe many of you may think that we've delayed it by the time, but it is that we are doing it very timely. There was a big event last Friday, where we loaded our first tanker from our Yamal LNG project and this is something that we are being very proud of, having done this project within the timing that we promised and within the budget that we promised.
And so, at this point in time, Christophe de Margarie tanker is passing through the (inaudible) and in a very ceremonial situation, this is the event which was attended by many guests from different countries and was attended by the President of Russia, Vladimir Putin; followed by very important meeting, although very short, dedicated to the development of LNG industry in Russia generally and maybe later on -- I will share some news about it later on. And we'll just to start with demonstrate a short video clip about the way we so quickly built the Yamal LNG.
We also gave it quite a thought since we are launching Novatek's rebranding, changing our logo and before the strategy presentation, we will give the floor to (inaudible), who will tell us about it. And so, our agenda is as follows; Mark Gyetvay will do the strategy presentation and it is quite a [luminous] presentation. There will be a short break followed by a bigger break and we have whole of the same executives attending this event and so we would be keen to respond to your question.
And so, your questions can be raised during the breaks and I mean you can submit them in writing and so as much time as needed to respond to this question that will be the amount of time where we will be willing to dedicate to answering your questions.
(technical difficulty)
So, you see the way it turned out to be so quickly and easily, Denis please.
------------------------------
Unidentified Company Representative, [2]
------------------------------
Good afternoon dear colleagues, before we begin the main event of today, the strategy presentation, I would like to dedicate just a few minutes to the re-branding that we specifically dedicated to this day, because this is the time when the company is living through transformation and the new quality becoming a big player in the global gas market. So the new course of the company does, we suppose the new brand quality and the quality of any brand is defined by the cumulated positive experience, the objectives, the goals and targets and comprehends all values and clear development in the strategy and accessible communication language and specifically a lot for language of communication to be international and to be easily understood in all corners of the world we made up our mind to launch this re-branding.
And one of the key elements in re-branding is changing a logo of company. The previous logo as you can see, it was created, endorsed and launched in March 2003, which was exactly the period of time when Novatek became the Novatek known to all of us; when the company was renamed and [representatives] you may see the kind of logo which was specifically intended for Russian domestic application. The main graphic part was done out of a styled letter N, Russian letter N, which is caused by the layers of gas symbolizing the production of gas as the company's core business.
The logo was called upon to present and project the company as the biggest competent independent gas producer, the one which produces all of its gas themselves, all of its gas in the Russian territory. Throughout the past few years, company was evolving and as you could see in the video clip quite quickly and successfully, as stated by Mr. Mikhelson within the budget and the time was developing its future and has kind of been living through the transformation period into a new quality. Today Novatek is not as much and not only we play on the Russian domestic market, but rather being the [bonafide] player of the global gas market, particularly considering the shipment of its first gas tanker. It's Number 8 in terms of the production amongst all of the global majors.
Here you see the new logo, its graphic part, which basically speaking comprises of the three basic colors. The blue that you see the bottom part symbolizes the cold and the Northern conditions that the company is operating within and produces gas there, which is summarized by the blue color as the basis of the company's business. Well red color symbolizes warmth which is produced out of gas and beside all the red lining, which you can see in the top right-hand corner, which is also the symbol of the rising sun, in which way we want to say that the company is going through the beginnings of its great journey and is ready to go into the full daylight of operation.
The logo itself is not quite usual. It is made out of -- I mean when developing it and we apply the pixel form, which is reflecting 2 basic states of gas, of methane, which is the aggregate state which are; the gas and the liquid. In parallel, there is no specific structure which would restrict it in terms of the placement. And that is intentional because in this way we want to say that, to all the stakeholders, so all the surroundings want to say that we're ready to respond to any quick changes and respond to any challenges.
The graphic part also was slightly altered, but not very significantly. The topography was done in a much more precise way and made more dynamic. And the last thing that I would like to describe and show in my brief presentation is the way it looks upon the competitive landscape of the global energy industry. In our understanding, this looks quit fresh, dynamic and contemporary. Thank you, this is it.
------------------------------
Leonid Viktorovich Mikhelson, PAO NOVATEK - CEO, Chairman of the Mgmt Board, General Director, Member of Mgmt Board & Executive Director [3]
------------------------------
Thank you. And so now, we will give the floor to Mark Gyetvay. Please Mark.
------------------------------
Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board, CFO and Member of Management Board [4]
------------------------------
Ladies and gentlemen, shareholders, good morning and welcome to our Corporate Strategy Day. It's great to see everyone here today as we quickly approach the upcoming holiday seasons and (inaudible) the New Year. We would like to extend our warm greetings to everyone here today in Moscow, as well as all those individuals who cannot attend in person but who are viewing this presentation online.
We encourage you to read this disclaimer statement before drawing any conclusions or making investment decisions. Throughout today's event, we will make references to forward-looking statements by using words such as plans, objectives, goals, strategies, and other similar words, which are other than statements of material facts. What we represent today reflects our view as of the date of Corporate Strategy and we undertake no obligation to revise these forward-looking statements in light of new information or future events.
Today's strategy presentation will be divided into several sections. We will discuss the factors changed in the global gas markets. We will briefly revisit our 2011 strategy. We will discuss our commitments to remain focused on our core domestic business. We'll then take a short 10-15 minutes break before resuming our second part of our presentation focusing on LNG and other matters. After the formal presentation is concluded, we'll take another break for about approximately 45 minutes before resuming the speech from our Chairman, Mr. Mikhelson. Then we'll proceed directly to the question-and-answer session.
Joining me on the panel will be Mr. Michelson, Mr. Alexander Fridman and Mr. Lev Feodosyev. We have issued A5 index cards to write your questions. We request that you write your questions legibly and hand these cards to one of our employees. We will use these questions to begin our Q&A session. So let's begin.
It's been quite a journey for Novatek since we published our last corporate strategy in 2011. The global energy markets have evolved significantly over the past 7 years and our new corporate strategy considers these changes that we believe define the future competitive landscape as we see it today. It gives a great pleasure to discuss Novatek's new corporate strategy to 2030. Our strategy takes 2 different paths, yet focuses on 1 fundamental truth. Natural gas will play a leading role in the future energy mix till 2030 and beyond (inaudible).
We have an existing business model that is committed to delivering uninterrupted natural gas to the Russian domestic market. This path generates substantial operating cash flows to fund our larger LNG ambitions. Our domestic gas liquid business generates more than $2 billion of free cash flows per year, and this cash generation will be maintained through the strategy period. It's important because it clearly shows the strength in today's macro environment as well as periods of severe commodity price volatility. Our low cost base is key, and this competitive advantage will remain a recurring theme throughout our strategy period.
The second path is our ambition to be one of the world's largest LNG producers. We will achieve this goal by utilizing technology and innovation to unlock our prolific resource base down the Yamal and Gydan peninsula. We will then begin focusing our attention on Arctic LNG 2. Then we will proceed to a series of other LNG projects to realize our global LNG ambitions. Our long-term LNG strategy is completely congruent with the overall energy strategy of the Russian Federation.
We believe that the government will fully support our initiatives. Our big plan is to create a new LNG center in Russia's Arctic zone that will rival the main LNG export centers of Qatar, Australia and the United States. The process of transforming Novatek from a domestically-focused gas producer into the next major LNG player began with a successful launch of Yamal LNG. The startup of the first LNG train and the formal first cargo loading represents an extraordinary accomplishment for the company. Despite all the doubt, skepticism and criticism, we delivered.
Our new strategy evolved from a very basic question, how would natural gas power mega cities in the year 2050? This basic question led to a series of debates about the role of natural gas in the future energy mix, considering climate change initiatives, renewables, and technological innovations. Just imagine asking yourself that question, how do you see the world changing 3 decades into the future and beyond?
We have to take a long-term view of the future because today we are operating and investing in major projects that will still be going on in 2050 and beyond. Think about that fact, every one of our major LNG projects will have an operating life exceeding 30 years. Unfortunately, long business cycles entail volatility and uncertainty.
How we view the future today is critically important. What role natural gas plays in driving economic expansion and addressing the concerns of climate change maybe different from our future expectation. Our future vision looks at many factors; some interrelated, some not. Factors such as population growth, urbanization, GDP growth, and the impact of renewables like solar and wind was considered.
We assess climate, change in demographics, the penetration of electric vehicles, climate change initiatives and governmental policy mandates. We assess the future of transport fuels, as well as many independent forecasts influencing the total energy mix. We reviewed and interpreted many of the published reports by global energy companies and respected industry consultants to draw our conclusion.
In the end, it was clear; natural gas will play a significant role in the future energy mix. Natural gas delivered to the markets in the form of LNG will lead the way in a world quickly transforming to a lower carbon greener environment. Our strategic vision to visible shape and LNG was our path to playing a major role in answering the three fundamental questions; 1, energy affordability; 2, energy security; and 3, energy sustainability. Our ability to build a world-class LNG platform, monetizing our prolific hydrocarbon resources affirmatively answers these 3 crucial questions.
Novatek can deliver low-cost and competitively-priced LNG to key consumer markets addressing energy affordability. Novatek has a huge high-quality resource base addressing energy security. And finally Novatek's vision to supply the global markets with low carbon natural gas addresses the question of energy sustainability. Climate change is a central issue in today's society. Russia has declared 2017 as the year of the ecology and we fully supported these initiatives. Novatek will play a major role in reducing harmful impacts caused by carbon emissions and we have aligned our business to meet these challenges in a socially and environmentally-responsible manner.
Today, we formally publish our strategic plan up to the year 2030. It highlights our LNG vision. We would like to emphasize however that we have not lost sight of our responsibility to supply natural gas to the Russian domestic market. Throughout the past year, we have repeatedly asserted that we are not an [ex-growth] company, despite production declines in our maturing fields.
Throughout the past year, we outlined our plans to decelerate these declines through remedial works, installing compressor stations, launching new producing fields, and drilling deeper into the Achimov and Jurassic formation. We achieved extremely encouraging results. The deeper producing formations will play a key role in our future development activities.
I made a statement on our last conference call that I would like to repeat today. I said it's no longer a question of if, but now it's a question of when. We have found the technical solutions to exploit our deeper resources. Now we need the time to drill and implement a prudent, cost-effective development plan. We believe our strategy outlined today addresses many of these questions. Along with a new corporate strategy, we simultaneously introduced our new corporate identity. It's a creative interpretation of vaporizing molecules. It represents our symbolic break from our past and a beginning of a new future. Our new look is bold and contemporary, and so is our future ambitions.
Our strategic framework has been slightly modified from when we published in 2011. We now introduce technology and innovation as a key enabler, as well as build in a comprehensible LNG platform. We possess an enormous hydrocarbon resource base at the core of our strategic framework. We unlock economic value by adopting leading edge technologies to monetize these resources and create a portfolio of value-creative projects. It is important that we minimize our environmental footprint, as well as support the social activities where we conduct our business operations.
Our business comes from leveraging our strengths. Besides resources, we have been very successful in maintaining our strong focus on cost controls and project execution. Let's look at Yamal LNG as an example. We have successfully developed this large-scale project on time and on budget, despite harsh climatic conditions and less-than-ideal market conditions. This accomplishment is something to be very proud of, of the company. Many of our global oil and gas peers have experienced massive cost overruns and project delays, or both. Later today we will discuss our plans to adopt gravity-based platforms using technology and innovation on our future LNG projects. This new concept will significantly reduce liquefaction costs. Achieving a low cost solution is important, so that our future LNG projects remain cost competitive in a new pricing paradigm.
It's also important that we strengthen our balance sheet. Our current business generates sufficient operating cash flows to internally fund our operations, service our debt and liabilities and distribute cash to our shareholders in the form of dividends. We have one of the best credit profiles in the Russian oil and gas industry. Our strong cash flows generated from our core domestic business has allowed us to significantly reduce our long-term debt portfolio and maintain strong credit metrics.
Our asset portfolio comprises 42 license areas. There is a clear distinction between those developed or pipeline projects within the unified gas supply system and those assets clearly earmarked for export-oriented projects in the form of LNG. Our high quality, long life resource base supports our strategic goals and objectives. This gives us a huge competitive advantage to have a highly concentrated asset base for both pipeline projects and LNG.
Since technology and innovation plays a crucial role in our future strategy, we would like to briefly highlight some of the technical accomplishments we have achieved over the past [several] years. We have taken conceptual ideas and transformed these concepts into tangible results. We constructed a world-class LNG project on permafrost, the first of its kind. We developed a test model of a tanker hole and then delivered the Arc7 ice-class tanker. We introduced long horizontal wells with multi-stage fracturing to drill and complete production wells in high pressured reservoirs. We developed a proprietary (inaudible) Cascade liquefaction technology for the fourth LNG train at Yamal LNG.
Technology and innovation will be used as a main driver to monetize our massive resource base. It will allow us enter the LNG markets with the new GBS platforms, as well as maintaining our strong commitment to deliver natural gas to the Russian domestic market and fully load our processing facilities by drilling deeper into our production formations.
The main highlights of our strategic objectives from 2018 to 2030 addresses our commitment to the Russian domestic market as well as our plans to transition to LNG in the future. We intend to increase our resource base, increase our core domestic production and maintain our low cost competitive advantage. We'll use processing facilities to increase our risk-adjusted margins. We'll also optimize our marketing channels by maximizing our use of the Northern Sea Route and develop strategic transshipment centers for our LNG business. By delivering on these strategic objectives, we will create long-term sustainable shareholder value. We have the ability to make quick managerial decisions to capitalize on changing market conditions. We are confident we can deliver what we promised.
