Russia's Novatek Sells 25% to Total and Raising Over $1 Billion For Gas Upstream, Downstream, and Export Projects

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Researched by Industrialinfo.com (Industrial Information Resources Incorporated; Houston, Texas) Novatek (Moscow), Russia's second largest gas producer after the state giant Gazprom (LSE,XETRA:GAZP), is moving up a gear in upstream gas and condensate production, downstream petrochemical production capability, and a diversification of its equity base with a sale of 25% of the company to TOTAL S.A. (NYSE:TOT) (Paris, France).

The company is set to boost gas production from the 2004 figure of 27 million cubic meters to over 50 million cubic meters a year in the medium term. In the first quarter of 2005, Novatek will launch a $150 million condensate plant in Siberia with a capacity to produce 1.6 million tons of condensate a year, 200,000 tons of liquefied petroleum gas, and 200,000 tons of butane fractions. At present, Novatek does not own a dedicated refinery, so condensate produced is sent to be processed at plant owned by Gazprom. Gazprom controls pipeline traffic in Russia.

The petrochemical plant at Nonokuybyshevsk at Samara in the Volga region will have an annual production capacity of 400,000 tons of polyethylene and 200,000 tons of polypropylene. Tough negotiations, centering on price, are underway with Linde for the construction of the plant which Novatek ceo Leonid Mikhelson said should be resolved by the end of the year. The feasibility study for the project was prepared by Linde. 'Our strategic decision to build this petrochemical plant will remain unaltered in any partnership and contract," he said.

Novatek's plans for the export of condensate to northwest Europe and the U.S., through the deep-water port of Vitino are dependent on it accessing gas export pipelines, which have been jealously guarded by Gazprom in the past. With the progress of gas market liberalization looking positive, the company has already signed long-term condensate sales contracts with three multinational companies, including BP and has plans for exports through Vitino to climb as it boosts its annual condensate out put to five million tons. Mikhelson said that the company was currently expanding the condensate storage reservoirs at Vitino.

Market analysts say that if Novatek is not allowed access to export pipelines it will be forced to continue to sell gas on Russia's domestic market, where prices are capped by the government and represent only 20% of the prices Gazprom obtains for exports. Liberalization of the domestic gas market has actually led to higher prices.

The 25% equity sale to Total is said to be worth about $1 billion and will allow Total to increase its production and reserves of hydrocarbons and further its strategy of participating in the development of Russian resources. The deal was based on a price of less that $1 per barrel of oil reserves. Novatek operates three major gas fields, all located in western Siberia, representing proved and probable reserves of about 4 billion barrels of oil equivalent.

The company is seeking to borrow up to $1.23 billion to fund the new petochemical plant and will secure the loan with 1.6 million tons a year of gas condensate exports. It is discussing a 14-year financing facility with a consortium of German banks led by Commerzbank, will finance up to 15% of the project's cost. $100 million for the project has also been raised through Dutch bank ING.

Novatek was created in 1994 in the privatization program of Russia’s state energy companies. In 2003 it had a turnover of $564 million and a net profit of $113 million.

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