Our new strategy transforms Novatek into a global gas power. We will rival many of the super majors in hydrocarbon resources and natural gas production. We will retain our unique position as one of the lowest cost producers in the global oil and gas industry, and most importantly, we will open a new LNG producing center that places Russia at the top of the LNG producing centers along Qatar, the United States and Australia, delivering clean energy well into the 21st Century.
In 2005, the consensus view was that the U.S. would be a major importer of natural gas. Significant capital was invested to build regasification terminals along the Gulf Coast and the eastern seaboards. All major gas players were developing projects to supply natural gas to this massively profitable market. Unfortunately, technology spoiled the party. Hydraulic fracturing opened high formations and the shale revolution was born.
Today the picture is clear. The global gas markets have evolved significantly since 2005 and 2011. What was first perceived as a rush to deliver natural gas to the United States in 2005 has dramatically changed with the success of the shale revolution. In 2011, it became clear that the United States had the potential to become a major exporter of natural gas, but a comprehensive energy policy was never formulated. That has changed. The U.S. is on the verge of becoming a major LNG exporter and the energy policy under President Trump supports this claim.
We have achieved an enormous amount of success since we published our last corporate strategy in 2011. Our corporate strategy is our guiding vision. The success of this strategy can only be measured by what we said we would do to what we actually achieved. I will briefly highlight what was accomplished.
Our 2011 corporate strategy centered on 3 primary things. First was to expand processing capacity; the second was to increase liquids output and the third was the launch of Yamal LNG. As of today, we have completed or exceeded most of our strategic targets as set forth in our 2011 strategy, except for a slight delay in the expected launch in the North-Russkoye field, which is now set to launch in 2019.
Expanding our processing capacity was a prerequisite to launching our core liquid producing assets. We achieved this strategic goal by expanding our Purovsky Processing Plant from 5 million tons per annum to a 11 million tons per annum, and by constructing and launching the 6 million tons per annum Ust-Luga Complex. These projects were launched on time and on budget and have been the cornerstone of our liquids monetization strategy.
Next, we successfully launched a series of greenfield producing assets; the Samburgsky Field in 2012, the North-Urengoyskoye Field in 2013, the Urengoyskoye Field in 2014, and the Yarudeyskoye, the Yaro-Yakhinskoye,the Termokarstovoye Field in 2015. These successful launches, again, on time and on budget, significantly contributed to the ramp up of our liquid production and a generation of strong operating cash flows. Our main short and mid-term strategy goals were achieved. We are now at our third and final theme of our 2011 strategy; formal launch of LNG train #1 at Yamal LNG. Implementing all of these projects assure that we achieved our major strategic goals as outlined in 2011. It represents the conclusion of our last strategy and the start of our transformation. An online news service (inaudible) summed up this message with a headline, Russia's Novatek now a world player with Yamal LNG.
Our massive resource position ranks Novaket as one of the largest oil and gas companies in the world. From 2010 to 2016, we successfully increased our proved reserves under the SEC reserves classification by 58% to 12.8 billion barrels of oil equivalent. Under the PRMS and reserve classification systems, we have approximately 23 billion barrels of oil equivalent and 37 billion barrels of oil equivalent, respectively. In June and August 2017, we successfully added roughly 20 billion barrels of oil equivalent to our Russian resource base by winning the auctions of 4 new licenses on the Yamal and Gydan peninsulas. These new resources are not reflected in our present reserve base, as highlighted on these graphs, but will be included over the next several years, as we complete exploration work and further develop our future LNG platforms. From 2011 to 2016, we increased our natural gas production by roughly 28% to 69 billion cubic meters and our liquid production by more than 3 times to over 12 million tons. The strong growth in our natural gas and liquids translated into a 3 fold increase in our revenues and a 2.8 times growth in our EBITDA.
Our free cash flow increased at a compound annual growth rate of approximately 28% from 2011 to 2016. Novatek ranked #3 in the world to reserve replacement costs as well as #3 for finding and development cost by the recently republished report by IHS. It is a constant theme throughout our story. We again ranked amongst the lowest cost producers in the global oil and gas industry.
The financial and operational results we achieved since our last Strategy Day and the unparalleled execution of our strategic projects is exceptional. We face many external challenges, but delivered to our shareholders what we promised we would deliver. The stage is now set for our entrance into global LNG markets and it is the underlying core theme of our new corporate strategy in 2030. We are now entering the next phase of our corporate evolution, developing the strategy to 2030 requires assessing many variables, some will materialize as we vision, others will not.
Our investment opportunities are extremely exciting and an improvement in living standards, economic expansion and growing populations all signal growth in global energy demand, particularly natural gas. The first strategic path we'll discuss today relates to our core domestic assets. This represents our legacy gas business and monetizing our liquids.
The starting point under both strategic paths are core domestic business and our global LNG begins with our low cost wet gas resource base. This gives us a huge competitive advantage. One of our key strengths is having our massive resource base in close proximity to the Unified Gas Supply System, including the uninterrupted use of the main pipeline quarters to deliver natural gas to the domestic markets.
Over the years, we have clearly positioned ourselves to be a reliable supplier of natural gas to a diverse base of power, industrial and residential consumers. We feel reasonably confident that our core gas business will remain relatively stable over the strategy period and we have a good mix of customers across Russia.
We are slightly less than 2 trillion cubic meters of natural gas and 266 million tons of liquids according to our PRMS reserves. In addition, we have the capability to add another 821 billion cubic meters of natural gas and 186 million tons of liquids with additional exploration and development activities.
We will continue to participate in upcoming license tenders to supplement our resources. The proximity of our producing assets to the UGSS allows us to effectively monetize our resource base through our uninterrupted access to the main pipeline network, thus maintaining our domestic market share.
But what will our domestic Russian look like over the next strategy period in our view? The general conditions of the Russian domestic market remain relatively stable throughout the strategy period in our view. Although we might be somewhat conservative in our demand assumptions, we believe that the domestic market could potentially provide some surprise. But overall, we feel that our estimation is quite reasonable.
We expect stable domestic consumption, inflationary gas price tariff growth, which is partially offset by slower increases in transport tariffs. Stimulating domestic gas demand will be important. In this regard, we believe the domestic gas market has still have room to grow, despite its maturity. We see potential market growth with additional regional gasification, conversion of transport fuels to LNG, and possibly some conversion of coal to gas to meet climate change targets. Essentially, the Russian domestic market is a highly gasified mature market, but there are a few bright spots available as we will discuss later today.
One of the main areas that we believe needs to be addressed is the regulatory framework. We are advocates of a comprehensive reform in the domestic gas market. We have stated many times in the past and we still believe it is true today that regulatory reform is needed. In our opinion, regulatory reform considers price in transport tariffs, pipeline access, extraction taxes and regional development initiatives in a more holistic manner to implement a comprehensive reform package. If implemented, we believe that this reform process [creates] an outdated model created with Gazprom as the only sole major supplier of natural gas.
We also believe that uncertainty over domestic regulations impeach investment decisions and hinders consumption growth. We strongly advocate constructive dialog among industry and government to facilitate investment decisions, stimulate demand and ensure adequate supplies of natural gas on the Russian domestic market.
Our regional gas market and presence has not changed drastically over the past several years as we supply natural gas to 39 regions throughout Russia. We supply natural gas to a number of large industrial consumers, power generating companies, regional distributors as well as residential consumers in regions where we control the distribution network. Our strategy today assumes that a regional market presence as well as our customer profiles stays relatively consistent up to 2030. Our present mix of gas supply contracts supports this assumption.
To implement an effective marketing strategy, we strive to achieve a good mix of various supply contracts over a range of durations. This essentially ensures a stable customer base and the flexibility to meet market demand. Our strategy over the period till 2030, we already have contracts to sell about 600 billion cubic meters of natural gas with long-term contracts accounting for more than 70% of our gas sales volumes. This implies a solid base of high-quality customers undermining our marketing efforts.
We will support our marketing efforts by participating in the gas exchange and potentially developing new market opportunities. The market is rapidly changing and with growing electrification of the global economy, we have to kind of accustom to the interconnected society though the expanded use of digital devices, the Internet of Things, and the evolving landscape of power generation. Energy inefficiency and structural changes in society are demanding that energy companies revisit this question and develop innovative solutions to address these new market opportunities.
As electricity is becoming the preferred choice of many end consumers, we have identified a series of potential services using our natural gas resources to deliver market-driven solutions. One area where we believe we can create a new market opportunity and address the consumer need is through the process of providing bundled power supply services to industrial consumers.
This will allow us to create a seamless one-stop solution to better integrate our gas business with our consumers to allow our customers to focus on their core businesses. We also see the opportunity to build an LNG refueler network for transportation within Russia. By building small scale LNG facilities, a key transport points and using LNG as a fuel of choice for power vehicles and trucks, we see market potential growing by more than 20 billion cubic meters of natural gas by 2030.
We can also expand this idea and construct small scale LNG plants in remote residential and industrial facilities that are not connected to the main power grid. These are just a few of the conceptional ideas which we believe that can create high value-added projects in the domestic gas market and provide innovative solutions to our customers.
Let's take an example of the pilot program we are working on in the Chelyabinsk region to convert LNG into motor fuel. Pilot concept uses natural gas as the primary fuel for large mining trucks that transfers back and forth each day at a set distance. The advantages of using LNG as a fuel source is the potential operating cost savings to the business owner and the increased mileage per tank of LNG.
Our plans call for the design and construction of the many LNG project at MMK in 2018. We have already completed research and engineering for the plant and have selected the infrastructure for the facility. We recently completed the testing of truck-to-truck refueling at MMK's production facility and we are ready to move forward with the initial pilot program.
Our marketing goal is to be viewed as a provider of value-added services, good businesses and a partner in developing innovative, comprehensive solution to improve business performance and increase profitability for our consumers. Moreover, this type of pilot program supports a federal initiative and creates an opportunity for us to develop a niche segment of the domestic market. The government forecasts that approximately 4% of Russian road vehicles or about 2.5 million vehicles will be converted to natural gas by 2030. Essentially a new trend is emerge and gaining traction throughout the world. We forecast that motor transport, namely heavy trucks and fleet vehicles will partially convert to either compressed natural gas, CNG or LNG. We also believe this transition will extend to rail transport and marine fuels, which underscores our strategic move into small-scale LNG projects and potential bunkering opportunities.
Over the past year, we have read many negative comments about our declining production from our mature fields. Many analysts label Novatek as ex-growth. We've (inaudible) disagreed with these comments and have subsequently spoken about concrete steps we plan to take on various conference calls. Now, we'll talk to more specifics.
Technology will be deployed to solve some of the decline in mature production by drilling deeper into the Achimov and Jurassic layers. We will use multilateral fracturing techniques to stimulate production flows in low permeable formations. The diagrams shown on the screen highlight that we use existing [well drillers] in some cases to penetrate the different producing layers, as well as increase the horizontal lengths from around 600 meters to between 1,500 to 2,000 meters. So far we have achieved very good flow rates with both natural gas and gas condensate by implementing this development program.
We also achieved a much higher gas condensate factor in earlier wells, which means we can optimize the cost of our development program and sustain production levels. We will deploy this new program across a range of our fields. For example, at the [Russia Yurkharovskoye] field, we plan to drill 13 wells in the Jurassic formation over the next couple of years after the positive results of well #135. It is reasonable to assume that we will not have been able to achieve this type of drilling results several years ago without improving downhole completion technology.
The next big domestic development program is in North-Russkoye cluster, comprising 4 fields. All of the main exploratory activities have now been completed. We will commence producing natural gas and gas condensate in late 2019, followed by crude oil production from the Kharbeyskoye field in 2020. We will drill 15 producing wells at the North-Russkoye field in 2018 and 2019 with first production estimated to commence in the third quarter of 2019. We will also drill 8 production wells at the East-Tarkosalinskoye field during the same period. In 2018, we will also commence exploration drilling at the Dorogovskoye and Kharbeyskoye field to test the natural gas and gas condensate bearing layers in the middle Jurassic zones. Over the next 3 years, we will spend approximately RUB 64 billion in capital investments to develop the cluster and commence production. There will be a lot of ongoing exploration and development activities over the next 2 years to prepare this cluster for production.
The North-Russkoye cluster is projected to produce approximately 14 billion cubic meters of natural gas, 1 million tons of gas condensate and about 4 million tons of crude oil, as outlined in the production profiles up to 2030. The cluster has upside to add potential PRMS reserves of 151 billion cubic meters of natural gas and 71 million tons of liquids.
The next major development program we will discuss today is our joint venture Arcticgas. Arcticgas is comprised of 4 fields at the same Samburgsky license area, the largest in terms of production and reserves. We have drilled some very promising deep layer Achimov wells in the northern section of the Samburgsky field, including well 6001 at the Urengoyskoye field. As a result of the increased liquid output, we decided to build a 1.2 million tons gas condensate deethanization unit to separate the high liquid contents at the Samburgsky field. This new unit will be commissioned within the first half of 2020.
We'll drill 26 development wells over the next 2 years to increase production output from the Achimov layers. The joint venture will maintain a production profile ranging from 26 billion cubic meters to 29 billion cubic meters and 7.7 million tons to 8.6 million tons of liquids. We will also commence the first phase of our oil development at the Yaro-Yakhinskoye field by drilling 29 production wells in the (inaudible) formation. First crude oil is expected by -- in 2018. Overall, our development activities will peak natural gas and liquid production to over 34 billion cubic meters of natural gas and approximately 9 million tons of liquid respectively by mid '20s, as noted on the production profile. The joint venture has budgeted gross capital expenditures of approximately RUB 95 billion over the next 3 years to increase production output and launch the Phase 1 crude oil program. We anticipate receiving additional dividends on the joint venture in 2019 and subsequently increase in post-2020.
The Geofizicheskoye cluster is a wildcard in our asset portfolio. This cluster provides us with the option to develop these resources as either a pipeline project to the domestic market, or as an LNG project for export. As of today, a definitive decision has not been made, so we excluded this cluster from our production profiles as part of our strategy material. We estimate the cluster can produce approximately 20 billion [cubic meters] of natural gas, with upside gas condensate potential. The cluster also has the potential to significantly increase the PRMS reserves by 2030 in further exploration and development activities. We will continue to assess our options for this cluster. Our development decision depends largely on the future market demand.
We recently announced the acquisition of Severneft-Urengoy from EuroChem, comprising a series of of mature producing fields at the West-Yaroyakhinskiy license area. The acquisition was acquired for approximately RUB 13.2 billion. The main license area holds resources of 55 billion cubic meters of natural gas, 7.5 million tons of gas condensate and 26.8 million tons of crude oil. In 2016, the license area produced 816 million cubic meters of natural gas and 93,000 tons of liquids. The fields are in close proximity to our existing infrastructure. We have revised the development program to now include drilling horizontal wells. As a result, we have raised the production profile to approximately 1 billion cubic meters of natural gas and 150,000 tons of gas condensate.
We've also acquired another set of smaller producing assets from a joint venture comprising Neftegazholding and Repsol for a net acquisition price of slightly less than RUB 3 billion. One of the fields is currently producing 799 million cubic meters of natural gas, and almost 7,000 tons of gas condensate. It is a mature producing field with limited upside potential. The other field acquired is still undergoing exploration activities, but we estimate that it can produce about 1.2 billion cubic meters of natural gas by 2020. We will focus on completing these activities and putting on the field on stream by the end of 2020.
We are committed to decelerating our production declines. We have taken concrete steps to achieve this aim. For example, we will significantly increase our exploration budget fivefold in 2018 to bring forward development in some of our assets. We will also undertake remedial work as required. We will continue to supplement our production profile through M&A activities if we deem these assets fit within our portfolio and our price attractively. We will only consider M&A activities if they are value-accretive to our shareholders.
The next slide is a high-level overview of our integrated model to monetize our wet gas resources and maximize risk-adjusted margins. It is essentially a flow diagram of how products move throughout our processing facilities and produce approximate end output and product output.
Sustaining natural gas production is important to retain our domestic market share. It is also very important to maintain liquid output through our processing facilities. One of the core objectives of our strategy is to ensure the maximum use of our Purovsky processing and Ust-Luga Complex. We are pleased to report that we will produce sufficient volumes of gas condensate throughout the entire strategy period to fully load our processing facilities.
Our liquid business generates strong operating cash flows and will contribute substantially to our current and future EBITDA. We will increase the processing debt at our Ust-Luga Complex by 2019. We will invest approximately RUB 17 billion over the next 3 years. This expansion will add another 1 million ton per annum light hydrocracker unit to further fractionate heavier bunker fuels into light products like jet fuels, naphtha and gas oil. We believe this type of investment is warranted and economically sound.
Marine transport will shift away from using bunker fuels to lighter products like diesel and converting ships to LNG. We project an average net back margin enhancement of roughly RUB 1,000 per ton across our whole product range with a projected 3-year payout period. This concludes the section on projects within reach of UGSS.
To summarize the section, we expect to cumulatively produce approximately 820 billion cubic meters of natural gas, [177] million tons of gas condensate and 72 million tons of crude oil up to 2030. We estimate that we will spend approximately RUB 700 billion to RUB 780 billion, excluding the cost of the Geofizicheskoye cluster projects to generate operating cash flows of RUB 2.4 trillion to RUB 2.7 trillion over the strategy period.
We will generate more than USD 2 billion annually in sustainable free cash flows from our asset base within reach of the UGSS. Our average production profiles over the next 13 years unequivocally demonstrates that Novatek is not ex-grow as prematurely commented throughout the past year. We see potential upside to reduction profile. More importantly, we will generate strong and sustainable operating cash flows.
In the next section, we will discuss our future LNG ambition, but first we propose we take a short 10-15 minute intermission break. We kindly ask everybody to please be back promptly when we notify of the resumption of the presentation.
------------------------------
Leonid Viktorovich Mikhelson, PAO NOVATEK - CEO, Chairman of the Mgmt Board, General Director, Member of Mgmt Board & Executive Director [5]
------------------------------
Thank you.
------------------------------
Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board, CFO and Member of Management Board [6]
------------------------------
The first LNG train was successfully launched with the first cargo loaded and discharged on the Christophe de Margarie on the 8th of December. The ceremony event is a significant achievement for Novatek as the originator of the Yamal LNG project and for all of our partners, contractors and employees who made this a reality. This brings us to our next section of the corporate strategy presentation, our LNG ambitions.
Yamal LNG was delivered on time and on budget. This speaks volumes considering the massive delays and cost overruns on other LNG projects around the world. Today is a day where we celebrate our achievement. We would like to recognize everyone who has worked diligently to make this launch a major achievement of Novatek and our partners and the opening of the next major LNG center in the Russian zone -- arctic zone of Russia.
We will briefly highlight some important facts. Yamal benefit from full governmental support, as noted by the tax concessions and export license, as well as comments reported from the subsequent ministerial discussions post the formal launch ceremony. Mr. Nicholson will make some brief comments about this later today. We were able to deliver train #1 in approximately 52 months, which is an enormous accomplishment when you consider that the average time to complete such a project is between 68 and 72 months.
The South-Tambeyskoye field has the potential for additional PMRS reserves. We will drill some wells into the deeper producing horizons in 2018 to test these layers. The test results from Wells #171 and #175 confirmed production potential in the Jurassic layers. So in 2018 and 2019, we will run approximately 560 square kilometers of 3D seismic and develop a project to drill to this deeper condensate-rich structure.
This upside supports further long production plateau throughout our strategy period and beyond. We will ship LNG to -- either to European or Asian-Pacific markets using our northern sea routes. The East-West transport model depends on the seasonal navigational periods. This dramatically affects the time and distance to market. We will transship volumes using the (inaudible) facility to offload cargoes to conventional LNG tankers when used in the European transport direction to the Asian markets. We would like to reiterate our plans to move forward with expected launch dates for LNG trains #2 and #3 by roughly 3 months and 6 months respectively. This decision was made after assessing the overall project construction progress to date and may again be revised based on further progress. We expect to launch train #4 in late 2019.
We have confirmed that we will expand Yamal LNG by another 900,000 tons per annum of LNG used as a proprietary arctic cascade liquefaction technology developed by Novatek's engineers.
We have filed a patent for this new technology and are awaiting approval. The arctic cascade liquefaction technology is based on a simplified 2-stage cooling process. The first stage uses ethane (technical difficulty) natural gas taking full advantage of the colder Arctic climate to ensure maximum energy efficiency. The second stage uses nitrogen that further cools the natural gas. This simplified process uses a higher pressure input that initially cool the gas and eliminate the use of multi-refrigerants such as propane and ethane -- propane and methane. One of the key considerations to expand Yamal LNG was to minimize capital cost and maximize present infrastructure. We estimate that the liquefaction cost is between USD 450 million to USD 500 million per ton of LNG produced. Moreover, the size of train #4 expansion doesn't require any changes to the existing infrastructure at Yamal which facilitates a relatively quick build out which minimizes expansion costs. Train #4 will be financed directly by the shareholders in proportion to their shareholding interest.
Our tanker fleet slide is a summary of Arc7 and Arc4 ice-class tankers as well as the conventional tankers that transport LNG to Sabetta to the alternate market destinations. The number of tankers required to transport LNG is a function of the build up of LNG capacity and the schedule of offtake contracts. We see no problem with the deposed tanker fleet matching our LNG output and we utilized 15 Arc7 ice-class tankers as previously announced and 11 tankers comprise of Arc4 and conventional tankers. The early startup volumes of LNG and our ability to bring forward the construction schedules for LNG trains #2 and #3 as well as launching train #4 in the fourth quarter are important marketing points.
Why is this important? Initially, we created a financial model that formed the basis the original business plan provided to the lenders. The original financial model incorporates a different ramp up schedule and start dates that were based on year-end launches, for example, the end of 2018 for train #2 and the end of 2019 for train #3. Early startup generates additional cash flows for the partners. This slide incorporates the early start dates and the changes in volumes as compared to the original model. In addition, the new 2017 business plan includes a launch of train #4, which was not considered an original lender model.
We will generate approximately USD 1 billion to USD 1.3 billion of additional early revenues to the project based on the new launch date assumptions and the commissioning of train #4. The launch of train #4 also reduces the overall liquefaction cost by about 5% and generates additional revenues of approximately 6%, thus improving the overall project economics.
In summary, we estimate that Yamal LNG will generate approximately $62 billion in operating cash flow, before financing costs through the strategy period, as well as generate enough revenues from the sale of stable gas condensate to cover the majority of the plants' operating expenses. The global gas markets are forecasted to increase throughout the strategy period and beyond. The rate of increase depends on the specific assumptions used in the forecast, but the trend is positive. We agree with these assumptions as they represent a gradual shift towards cleaner burning fossil fuels. We spent a lot of time assessing the fundamental shifts in global markets that drive consumption of natural gas. Analyzing the main drivers was fundamental to our decision to build our LNG platform.
We believe that [private] market will be available for LNG and those companies that create a competitively priced LNG business model will find consumers for their natural gas. Global gas demand is expected to [increase] by approximately 26% from 2017 to 2030 according to research published by IHS, which more or less corresponds to the forecast by most energy consultant firms as well as our internal range of 23% to 26%. Not surprising, power generation and industrial companies remain the largest consumers of natural gas throughout the strategy period, but we stay strong relative movement in the transport section despite its low starting base. The consumer nations of the Asia-Pacific region represent the largest market opportunity for LNG producers and China leads the expected growth in natural gas consumption. The Chinese government's 13th 5-year plan and the latest energy production and consumption report support this transition from coal to natural gas. The newly enacted environmentally green policies are designed to reduce carbon emissions and air pollution yet at the same time foster economic growth. It is anticipated that China's gas demand will treble from roughly 200 billion cubic meters in 2017 to over 600 billion cubic meters by 2030.
This demand growth correlates to the Chinese government's objective of increase in natural gas and the total energy mix by 15% by 2030.
India and other developing nations in the Asia-Pacific region also represent large potential market opportunities for natural gas. However, infrastructure questions and price sensitivity for consumers are main driving factors for LNG to penetrate these new markets. We have witnessed a new renaissance over the past couple of years as many first-time LNG buyers have entered the market. The scope of this growth depends on many variables, but the trend is positive and lower LNG prices will foster further demand growth. India with its huge expected growth in population and lower GDP per capita represents the ideal market environment for the imports of natural gas. Unfortunately, there are still many barriers to overcome. The Indian government must take a definitive position on climate change mandates versus economic development, a decision between cheaper coal competing with increased imports of natural gas. Therefore, competitive pricing will strongly influence India's decision to convert from coal to natural gas.
Natural gas remains the only fossil fuel with an increasing share in the total global energy mix. The absolute growth in natural gas consumption of 802 million tons of oil equivalent is the largest amongst the other energy sources including renewables. LNG is the fastest growing segment within natural gas. Future LNG trade represents the bridge to connect the global markets in the same way that crude oil markets are interconnected.
Our LNG projects will help make this connection. Global LNG demand is forecasted to increase by approximately 214 million tons in 2017 to 2030 with about 79% of this growth focused in the key consumer Asia-Pacific markets and in Europe. The growth in LNG consumption within specific geographical regions is based on specific country drivers, but there is a clear move towards cleaner burning energy sources and a rapid penetration of renewables into the energy mix, although renewables, solar and wind, tend to garner most of the favorable comments from politicians, there are still many barriers to overcome.
Issues surrounding battery technology and storage remain a critical issue. Questions of intermittency or peak versus base loads for power generation must be answered. Prolific advances in technology will obviously facilitate this gradual transition towards renewables, but natural gas remains a viable source of energy way beyond our strategy period of 2030.
Many commentators who may have labeled natural gas as a transition fuel until renewables takes a larger piece of the total primary energy mix, we would disagree with this statement. Natural gas is a major fuel source empowering economic expansion and prosperity. It will be a key part of the primary energy mix for many decades to come. The overall structure of LNG contracts is undergoing a radical change. The new LNG pricing paradigm is emerging. The future LNG market will be characterized by shorter duration contracts, lower volume offtakes and higher credit risk customers as new market entrants emerge to offtake increasing volumes of LNG. This doesn't necessarily mean bad situation, but LNG producers must adjust to secure willing buyers in a particular market. We will repeat many times a today that low-cost LNG will be important for the future. You can already see this point being discussed amongst our competitors.
Our next wave of LNG projects will be competitively priced in any market and this will become one of our major strengths to attract partners and successfully market our LNG output. We expect about 80 million tons of LNG will expire over the strategy period combined with the absolute growth of approximately 214 million tons, I discussed earlier. This chart conservatively defines the potential market as we see it today, although we strongly believe there will be further revisions upwards in the total natural gas consumption, including LNG post 2020.
The LNG glut is quickly fading as demand materializes quicker and the markets absorb the present supplies of LNG. We know that there will be statements to the contrary, but the forecast of tightness in the LNG market, absent new final investment decisions, is a real concern. Based on current supply-demand forecast that expected LNG supply deficit corresponds to the mid-2020s or possibly even earlier. This timing corresponds exactly to our expected launch of Arctic LNG 2.
This essentially is naturally just the next analysis and that means assessing the 4 main LNG production centers. We may debate the absolute size of the LNG consumption or future LNG pricing, but there is little doubt regarding the main LNG players in the market. The competitive landscape has evolved with the Australian LNG boom and the emergence of U.S. as potentially one of the main LNG exporters. But our recent launch of Yamal LNG combined with our future LNG ambitions squarely places Russia in the center of these discussions.
From our analysis, there are definitely 2 low-cost producers in the market today; Russia and Qatar. The U.S. is clearly evolving, moving towards this lower cost distinction; however if U.S. LNG projects continue to use Henry Hub prices, we would competitively place United States as a moderate cost producer. We would classify Australia as one of the highest cost production centers in the world.
We read recently reports of so-called free gas in the United States, but we don't give much credence to these exaggerated claims. What we see emerging out of the United States is that reintegration of LNG projects back upstream like Tellurian to make their projects more competitive in today's pricing environment. Qatar could certainly debottleneck some of their current LNG in plans as noted, but nothing else emerges that represents significant scale.
This forms emerging competitive landscape from our perspective and sets the stage for the second wave of LNG projects to be commissioned post-2020 and beyond. Today, natural gas in the form of LNG has morphed into the next evolution of what they call this the golden age of natural gas. A more liquid LNG market is needed just to facilitate sustained demand growth. Price sensitivity remains a big concern for producers and suppliers, climate change initiatives and governmental policy mandates will drive a move towards renewables to reduce carbon emissions and greenhouse gases.
Technology advancements will reduce the need for fossil fuels in power generation, industrial consumption and the transport sectors. Distributed power generation, smart meters, the Internet of Things, electric vehicles, efficiency gains, advances in energy management, biomass, battery storage and carbon capture will all influence demand responses to natural gas. The competitive landscape is formidable as cheap coal and a reducing cost of renewables affect the wider gas markets.
A new global gas order is emerging and market challenges exist beyond their control. How we define our LNG strategic goals to address these many challenges ultimately determine the competitiveness and its success in today's evolving market environment. We must remain a low-cost provider of natural gas to be competitively priced in any consumer market. We must adopt an LNG market strategy that is flexible to meet the new demands of the consumers.
We must build the Kamchatka Transshipment terminal to establish a Russian hub price and alternative trading options for consumers and portfolio players. We must scale our LNG projects to adopt the market demand and we must innovate to lower our transport costs to market.
We can achieve our long-term LNG ambitions by leveraging our core strengths. Novatek is uniquely positioned. We are one of the largest conventional hydrocarbon resource bases in the world to support our future LNG ambition. Moreover, we have consistently demonstrated that we can develop our asset base and competitively produce natural gas in Russia's Arctic zone.
We have gained invaluable experience at Yamal LNG in implementing a large scale LNG project in the Arctic region, where despite the harsher conditions, the colder temperatures provider us with a competitive advantage to lower the cost of liquefaction. One of the main challenges confronting every LNG producer today is the cost of liquefaction to make LNG prices competitive against alternative fuel sources.
The upcoming second wave of LNG projects post-2020 must substantially reduce liquefaction costs as the industry transitions from the old pricing paradigm of oil and leakage to one that is based on the mixture of price formula that largely comprising hub pricing. The Arctic cascade proprietary liquefaction process is one way we are utilizing technology and innovation to drive down costs. Another way is building that Kamchatka Transshipment facility to reduce transport costs and provide more flexibility to consumers.
We are also presently look at new designs to lower the construction cost of Arc 7 ice class tankers and improve their operating efficiencies, as well as optimizing the passage through the northern sea route. We will use technology and innovation to develop our new concept to build our future LNG platforms using gravity-based structures. This innovation combined with our LNG construction center in the Murmansk region is aimed at maximizing the use of local content and equipment to optimize logistics, construction and fabrication costs.
We will search for innovative ways to further optimize our future LNG projects that reduce liquefaction costs while increasing the efficiency and effectiveness of the workflow streams. The Yamal and Gydan peninsulas hold enormous hydrocarbon resource potential of approximately 8.4 trillion cubic meters of conventional natural gas under the Russian Reserve Classification Stream and has the potential to produce more than 70 million tons of LNG, annually. This geographical zone will emerge as Russia's main LNG production center and we are well-positioned, strategically, to capture this opportunity with our proposed LNG platform.
We have amassed an enviable resource base with our various license areas in the region. Under the PRMS Reserve system, we currently hold approximately 1.3 trillion cubic meters of natural gas and 53 million tons of liquids on a net basis. More importantly, we have the ability to more than double our PRMS reserve base up to 2030 through exploration and development activities.
This past year, we acquired equivalent of about 20 billion barrels of oil at our 4 license areas purchased from the state via a tender in June and August 2017. These new license acquisitions consolidate our resource holdings and form the core of our resource base for future LNG projects. We will significantly increase our geophysical work on the Yamal and Gydan in 2018 and 2019 by running and processing a series of 2D and 3D seismic activities on our newly acquired field.
For example, at the Gydansky license area, we will run and process 1,000 square kilometers of 3D seismic in the 2017-2018 seasons, and then another 1,900 square kilometers in the 2018-2019 seasons. This will allow us to prepare and drill 3 to 4 exploratory wells into the Cretaceous and Jurassic deposit as well as build a detailed 3D geological model to outline an appropriate development of the field. We will provide additional information on these upcoming conference calls with the results of these activities.
We will also utilize our shared infrastructure to reduce our costs. This represents another important step to ensure our low-cost LNG platform, infrastructure such as Sabetta International Airport, the deepening and widening of the Elbe river channel and our public-private partnership with the Russian government to build the Sabetta port facilities will all be leveraged on our future LNG projects to save costs and make our projects competitive.
Arctic LNG is our next major LNG project. It will represent our first LNG project launch post 2020 during the so-called second wave of global projects. The underlying resource base is a prolific Utrenneye field. It is larger than Yamal LNG's South-Tambeyskoye field in terms of potential resources and production output. From 2011 to 2015, we ran in the process approximately 1,850 square kilometers of 3-dimensional seismic to gain a thorough understanding of the field subsurface characteristics. We have drilled, completed and test 5 exploration wells in the (inaudible) formation to confirm the fields potential. We've also drilled an exploration well, #294 into the deeper Jurassic formation, but as of today, we have not completed our test results. We will complete those results in mid-2018.
The Utrenneye field is made up of 3 primary domes: the South, Central and North. In addition to the field, contains an undefined section in the southern part of the license area that awaits further exploration [activities confirmed]. The field has approximately 784 billion cubic meters of natural gas and 37 million tons of liquids as reported under the PRMS reserve methodology. We believe the reserve base could conservatively add another 277 billion cubic meters of natural gas and 15 million tons of liquids by 2030, as well as potentially increasing the gas reserves by another 40% by developing the deeper Jurassic layer. The present development plan will feature about 20 drilling clusters, utilizing 6 drilling rigs to drill roughly 245 to 260 producing wells over the field's estimated life. The estimated production plateau is 30 billion cubic meters per annum and we estimate a maximum -- we estimate a minimum plateau life of 15 years. It will also produce gas condensate, which similar to Yamal LNG will generate sufficient revenues to more than offset the project's operating expenses. The field's natural gas production [will feed green] LNG trains at 6.1 million tons per annum, utilizing the gravity based structure platforms for GBS, which we will discuss shortly. The Front End Engineering and Design or FEED is currently in progress and we anticipate this important step to optimize the project will be completed in late 2018. Although Arctic LNG is relatively in close proximity to our flagship Yamal LNG project, there are enormous differences in the project development concept that is intended to significantly reduce the project's capital intensity, combined with minimizing its environmental footprint. The project also benefits from the same fiscal tax regime and LNG export rights as Yamal LNG. We will now take a closer look at the GBS platform.
Our proposed concept is to develop an LNG platform utilizing a large barge structure, that is self-contained unit. The GBS will include a liquefaction unit, LNG and gas condensate storage tanks, power units and the offloading arms amongst various other operating equipment. The proposed baseload liquefaction process is Linde's Mixed Fluid Cascade Process technology, utilizing 3 independent mix refrigerant cycles, a pre-cooling liquefaction and sub-cooling that are combined in a Cascade system. The MFC liquefaction process can accommodate up to 8 million tons per annum, so the liquefaction technology is perfectly suitable for the GBS design and our initial proposed LNG output of 6.1 million tons annually.
The GBS concept will utilize the use of local content and reduce logistics and construction costs and minimize onshore work to limit our environmental footprint. The GBS is approximately 300 meters in length, by 150 meters in width. We plan to invest more engineering time at the FEED stage (inaudible) the GPS unit, as well as the topside modules and equally important, involve as early as possible fabricators and local contractors.
Each GBS platform will contain 15 modules from 5,000 tons to 11,000 tons each. We plan to anchor each platform approximately 500 meters from the shoreline. The depth required is approximately 15 meters and will be positioned on solid soil with no permafrost (inaudible). We will need to dredge the surrounding area from roughly 6 meters to 15 meters and construct some form of ice barrier to protect the units. Our primary goal is to significantly reduce our overall liquefaction cost to the range of $615 million to $715 million per million tons of capacity and we believe the GBS LNG concept will achieve this goal.
Our target is to reduce the Arctic LNG plant construction by at least 30% from the cost of constructing Yamal LNG. We will achieve this target by reducing the cost of items no longer required by the GBS concept and by localizing, fabrication and construction of items in Russia as much as feasible. We fully anticipate that some of the module units will be built internationally, but our primary aim, either locally or internationally, is to reduce the overall cost to construct these platforms. There is also a further scope to potentially reduce cost through the scalable construction of the GBS platforms. As we increase the number of platforms produced, we believe the construction cost per GBS may be potentially decreased as we factor in learning experience, design modification and bulk purchases of basic items.
One of our core goals is to develop an LNG center of excellence in Russia. We will develop in-house LNG technical experience, as well as foster a broader scientific research and technical LNG expertise within Russia. This will stimulate regional economic development, contribute to GDP growth and secure future technical expertise. But how will we achieve this goal?
The LNG construction center will be based in the Murmansk region, will be the center of these particular efforts. The idea is quite simple. We will strive to develop localized LNG expertise and reduce our costs. The LNG construction center will manage the overall process of fabricating and constructing the GBS LNG platforms, as well as some of the topside modules. The new facility will be located on a land plot above 150 hectares housing various fabrication facilities, dry docks, workshops, a 150 kilowatt substation, concrete batch plant and housing accommodations. We believe the underlying economic multiplier effect will create new jobs for about 5,000 engineers and over 10,000 jobs for laborers, constructing workers, welders and other technical personnel. It would also create an economic stimulus for many companies inside of Russia to build and work on our projects. This job creation benefit and the economic multiplier effect receives positive endorsement and support from the Russian government. We formed a joint venture consortium called NovaEngineering LNG, which includes NIPIGas, TechnipFMC, and Linde, as well as other subcontractors, like [Cipam]. They are presently conducting a FEED, which we expect to be completed in the latter part of 2018.
The overall LNG markets are rapidly growing with new consumer nations emerging. There are 2 main consuming regions: the Asian-Pacific region and the European markets are most relevant for our discussions. Transportation cost between Europe and Asia vary depending on the time of season, the markets and specifically for us, the duration of time we can use the Northern Sea Route. We have provided a couple of different transport scenarios using the East versus West routes. We will optimize our transport cost by considering different navigable periods of 5, 9 and 12-months usage of the Northern Sea Route. Our proposed optimization scheme obviously impacts transport cost due to the type of vessel used, the time at transit and various fees, such as the transit cost to pass through the Suez Canal. We will also consider the need of our time chartering arrangement and potential subleasing of underutilized tankers.
Our transport tariff cost on average to Asia varies from the high of approximately $2.22 per MMBTU under the 5 months use, to a low of $1.65 per MMBTU for the 12 months use. Our blended average transport cost across our portfolio is roughly $1.40 per MMBTU for 5 months and $1.32 per MMBTU for 9 months use. Our future LNG transfer model uses the Kamchatka transshipment facility as an integral part of our Asian logistical model. Under this scenario, we'll reduce our transport cost by approximately $0.80 per MMBTU between the Eastern and Western routes. Moreover, we save a significant amount of travel time between routes, lowering the boil-off gas due to the shorter transport distance. Boil-off gas will be sold to the local gas networks in Kamchatka and more or less covers the complete operating expenses of running the transshipment facility. The Kamchatka transshipment terminal establishes a benchmark Russian FOB hub price. It also provides security and supply for Asian countries requiring flexibility to purchase volumes on short notice and short delivery times. Let's use the developed markets of Japan and South Korea as an example. Both countries are established LNG markets. Each has its own market characteristics and different consuming requirements. Both countries are only 3 days shipping from Kamchatka. This maximizes security supplies and allows for delivery of LNG to the respective regasification terminals on short-term notice. This is often overlooked in market analysis, but nonetheless is a very important marketing consideration from both point of view of the seller and buyer perspective and from the vantage point of security of supplies.
What is Kamchatka transshipment facility? The Kamchatka transshipment terminal planned capacity is 20 million tons per annum. It is less than 4,000 nautical miles from the Sabetta port and takes about 12 days to reach Kamchatka depending on the specific time of year. (inaudible) is presently conducting the pre-FEED and is expected to be completed by the end of 2017. We expect to move directly from pre-FEED to FEED work. The FEED work phase is projected to be completed during the first half of 2018.
The concept selected is based on [morab] or floating transshipment complex using an LNG storage facility such as Q-Max ship. It is a relatively straightforward project so it could be implemented rather quickly once a positive decision is made to proceed. We expect the FID decision to be made right after the FEED work. We have 10 of [these] commissioning date of 2020 or 2023 to correspond with the project first launch of Arctic LNG 2. We also have the capability to expand this complex to accommodate an additional LNG storage ship as we increase our future LNG output. This provides enormous flexibility to the proposed facility and further supports the creation of the Russian benchmark LNG hub price. There has been a lot of interest in this project. We recently signed an MOU with Marubeni and the Mitsui O.S.K. Lines or MOL. We have also received other expressions of interest with this transshipment complex, confirming the importance of this complex, the future LNG trading and security of supplies in the Asia-Pacific market.
Our target of the strategy period to 2030 is to produce approximately 270 million tons of LNG. This equates to roughly 432 billion cubic meters of natural gas and about 28 million tons of gas condensate utilizing our existing resource base. We have now entered a global gas market with the formal launch of Yamal LNG. Yamal LNG combined with our future LNG projects catapults Novatek to the status of a major LNG producer and fulfills the broader Russian energy strategy of becoming a major player in LNG.
Our LNG volumes are expected to generate between RUB 4 trillion to RUB 4.3 trillion of operating cash flows or approximately $72 billion up through the period 2030. Our forecasted LNG volumes are scaled based on the projected launch dates, but essentially covers [our next year] in Yamal LNG and 100% ownership in our other planned LNG projects. Our capital investment program is forecasted to range between RUB 2.5 trillion to RUB 2.8 trillion based on 100% of the costs associated with our new LNG project, excluding primary capital for the fourth LNG train at Yamal LNG. Our intention is clearly not to finance 100% of the capital cost program. We will sell interest in each of our future LNG projects at value accretive multiples for our shareholders.
We are currently discussing Arctic LNG 2 with potential parties and the interest is quite high. Arctic LNG has many positive attributes, large conventional resource base, low feedstock cost, low liquefaction cost and a proven logistical model. The license also includes tax concessions and export rights. We will obviously keep the capital markets informed of any future equity sales through our normal communication channels. We are very excited about our future LNG as well as the evolving LNG markets. LNG will facilitate a global gas market with unique regional characteristics. [Virgin] demographics, urbanization, commodity and economic cycles and sustainable development initiative support future LNG growth. Natural gas will become the fuel of choice for many decades to come.
As we move through various cycles, we will no doubt witness periods of price volatility. This reality is a fact of doing business. The emerging and developing economies where we see the largest consumption growth from low levels to higher levels. This movement or this economic expansion phase drives demand for natural gas and increase energy intensity. Empirical data unequivocally supports increased energy intensity through these economic expansion cycles and many of the emerging or developing economies exhibiting high potential natural gas consumption fits this model [adder].
I would like to briefly shift from large scale LNG projects to small LNG projects. We see a potential niche market opportunity to exploit this market space in Russia and abroad. There are many discussions around [the small] LNG project, but no real consensus on the potential size of the market. Therefore, we have reviewed a series of forecasts and estimate that the global demand could potentially reach more than 120 million tons per annum from various market sources.
Bunkering and motor transport areas are interest for us as we've mentioned previously about our pilot program in the Chelyabinsk region. The marine transport sector is changing due to regulatory mandates to reduce carbon emissions. This appears to be a logical choice, but there are still questions on the ultimate size of this market. If we assess the number of vessels and construction yards that are either converting to LNG or are fuel source being specifically built to [use] LNG, the market gives us optimism. This conversion impacts both cargo vessels and cruise ships navigating rivers and coastal areas.
In 2016, there was approximately 157 vessels using natural gas as a fuel source and this number is forecast to increase to approximately 220 vessels by 2020, representing a 40% increase in gas fueled vessels. This trend has already impacted the Baltic Sea and many shipping lanes in Europe. The regulations approved by the International Maritime Organization as well as regional governments will enforce this conversion policy to expedite the transition to natural gas.
This emerging trend correlates with our investment decision to acquire a 51% equity stake in the LNG plant in [Biogas resource project] for RUB 1.6 billion. The LNG plant and transshipment terminal is considered a mid-scale project comprised of 1 LNG train of 660,000 tons based on Air Liquide's Smartfin technology. The Smartfin technology process uses a single mix refrigerant technology and braised aluminum heat exchanger to allow for a more efficient process to liquefy natural gas and is in compact and modular in its design approach. The projects available land plot allows us to expand to a 2nd train of equal size of 660,000 tons for a potential total of 1.32 million tons.
This project serves a niche market in the Baltic and Northern European markets, the Russian domestic market and the Baltic area using marine fuels. We have already contracted approximately 50% of the first LNG train and we are confident that we will successfully market our remaining volumes. This will allow us to build a complementary small-scale LNG business. The total capital remaining is approximately RUB 24 billion and the first train will be commissioned in 2019. Our main financial objectives have not changed substantially since our 2011 strategy. They reflect our conservative financial policies we originally adopted when we went public in 2005. And actually, we have increased the scale and size of our business operations, we have modified some of the financial targets to reflect the new realities of our business. The primary guiding principle is to sustain a strong balance sheet that can withstand severe changes in a macro environment at the same time providing credit and liquidity targets that support our internal and external goals of achieving investment grade credit ratings commensurate with our debt profile. In essence, our goal is to maintain a strong balance sheet and liquidity position so that we can service our debt, pay our liabilities, internally fund our capital program and increase dividend payouts over time.
The next several slides highlight some of our specific financial metrics we have achieved as well as provide our projected guidance for 2018. We won't go into specifics on each and every one of these metrics, but we would highlight ones that we feel are important distinguishing ones for the company. Our debt to normalized EBITDA metric is well within reach. We support an investment grade rating and highlights the fact that we've reduced our debt positions according to our debt repayment schedules. Both our cash positions and our lines of credit have expanded consistent with the growth of our business operations. We have established strong track record of adhering to credit-friendly financial policies. We believe Novatek's financial position, credit profile and cash flow generation warrants an investment grade rating beyond the sovereign cap. We request our credit ratings agencies reassess the present position and take the correct rating upgrades as warranted.
We have maintained a reasonably consistent range of financial metrics over time, reflecting our growth in revenues and maintaining operating expenses that we believe support our business operation. The metric that we believe really differentiates Novatek from our global peers are the ones focused on returns; return on equity, returns on capital employed and returns on invested capital. We have delivered financial returns at almost double the global oil and gas industry averages, which is consistent with high growth revenue generation and a low cost of capital employed to deliver these stellar results. We are one of the lowest cost producers in the global oil and gas industry and we have ranked in the top quartile in many of these important industry metrics, like reserve replacement cost, find and development cost and lifting costs. These are the general benchmarks to compare the effectiveness and efficiency of our operations relative to our peers. They also support our proposition that the lowest cost producer will always find a market for the hydrocarbon project. This distinction is extremely important today as many of our key consuming nations are highly price sensitive.
Many of the metrics listed on the table fluctuate for various reasons, but they are very low in relative terms to our peers. For example, if you look at our 3 year average reserve replacement cost in 2016, at $2.70 per barrel of oil equipment versus the global oil and gas average of [$23.13] per barrel of oil equivalent, you can see we have a significant competitive advantage vis-a-vis our competitors. We will apply the same cost competitive to build out our future LNG platforms.
Many analysts/investors have focused much attention this past year on the dividend payout stories surrounding state-owned enterprises, or more recently, to entities with limited growth opportunities. This logic is quite reasonable, but it does not fit perfectly with each and every case. Some of the SOUs like Gazprom and Transneft have lobbied for exemptions to this 50% SOE dividend payout based on capital investment requirements. Other companies have already reached their peak capital investment cycles and offer limited growth opportunities. So reverting to a higher dividend payout makes absolute sense. Novatek is not such a company. We are still a growth-oriented story with great opportunities to invest capital and significantly increase our operating cash flows as outlined in our corporate strategy. We have also read comments that our dividend policy is obsolete or outdated in today's environment to maximize total shareholder returns. Increasing our dividend payout might [relay] our investment grade, derisk some skepticism on our long-term projects, as well as could provide a positive signal to the market. We understand this logic. Our goal is to increase our dividend payout. However, this goal must be balanced against our strategic priorities.
Over the next couple of years, we will increase our capital spending to fund Arctic LNG 2, as well as the LNG construction center to build the GBS platforms. We will also fund the capital requirements for the Kamchatka transshipment terminal. These new capital investment programs over the next 3 years are fundamental for us to deliver our future LNG ambitions. We will fund these projects until such time as we sell equity interests in our LNG projects in the Kamchatka facility. We have strong potential partner interest in both these core projects, but we do not believe funding will be a major issue.
We also have another important counterbalancing factor influencing our ability to immediately raise our dividend payout. The Yamal LNG loan facility requires a certain completion test be performed for each phase in a project. These type of completion tests are standard practice for project financing commitment. We will need to complete these completion tests before the debt service underwriting or DSU will be released. We anticipate that the completion test will be satisfied by late 2019, or early 2020. But right now, we have a dilemma. This dilemma is our trade-off between short term cash payouts versus our longer term growth story. As we presented today, we are very optimistic in our base case scenarios and our ability to deliver these value accretive projects. There are also specific windows of opportunity that require us to act fast and capture market share. We will do this successfully with our proposed strategy. Dividends are important for everyone. We will eventually increase our dividends commensurate with the growth of our business and the generation of strong cash flows from our newly launched projects. But let me be absolutely clear please, our goal is to increase dividend payment, but at the right moment. We are committed to increasing total shareholder return.
Climate change and sustainable development initiatives are increasingly important issues facing energy companies. Society and governmental policies demand a move towards a cleaner burning energy to reduce carbon emissions. There is no escaping this fact. We understand this new reality and have adopted a new sustainable development framework that guides our actions. It fosters an open dialog with all our stakeholders and underlines a reporting and disclosure requirement. We will highlight concrete steps we are doing to reduce greenhouse emission, carbon emission and mitigate the risk of climate change. Novatek was an earlier adopter in Russia of reporting under the carbon disclosure and water initiatives, and this year marked our 10th annual sustainable report that can be found online in both the Russian and English languages. It is a comprehensive assessment of our sustainability principles and our commitment to social activities in the areas of our operations. We would encourage you to read this report to get a better understanding of what we are doing in this important area. More importantly, we are committed to improving our reporting and disclosure standards and we have made sustainable development principles a core of our strategic objectives.
We believe that climate change initiative will be one of the major drivers in the conversion from coal to natural gas. It will foster in a new era and ultimately influence the total primary energy mix. We will witness the changing landscape in future that is more focused on less carbon-intensive energy sources like natural gas and nuclear and a rapid rise of renewables, consisting of wind, solar and bio-fuels. As a low carbon emitting fuel, natural gas will play a key role in reducing carbon emissions in future energy mix. Two of the world's largest populations, China and India, will make big strides towards reducing carbon emissions, but their respective methods of achieving this end might be drastically different. China has already embarked on a governmental mandated program that will reduce coal usage in major cities. India is yet to embark on a similar path. Instead, it might offer a cheaper coal to sustain economic development. The different approaches to achieving a greener society could have a profound impact on the forecasted demand growth and natural gas consumption globally.
Novatek is well positioned for taking active role in combating climate change by significantly reducing our lower carbon LNG output on the Yamal and Gydan peninsulas. We have already been recognized for our commitment to sustainable development, but we have room to improve. We will continuously improve our reporting standards to meet best practices in sustainable development disclosures. Clean technologies will play an increasing role on our operations and we have instituted various steps to reduce our carbon footprint in all of our operations. We have introduced solar panels to monitor almost 1,000 kilometers of inter-field pipelines. We have substantially reduced (inaudible) by capturing the associated gas and delivering this gas to market. This past year, we introduced the greenhouse gas emission management system to capture, monitor and analyze greenhouse emissions in our operation. Our goal is reduce our carbon footprint and remain a leader as a socially and environmentally responsible company.
It's been an enormous and rewarding journey to build Novatek into a world-class natural gas company. From our humble beginnings in 1994, with the beginning of the transformative steps into the global gas market, we are taking each step along this journey with humility and a keen focus on cost control and project execution. Our transition from purely a Russian domestic gas producer to our ambition to be one of the largest LNG producers in the world, has been a dream we envisioned even before we presented our last major strategy in 2011. Our journey to realize the stream and transform Novatek into a respected global gas company has underscored our decision-making process each and every year thereafter.
Novatek's vision is to build a formidable LNG platform. Today, we offered a glimpse of our LNG future to 2030. If one thing is certain there will be many changes along this journey. New technologies will emerge, government mandate will facilitate a change towards greener society with less focus on fossil fuels. Energy efficiencies will continuously improve. We will witness an unprecedented societal shift as population grow and new economic centers emerge. It is almost impossible to capture the multitude of variables that could impact our corporate strategy. The long-term strategy presented today is our best assessment and reflects our present view of this dynamically changing world. Change is certainty and we must adopt to the realities.
Renewable energies and climate change is the new mantra. Some of the more ambitious targets are transforming the energy landscape and significantly increasing renewable may be wishful thinking. These may be politically correct statements rather than statements of back to reality. We are not here today to dispute these [comments]. We are here today to make the case for natural gas. We've outlined our future strategy built on the foundation of natural gas.
Fossil fuels have powered an economic transition that was unimaginable a century ago. The moral imperative of delivering billions of people out of economic poverty through coal, crude oil and natural gas is unquestionable. Fossil fuels have led an unprecedented global economic expansion and we should not lose sight of this fact. Instead we should be very proud of our contributions to this economic reality.
Novatek believes that natural gas will play a major role in the forecast for economic expansions in the decades to follow. Natural gas is the largest growing fossil fuel source and will represent slightly more than a quarter of the total primary energy mix for many decades to come. It is abundant and versatile, it's a fuel of choice. We have an enormous hydrocarbon resource base comprised largely of natural gas a successful monetization of this endowment will largely be in the form of our future LNG platform.
Natural gas will play a leading role in contributing to climate change initiatives. It will represent a principal shift amongst fossil fuels towards less carbon emitting source of energy for electricity generation, industrial demand, and an emerging option for transportation like marine and large trucks.
The various exploration and development projects we highlight today will conservatively increase our PMS reserves from approximate 23 billion barrels of oil equipment in 2016 to slightly more than 30 billion barrels of oil equipment in 2030. Over the years, we have a great track record of converting our resources into production. It is safe to say that resources will not be an issue for us, but rather [inevitable] competitive advantage.
Our asset portfolio, as we highlighted today, is a mix of various projects. Our traditional matured legacy producing assets will slowly decline over time. This decline process is consistent with resource depletion and will be fully offset by our assets within the reach of the UGSS. As outlined today, we will sustain our natural gas production over the strategy period as well as grow our production with the emergence of our LNG platform. We forecast that our LNG production will increase from approximately 63 billion cubic meters in 2018 to around 126 billion cubic meters by 2030. This implies a 5.9% compound annual growth rate of this strategy period and hopefully alleviates concerns for ex-growth once and for all.
Our liquid production will remain strong due to the strategy period and fully load our Ust-Luga Complex. We will sustain the profitability of our liquids value chain and generate above average returns and strong operating cash flows. We forecasted our liquids to grow from approximately 11 million tons in 2018 to approximately 18 million tons in 2030, representing a growth of approximately 59% over the strategy period.
Next, we highlighted our expected timeline for project launches. We will launch Arctic LNG 2 in 2022 and 2025 and then launch a series of new LNG projects post 2025. The ramp up of our future LNG output will be market-driven. So scalability is important. This leads us to one of our final questions, what does this mean for shareholders. Our investment case is strong. It remains compelling. It is based on monetizing a world-class resource base of providing innovative solutions to remain a cost -- low-cost producer as outlined in our strategic framework. A new pricing paradigm has emerged in a global gas market. This will change our relationship with our consumers. This shift requires destination flexibility, a base pricing, shorter-term contracts and spot cargo availability. This will determine successful market penetration and facilitate the conversion of coal to natural gas in price-sensitive markets.
A global LNG trading market will emerge. It will be liquid and provide gas importing nations with the flexibility to call on LNG supplies when needed in a timely manner. This emerging trend underscores our decision to build our Kamchatka trans-shipment facility as an economically and strategically viable investment decision. The emergence of LNG as a fastest source of growth in the global gas market is not a new phenomenon. Since 2010, the global oil and gas industry has invested a significant amount of capital and a share revolution in United States and a liquefaction boom in Australia. The United States and Australia have clearly changed the competitive landscape of LNG. Novatek is well positioned to capture our share of this market space with our low-cost competitive operating model. The expected increase in liquefaction through 2020 and a second wave of LNG projects post 2020 will create a more liquid and robust gas market.
A significant increase in liquidity will force the decoupling of gas price formulation from traditional oil-linked prices. It will facilitate the rise of portfolio players and open the door to newly emerging LNG importing countries. The low gas prices in the past several years combined with climate change initiatives have already had a dramatic impact on the global gas markets. We have witnessed the growth in LNG importing countries from 15 at a time of our IPO in 2005 to over 40 today.
Our experienced management team has consistently delivered stellar financial and operational results year after year. We have an excellent track record of project execution and decision making. Management is fully committed and aligned with our shareholders to grow total shareholder returns. One of the most important distinctions that we offer potential partners interested in our future vision is the size and scale of our LNG platform. We offer an unparalleled opportunity to invest in large resource base with low cost natural gas feedstock to liquefaction facility. We offer our potential partners the ability to scale LNG projects to meet the growing energy needs of gas consuming nations while sufficiently addressing important questions of energy affordability, energy security and energy sustainability.
In 2005, we made our debut on the London Stock Exchange. It was our first step as a publicly traded company. We used the analogy of the [portfolios] model to highlight the attractiveness of Novatek as an investment opportunity. It defined our core strengths in one simple picture. Today, we are proud to add a fifth column scalable LNG projects, further strengthening our foundation, our uniqueness and our investment story. Our esteemed Chairman of the Management Board and Founder of Novatek, Mr. Leonid Mikhelson challenge us to think big and think boldly. He remains the guiding vision behind creating this amazing company called Novatek. His leadership, his perseverance and his total dedication to build in a world-class natural gas company is without comparison among his peers. It's been a truly an honor and privilege to work alongside of Mr. Mikhelson. In the past 20 years, I've witnessed first hand the evolution from the small domestic gas producer with our roots firmly planted in Tarkosalin to the largest gas company in the world that no one has heard of and now our new vision to be one of the largest LNG producers as outlined in our corporate strategy today.
It is important also to recognize the management team of Novatek and the many, many dedicated employees of the company based here in Moscow and at each of our [strategic] locations. We will never achieve our strategic goals without their commitment, dedication and hard work. We truly value their contributions to our success. And finally to our Board of Directors who are tasked with the fiduciary responsibility to oversee the achievements of our broader vision. Their wisdom, guidance and stewardship representing the interest of all stakeholders is much appreciated.
Ladies and gentlemen, shareholders, colleagues and friends, today is a great moment for Novatek. Today, we can proudly state that we delivered one of the largest projects in post-Soviet history on time and on budget. It is an amazing accomplishment for a company against all odds. I would like to paraphrase a statement President Putin made Friday at our first loading ceremony in Sabetta. He said many people told them not to do this project, it was not possible. However, the project originator, Novatek, said it can be done. Yes, it was done. We had a dream and now we have realized that dream by transforming Novatek into a global gas company. Today, we start a new chapter in our corporate history, like our new corporate identity, it represents our bold and contemporary vision to meet the energy challenges of tomorrow and for decades to come.
Our strategic decision to transition Novatek into the global LNG market is the right move. It firmly establishes a new LNG production center in the Russian Arctic zone and today Novatek will lead the way. This opportunity is our legacy. When they rewrite the history of Russia's oil and gas industry, this moment will be immortalized. Ladies and gentlemen, shareholders and friends, we have finally outlined our long awaited new journey, our new corporate strategy. What we presented today is how we will create sustainable shareholder value through 2030 and beyond. Thank you very much.
------------------------------
Leonid Viktorovich Mikhelson, PAO NOVATEK - CEO, Chairman of the Mgmt Board, General Director, Member of Mgmt Board & Executive Director [7]
------------------------------
Well, as we agreed, we'll now take a 45-minute break and I would like to reiterate, those of you having questions please submit them in writing. After that we will be glad to take all the questions that are of interest to you that Mark Gyetvay will cover, but I believe that he gave a very good report. Thank you very much. Thank you.
------------------------------
Unidentified Company Representative, [8]
------------------------------
(inaudible) I suggest we should resume. We have received quite a few questions and we will do our best to answer to all the questions. Some are repeating themselves, so I won't read them twice. But before I do that let me offer a bit of an introductory word (inaudible) presentation took some time and I believe that Mark was able to deliver it to you in full and it's quite [illuminous] and all of us here are well qualified and professional people and in a position to derive the proper conclusions from the information that we have been given in the presentation. But nevertheless, I would like to highlight certain things out of this strategy, and we already started saying that Novatek has gone through the growth phase. But it's exactly the opposite. I mean the fact that we've shipped our first tanker and we managed to do it within the schedule like -- I remember it was December in 2013 when we made our investment decision and we managed to [perform] this project within the budget and withing the timing and that we have been in position to fulfill this construction, because the first time I remember we [drove] in December 2013 and 2014, and so we commissioned it now into operation, 2017.
So this is quite a huge accomplishment by the company. Most importantly, we've been able to understand what is the proper way of developing and building LNG projects. Novatek now enjoy's new opportunities. And [somehow] it really passed unnoticed that during the past year -- during this year, the issues of of financing for the [LNG] project. If you recall, we resolved it about 18 months ago in the summer of last year and immediately went about working on this undertaking. And during this time, we acquired 4 licenses on the Gydan peninsula and 1 license on the Yamal peninsula. And this year we acquired 4. So please note that there is a new province now in place for Novatek to develop into the future.
I am used to count reserves [A, B, C], one of those C2 and today we possess the kind of a resource base in terms of our reserves, which is about [3.7 trillion - 3.8 trillion] cubic meters. And on top of it similar kind of resources. So we have enormous opportunities for development.
So can we have the next slide please. No, not this one -- this should come later. Yes, this is the one. So as you may see, 24 years is what we fully covered by the reserves. And I don't believe this to be a good indicator. This is a bad indicator, because we need to increase our production and we have this opportunity. But just note, the recovery -- the replacement cost in terms of the reserve replacement, because it is one of the lowest in the industry and one should understand that the aspiration efforts in Gydan and Yamal is not in the area of (inaudible) where you have full structure that will come a little bit more expensive, but not way much, because we have the have opportunity to expand our resource base in a significant manner in order for the company to become a global LNG market play, and our overall strategy is primarily aiming for that. So I cannot but mention a couple of words about the domestic market within our portfolio, because we believe that we will be able to maintain our share of domestic supplies and we did several acquisitions. There are certain questions about what we did it for and how much we paid for that. But most importantly, is that we are doing it in the places where we already have an existing infrastructure, like for example, we acquired additionally the (inaudible) field, which is located several dozens of kilometers away from our Khancheyskoye field, which has a declining production. So the development of this new field in our portfolio with a potential output of 1.2 billion cubic meters will really do a lot of good for the company.
And so we now started the exploration for the Jurassic horizons and lower than that our first investment project at the Yurkharovskoye field, is what we already have accepted and we will continue that, and I believe that we will maintain our share in the domestic market. And Mark told us that we are busy with that and it is necessary to set for the changed new rules and we will monitor (inaudible) of the domestic market process. But most importantly, it's development of our LNG projects. And the fact that this event took place, which was this integration and the ceremonial shipment and the meeting which was chaired by the President, attended by almost all of the ministers from the government points to Russia possessing somewhere about 22% of the global reserves. And certainly the task which is currently being set by the government to have about 15% to 20% of the global LNG market as well, which is quite feasible and it is quite important to us, why, because we do enjoy a good support in our Yamal LNG project implementation and in the very same government decree which was signed by Vladimir Putin in his tenure as a Prime Minister, because there are 2 internal fields in Arctic LNG. And so that gives us a good indication that we will continue to enjoy this kind of support.
Another super important point is that we have changed the concept of our future project development. And we already went about building the Kola shipyard. And towards the end of the presentation, you are able to see where we were showing specifically what is the capacity that we have at the Yamal LNG and the kind of capacity that we are currently planning for the Arctic LNG. And further on we wrote down up to 2030, the liquefaction stages that we plan to launch into operation by 2030. And we also have the capacity. And as far as any location is concerned where we believe it is much more economic, we will go about starting drilling work at the North Obskiy field. Also next year we will begin drilling at the Gydan field, and we will see where it will be more economical and viable to continue our next project, for the Novatek's cost of recovery is one of the lowest in the world amongst our peers and we believe that through this decision, we will be able to achieve a super competitive liquefaction price. Let me emphasize, super competitive, and the cost of the transportation of our future LNG in terms of expensive tankers being in the freight is where we lose a little bit, but 2 important points that you've heard about the construction of transshipment center and during the meeting of the President, it was also stated that you might know a decision was made to build 3 new 60 megawatt nuclear ice breakers too, which are already being built. And during that meeting the discussion took place about the future development of the Ice breaking fleet in Russia and a task was signed to consider the possibility of building 2 additional 60 megawatt tankers, but with a broader width than this one, in terms of the (inaudible) and consider the possibility of building a leader tanker with a capacity of 120 megawatt, meaning to say that we've got full confidence these days. So it's just a matter of time, it is not going to take place tomorrow, but quite possibly the day after tomorrow, meaning to say that with 12 months during the year, we'll be able to sail eastward.
And so I believe that the next project, bearing in mind the fact they are going to be less capital intense, there are certain issues about it that we are going to respond to these questions here. So we are in a position -- or the biggest part -- I mean, maybe altogether depending on the current market environment. But we are going to bring in partners, because quite naturally against such a big positive cash flow well the issue we are facing that we would need to raise the dividend payout and I'm personally for it because I'm a shareholder myself and so I do think that specifically in 2019, we will be ramping up to the design capacity, the Yamal LNG project and I think that will plan to make a investment decision towards the end of 2019, with respect to Arctic LNG 2 and somewhere within the same period of time, it would be possible to revisit this issue if Mark is not against it. So this is my introduction.
==============================
Questions and Answers
------------------------------
Unidentified Analyst, [1]
------------------------------
So now let us try and answer all of your questions or almost all of your questions. So the first question here, quite accidentally, I was given the first bench, what is it that we are planning to reduce CapEx for Arctic LNG towards 30% downward compared to Yamal LNG?
------------------------------
Unidentified Company Representative, [2]
------------------------------
Well, during the Yamal LNG project implementation, we particularly were able to create new -- listen I don't remember the exact amount of millions of cubic meters of dirt that put out, an enormous amount of pass, dozens of thousands of them, that we had to drive down underneath of the facilities. But at the same time, we had to preserve the permafrost. It was also a humongous size of it. So just the logistical effort for Yamal LNG cost us, based on my estimates, about USD 1.5 billion. And I believe that the logistics within the new implementation concept, the residual cost will be reduced by about 2/3 from that amount. And due to its compact size, we will be able to reserve that specifically for Yamal LNG and we're able to build an artificial one that's in the form of platform and inside there would be the tanks. And I believe the 30% is not the limit in terms of the ability to reduce the spending, maybe even more than that.
------------------------------
Unidentified Analyst, [3]
------------------------------
Now, there's a question about Arcticgas. Will these entities start oil or condensate supplies into the Zapolyarnoye-Purpe pipeline by 2018 and what's going to be the amount of these supplies and how these volumes are set to grow in the subsequent years.
------------------------------
Unidentified Company Representative, [4]
------------------------------
Yes, indeed we intend to launch the oil program within Arcticgas at the end of 2018. And this crude oil will be supplied into this Zapolyarnoye-Purpe pipeline. And I think in the coming 3 to 4 months -- after 3 to 4 months it will reach its plateau at around 1 million something. Next question about Yamal LNG, recently Novatek said that the long-term contract shipments would start in April 2018.
------------------------------
Unidentified Analyst, [5]
------------------------------
How many cargos do you expect to load before that into the spot market? And how many cargos you're going to ship by the end of 2017? How many Arc7 LNG carriers would be ready for shipping by April 2018? There is a set of questions. Mr. Feodosyev, over to you, please. Can you hear me?
------------------------------
Lev Feodosyev, [6]
------------------------------
Yes, first of all, good afternoon everyone. Well, probably I would start with December saying that, our shippings aren't going to be limited to the Christophe only. In December we're going to have 3 in total -- we're going to have 3 cargos in total in December. By April we expect to ship around 14 cargos. And as you rightfully highlighted, in April, our long-term contracts kick in and under the long-term contracts we are going to be having 35, 37 cargoes or the total number of cargos in 2018 will be at around 70 to 75 carogs. That would be it for this. In terms of vessels availability, all of the 5 LNG carriers have been built so far. By April, we will have 5 Arc7 vessels in operation. Well, that would be my answer.
------------------------------
Unidentified Analyst, [7]
------------------------------
Would you please sum up your CapEx plans for the coming 3 years?
------------------------------
Unidentified Company Representative, [8]
------------------------------
May I not just sum up -- may I give our estimate of CapEx in the coming years. In 2018, we expect to spend around RUB 90 billion. And then the growth in 2019 would probably be in the range of 1.5x -- I mean 1.5x. But this includes the construction of the Murmansk yard, but net of Arctic LNG 2. And then going forward, definitely, it will then depend on the investment decision on Arctic LNG 2.
------------------------------
Unidentified Analyst, [9]
------------------------------
Severneft-Urengoy, what was the price you paid?
------------------------------
Unidentified Company Representative, [10]
------------------------------
I think we paid a fair price. If my memory doesn't fail me, it's around RUB 13 billion.
------------------------------
Unidentified Analyst, [11]
------------------------------
No. I would read out loud 2 questions in a row and I would ask Mark to take them. The financial guidance for 2018 is not that ambitious compared to the achievements you originate and compared to historical data. And now, the second question would be, and they make reference to page 66 in our presentation, that was 65 and now 66, the indicators (inaudible) why do you have this spike into 2018?
------------------------------
Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board, CFO and Member of Management Board [12]
------------------------------
The first question on the financial metrics. It's largely, I think, a reasonably conservative number. We use the oil price forecasts of about $60 in the next year and an inflation adjusted gas price of about 2% increase. So it's reasonably conservative. Also keep in mind that as we increase the output from our joint ventures, we're also purchasing more volumes from our joint ventures. And that means we also have a slight compression of the margin as we're buying more and then selling it. So it becomes a higher proportion of our business, it takes on a little bit more margins on our net profit. And on the other question, I think it's pretty simple too. The second question about the find and development of reserve replacement costs. As we go deeper into horizons, obviously it's going to be a little more expensive to develop the fields. But by and large, the main difference in 2018 relative to what we've seen in prior years, particularly last couple of years is that now we've made some acquisitions. And for the last couple years, we haven't really had any acquisitions. So that will affect our reserve replacement cost, which includes acquisitions, finding, which would be our exploration, which I said earlier in my text that we plan to increase by 5-fold in 2018, as well as the development activities. So I think it's pretty much explanatory what we plan to do. And then we'll just have to compare the actual results. But even if we hit those targets, it's important to remember that we still are the lowest cost producer in the world by pretty much a wide margin. And so I think we're safe to say that we'll keep to these numbers. They may be slightly lower when actual results come in, but that's pretty much our best estimate as we speak today.
------------------------------
Unidentified Analyst, [13]
------------------------------
Taking into account the growth of LNG in the future, are you considering taking part in LNG projects outside Russia with your global partners?
------------------------------
Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board, CFO and Member of Management Board [14]
------------------------------
Well, we presented our vision of our opportunities in terms of cost when it comes to LNG production based on our reserves on Yamal and Gydan. And if we find somewhere, anywhere in the growth, where we are going to be led in to get a share in such low cost, we will then consider them. But I really doubt that one can find such a project. I mean this is the Qatar field (inaudible) which is the same filed, different name. I don't think any other -- we can think of any other place where you can get similar level of costs. And we are considering taking part in certain investment in the downstream markets, such as regas terminals to make sure our LNG finds its way to our consumers. Arctic LNG 2, what's the expected CapEx number was the indexation rate. Yamal LNG, as the project has a CapEx of around [RUB 27 billion] and we were also saying and mentioning the share of the upstream cost and this is around 1/3. And then the other 2/3 of the amount was spent on the liquefaction train. So the upstream path, the Utrenneye filed expenses, we expect them to be on par with Yamal LNG. As for liquefaction, as I mentioned already, we really want to achieve a reduction of at least 30% and more in our CapEx.
------------------------------
Unidentified Analyst, [15]
------------------------------
Taking into account your production of growth in non-LNG assets, are you considering any expansion of the Purovsky plant in Ust-Luga?
------------------------------
Unidentified Company Representative, [16]
------------------------------
Specifically in his speech, Mark mentioned that we are making sure that we have the plateau necessary to maintain (inaudible) we are not considering any expansions on that.
------------------------------
Unidentified Analyst, [17]
------------------------------
When do you expect to commission the hydrocracker at Ust-Luga? Do you expect to get any price premium from the low sulfur bunker fuel from the new bunker fuel in the new regulated areas?
------------------------------
Unidentified Company Representative, [18]
------------------------------
I don't think these questions actually converge. If I may, Mr. Fridman, over to you.
------------------------------
Alexander Fridman, [19]
------------------------------
Good afternoon colleagues. As was said in his speech by Mark, we expect to -- plan to build a hydrocracker in Ust-Luga that would enable us to produce higher margin products and the commissioning timeline and completion of construction is end of 2019. So that in the very early 2020 we commission facility and then put it on stream not later than February or March when it comes to this hydrocracker. Starting in second quarter 2020, our budget already includes different product assortments. In terms of margins, given that we are going to move away from bunker fuel to jet fuel and we are going to have more of that and as well as naphtha, light and heavy naphtha, our margins are going to increase by approximately $13 to $15 to $17 per ton of product output by the hydrocracker in Ust-Luga, looking at the entire product slate at Ust-Luga. Thank you.
------------------------------
Unidentified Company Representative, [20]
------------------------------
May I please, one more thing, an interesting point. I mean Mark also mentioned results in his presentation and there is a link with this, in the Baltic area we are having these 2 fundamental projects, such as the Ust-Luga splitter and the reserves project and probably would also be interested to find out with our partners South-Tambeyskoye are now considering building for the jet fuel, building 3 carriers, jet fuel carriers that would be LNG powered. So simultaneously we would ensure we have the fleet for the product and we will also create an anchor customer for (inaudible). I think this is going to be of interest.
------------------------------
Unidentified Analyst, [21]
------------------------------
And Mr. Feodosyev may also take 2 next questions. What is the pricing formula, what is the volume forecast [of number of zones] and the cost of delivering LNG to Petro China?
------------------------------
Lev Feodosyev, [22]
------------------------------
Well, the cost of delivering LNG to Petro China was very well presented in a relevant slide in Mark's presentation for winter, and in summer it may be different. And indeed we expect a huge optimization in what Mr. Mikhelson mentioned in the beginning that is the higher utilization of the Northern Sea Route. This would create a significant saving on cost and that will bring our returns up. And the formula is well linked Z-curve, no surprises here.
------------------------------
Unidentified Analyst, [23]
------------------------------
And second question, what is the view of the company of the gas demand drop because of the renewables taking bigger share in the energy mix?
------------------------------
Unidentified Company Representative, [24]
------------------------------
Well I would answer this question as follows. The forecasts that we presented to you today with regards to the gas demand, the 73% to 74% goal by 2030, my personal conviction is that these forecasts in the coming 3 years are going to be reviewed upwards and we will be using completely different numbers when it comes to gas market. The second component would be -- it's not a secret that alternative energy sources in any amount requires backup fuel, and it's obvious that gas is the most efficient backup fuel for such alternative sources. So I don't see any competition here, rather additional opportunities.
------------------------------
Unidentified Analyst, [25]
------------------------------
You have sufficient results for a full fledged Yamal LNG train 4, why are you only launching a small-scale train?
------------------------------
Unidentified Company Representative, [26]
------------------------------
The 900,000 tons, I wouldn't say this is a small-scale plant, let me call it a mid-scale plant, mid-scale train. And there are 2 obvious reasons for that, #1 is that we are going to use our proprietary technology and we have never built anything on that. And starting with the big upfront, probably it wouldn't be so much appropriate. Another important part of this question again is that the performance of compressors and turbines for this volume -- I mean there are serious production units available for this capacity in Russia. Basically, for this train we are going to use almost 100% of Russian-made equipment. And another reason, which is also very important that we built Yamal LNG for 16.5 million tons and there are certain utilities and there are loading facilities, there are the BOG compresses, the storage facilities. Adding 1 million ton will not require any expansions on that. And taking the totality of these factors with the shareholders we made this decision.
------------------------------
Unidentified Analyst, [27]
------------------------------
Next question , which is quite easy to answer. Are you still discussing buying the [Tambay Group] fields with Gazprom over the government?
------------------------------
Unidentified Company Representative, [28]
------------------------------
No, we are not.
------------------------------
Unidentified Analyst, [29]
------------------------------
Do you expect Gazprom to maintain its 10% stake in your equity?
------------------------------
Unidentified Company Representative, [30]
------------------------------
I have never heard of them having any ideas whatsoever around that. I recall when they were buying the stake at what the value was back then, what the value is today, and us saying we want to pay more dividends. In their place, I wouldn't actually do that.
------------------------------
Unidentified Analyst, [31]
------------------------------
When do you expect to start getting substantial dividends from Yamal LNG and can you give a forecast on the trend of the dividends?
------------------------------
Unidentified Company Representative, [32]
------------------------------
Mark, will you be able to take this question?
------------------------------
Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board, CFO and Member of Management Board [33]
------------------------------
There's 2 components I think that answer that question. One will be when do we start receiving repayment loan facilities would be one part of the question. The second will be when do we start getting payed dividends. Based on the cash flow model that's built, we expect to start receiving repayment back of our loan as early as 2019. There should be the first cash flow-back to the group in terms of its finance (inaudible). If you remember, the way our financing was broken down, we made -- 2 sort of investments we made, about $3 billion in loans facility to the plant, as well as we invested about [$1.2 billion] and actual capital investment into the equity of the plant. So the loan starts getting paid back in 2019. And then on the dividend payments, I think given the ramp-up that we're looking at today and the profile, we should start receiving increasing dividends beginning in 2021. So we see the first payment in 2019 for debt and 2021 increasing throughout the rest of the decade with dividend payments.
------------------------------
Unidentified Analyst, [34]
------------------------------
Now, what was the share of ruble denominated costs in Yamal LNG Capex given that ruble depreciated by almost half. Shouldn't that have driven the CapEx down instead of it maintaining at $27 billion?
------------------------------
Unidentified Company Representative, [35]
------------------------------
Well, there was a different -- several aspects to this effect. Not such a big share (inaudible) of the cost was ruble denominated and naturally this is going to change for following projects and there were some additional activities as well performed and there were certain ruble denominated payments which were still linked to the exchange rates. So the CapEx was changing all the time but at the end of the day, as of the end of the construction, we are approaching the $27 billion -- we are approaching this with the number $27 billion as we indicated.
------------------------------
Unidentified Analyst, [36]
------------------------------
Do you have a spot component in your pricing formula's in your Yamal LNG contracts?
------------------------------
Unidentified Company Representative, [37]
------------------------------
Mr. Feodosyev?
------------------------------
Lev Feodosyev, [38]
------------------------------
To a certain extent, we do have it.
------------------------------
Unidentified Analyst, [39]
------------------------------
What is the expected CapEx of Kamchatka and the Kola?
------------------------------
Unidentified Company Representative, [40]
------------------------------
Mr. Fridman?
------------------------------
Alexander Fridman, [41]
------------------------------
We will take this question, sure I will. [Remind me] there were some other questions related to this, probably not to come back to this several times, let me speak in brief, Kamchatka as Mark said, we're going to setup and the key idea is to make sure we have offshore transshipment in December. We are going to complete the pre-FEED done by GT (inaudible) and in this process we will finalize which storage carriers or which storage in general we will need. I'm sure this will be taken into account the logistics we mentioned, I mean the East-West mentioned by Mark and Mr. Mikhelson and then we're going to have some storage carriers, the Anchorage facility which [is going] to be a very simple one again. And then the gas supply to (inaudible) to meet the shortfall in gas demand because the supply is from gas brownfield is going to decline given by Gazprom. So the current estimate for [2023] is 600 million cubes and -- but our boil off gas that will be generated during transshipment and usual storage in carriage is how much we are going to cover for (inaudible). In terms of the cost of this facility our estimate is at around RUB 60 billion. Speaking about the Kola yard let me also mention that the situation is as follows: as of this date, we have completed the engineering activities and are working on the detail of the designs we received the necessary authority approvals and received the construction permit and we're now doing ground work and blasting work because approximately half of the soil is rock there actually and now this is being developed in the Kola yard. For those interested, around 130,000 cubes was the biggest blast we have made just last week. Quite a bit of work I must say and we expect to complete the first phase and this includes the [berths and] dock #1 to be able to start building the gravity base structures by mid-2019. Now cost estimates for Phase 1, well I just mentioned for Phase I is around RUB 50 billion and in general the total CapEx estimate for the Kola yard including Phase I and Phase II that would include the so-called topside site or we're going to be building the liquefaction modules to be further then integrated on to the GPS. The third number stands at around RUB 80 billion, RUB 90 billion. Thank you.
------------------------------
Unidentified Analyst, [42]
------------------------------
Thank you. Now liquids production, as you go deeper and as you drill longer horizontal drains, what your development costs are going to be and what are your operating expenses are going to be compared to the historical numbers? Thank you.
------------------------------
Alexander Fridman, [43]
------------------------------
Naturally, the cost of drilling will be higher than for the (inaudible) deposits, but let me highlight for you that we are now undertaking exploration and as I mentioned already, we already made the investment decision on the (inaudible) square field, I mean this is still within the existing infrastructure we have and you don't have to do anything else, just drill. We have the transportation facilities, we have the treatment facilities, the processing facilities for condensate and I do not think that the operating expenses are going to grow significantly.
------------------------------
Unidentified Analyst, [44]
------------------------------
Now Mr. Feodosyev again probably 2 questions for you in a row, which are quite similar. Kamchatka will significantly reduce your transportation costs from Yamal LNG but how? And the second question, given that the winter is going to stay, will seasonality have its impact on the utilization of conventional carriers and what the carriers are going to be busy with off the season.
------------------------------
Lev Feodosyev, [45]
------------------------------
Let me begin from the end, a good carrier finds the job itself anyway. So we're going to be subletting non-utilized carriers. And speaking about Kamchatka, Mark actually presented this and demonstrated it very clearly in his presentation, I mean the fact we're going to have -- in that Slide you saw the comparison between East-West transportation and the savings are just obvious, so it's not too difficult to estimate them either by cargo or by volumes. I would like just to add probably to this Kamchatka case saying that in the marketing section of the presentation, Mark focused on how the structure of contracts is changing, they are no longer that long term, they're becoming shorter term and so we are starting the -- we are seeing the advent of mid term contracts and liquidity is growing and the consumer wants more and more flexibility. The flexibility in the LNG market starts to play a particular special role and Kamchatka transshipment facility and the ability to use this ice-free harbor and the ability to transship to conventional vessels that going faster that consume less fuel and they ensure the flexibility that consumers are expecting. That is the key ideological points -- commercial ideological points behind this transshipment. Thank you.
------------------------------
Unidentified Analyst, [46]
------------------------------
The next question overlaps with your answer to a certain extent. New LNG consumers try to avoid signing long-term contracts. How confident are you in terms of carrying on with your field work or making investment decisions without signing contracts for parts of your future outputs?
------------------------------
Lev Feodosyev, [47]
------------------------------
Specifically, creating this transshipment facility at Kamchatka and the expected level of cost that we see possible, our future LNG projects give -- all of this gives us confidence and we will not even aspire, I mean for Yamal LNG, we contracted over 90% of our future output and we are not going to aspire to achieve that with future projects. We're going to have a slower, more smaller portion of that. And what's also going to be helpful is that with raising the finance -- the global finance for Yamal LNG, it actually in a way required secured offtake and I expect that we will have smaller share of external financing compared to equity financing in our following project. Therefore -- and we also expect the spot market to grow and believe that we have to be in this market.
------------------------------
Unidentified Analyst, [48]
------------------------------
Is there any connection between the Arctic Cascade and Arctic LNG 2?
------------------------------
Unidentified Company Representative, [49]
------------------------------
Mr. Fridman, is there any connection?
------------------------------
Alexander Fridman, [50]
------------------------------
Well, obviously there is. I mean everybody feels that is purely virtual for now, but Novatek history demonstrates that we always start with something smaller, then we would proceed to bigger things and then we went on to implement such large scale project as Yamal LNG. This is a very similar approach for us to putting in place our own proprietary technology. We have the process design package in place, we're ready and we are now proceeding with the engineering for this facility. So that at the end of 2019, we commission it. Naturally, our objective for the future would be as you heard already in Mark's presentation that Arctic LNG 2 is expected to launch in 2022, 2023 and then it's going to be developing further on at the capacity of 6.1 million tons. But for us to understand how this unit actually operates, this 900,000 tons will have to be tested, we'll have to launch them and test them and see how energy efficient this unit is and how the full system is going to be used with 2 refrigerants, specifically ethane and nitrogen. And then to enable us within Arctic LNG 2 to try to scale and roll this out. Well, I don't think we will have time to do this by '21 and probably, by '22, but still we have this objective to try and make sure the '23 of Arctic LNG 2 is already taken into account the results of this work within Yamal LNG to then be able to apply to GBS for Arctic LNG 2, at least for '23. Thank you.
------------------------------
Unidentified Analyst, [51]
------------------------------
What is the likely shareholding structure of Arctic LNG 2? What's going to be the minimum share of Novatek? Do we need to expect any new investments that we don't see in Yamal LNG? And what's the minimum stake?
------------------------------
Unidentified Company Representative, [52]
------------------------------
I mean, it's obvious, it's a controlling stake, 50% plus 1 share, that's the minimum share of Novatek. Now, we would welcome and they are already looking into this project and talking about the Yamal LNG shareholders and we would welcome their participation in Arctic LNG 2 as well. But we may see other shareholders coming in. But I think that the 30% to 49%, I think it still makes sense for this amount to be having partners in the Arctic LNG 2.
------------------------------
Unidentified Analyst, [53]
------------------------------
What's the potential amount of Novatek contribution into Arctic LNG 2, either in the form of loans or in terms of -- in the form of equity in 2018-2025?
------------------------------
Unidentified Company Representative, [54]
------------------------------
Well, I think this would be appropriate to ask this question when we have identified with our partners what's their stake going to be, what the terms of the end share going to be. And I do not think there will be any questions like for Yamal LNG or on the entries. I mean they need to carry the additional carrier financing. I don't expect that. And in terms of its amount, the financing is going to be less and probably with the future partners, we may require less of external financing for this project of ours.
------------------------------
Unidentified Analyst, [55]
------------------------------
What is the likely CapEx in Yamal LNG Train 4 and what's Novatek share going to be?
------------------------------
Unidentified Company Representative, [56]
------------------------------
(inaudible), would you please take this question? What is it?
Well, probably someone has read this already. This number has been mentioned before. We estimate and we think we're close to the reality, because the engineering is in progress as said. We have done a lot of work with fabricators in Russia. I would say, 95% and 97% of the equipment pieces are going to be supplied by Russian manufacturers, including the main turbine and compressor, which is not a simple one, will also be a Russian made. And our total estimate of CapEx in Train 4 is at around RUB 24 billion, RUB 25 billion. And as you rightly said, that's Train 4 of the Yamal LNG. This means that Novatek share will be what it is for Yamal LNG.
------------------------------
Unidentified Analyst, [57]
------------------------------
And then this next question probably I need to also verify to you. Do you expect the same condensate stream in Arctic LNG 2 as in Yamal LNG?
------------------------------
Unidentified Company Representative, [58]
------------------------------
Well, basically we have approximately the same condensate, but is slightly higher in the Utrenneye field compared to the South-Tambeyskoye that is the basis of the Yamal LNG. But given that on this second project, our LNG production is going to be slightly higher by 10% to 12% we're going to have (inaudible). So this means for this volume of gas we're going to have a slightly higher volume of condensate. For Yamal LNG it was [1 million tons, 1.1 million tons], we're going to have 1.3 million tons, 1.4 million tons for the next project and this section guarantee stable gas condensate.
------------------------------
Unidentified Analyst, [59]
------------------------------
What is the likely shareholding structure of (inaudible)? And then the next part is CapEx and [Mr. Fred] already mentioned that.
------------------------------
Unidentified Company Representative, [60]
------------------------------
Well, I can only say one thing that we have a very vivid interest from various companies willing to take part in this transshipment projects and naturally the controlling stake is going to be held by us and negotiations with the potential partners. We already started preliminary talks with them.
------------------------------
Unidentified Analyst, [61]
------------------------------
Do you have any plans with regards to gas fueling stations? How many of them are you going to have by 2025? Are they going to be spent all by Novatek? This is a difficult question, I don't know. And then next probably I guess you Mr. Feodosyev. Can you run out of gas for your domestic market supplies given the growth in the LNG that will be offset by buying from other producers? What's the highest risk rate from this standpoint? I don't think we have a signed the contracts without having secured production, but if you may, please answer these questions.
------------------------------
Unidentified Company Representative, [62]
------------------------------
Exactly, we never signed a contract that we cannot supply under and recover. In terms of filling stations as far as I understand, you are most likely speaking about LNG filling stations. And the project that we expect to implement, the concept of it, the idea behind it is currently focused around on the Chelyabinsk region. Next year we expect to build 4 filling stations in that particular region that will be providing LNG refueling. And depending on the program results we will be rolling this out. Sot it's too hard for me to give you a specific number of our filling stations by 2025. There is the market that still needs to be created. We are working on it and Mark has covered our pilot program and our tests with the MMK, the Magnitogorsk Iron & Steel plant. So time will show. It's too difficult for me to give you any specific numbers at this point in time.
------------------------------
Unidentified Analyst, [63]
------------------------------
Well, it's a difficult question. Do I need to read them out loud? What's going to be the ruble exchange rates by 2030?
------------------------------
Unidentified Company Representative, [64]
------------------------------
Thank you. You actually helped me to answer this question. I would rather speak about bitcoins, shouldn't I?
------------------------------
Unidentified Analyst, [65]
------------------------------
Why do you need the M&A deals if Novatek as such already has a good resource base? Does the company intend to participate in international projects?
------------------------------
Unidentified Company Representative, [66]
------------------------------
I mean, if you highlight and maybe I repeat myself, the acquisitions that we've just made are located where we have a production decline and within the region of our existing infrastructure, they are very beneficial for us and they are not that costly and we will just ensure the full load of the facilities we already have. Speaking about the international project, we treat them with prudence. We have the Montenegro project and we are there with our -- and we are with our our partners Total and Eni in the Lebanon tender that is supposed to close soon as they say. And we may be considering projects like this at initial stages, not requiring significant investments. Thank you. I think we've run out of questions. So shall we wrap up? Well, I believe that judging by the questions, we actually managed to put together a nice presentation of our strategy through 2030 for you and I'm more than certain that after 3 or 4 years' time, maximum 5 years' time, we are going to have an update of this strategy and we'll see how the markets develop. I would like to reiterate the years 2019 and 2020 are going to be very important for us. We're going to ramp up Yamal LNG to its plateau. We will have full understanding of Arctic LNG and then we'll be approaching making the FID and then we'll probably have more clarity -- receive more clarity over the 2, 3 years of the exploration results on our new licenses. And naturally we will communicate the updates to the investment community. Thank you very much.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------