China and Russia to Jointly Develop Major Arctic Liquefied Natural Gas Project: CNOOC and CNPC to Invest
The cooperation between China and Russia on the world-class liquefied natural gas (LNG) project in the Arctic region is progressing rapidly. During the 23rd St. Petersburg International Economic Forum, the two major state-owned Chinese oil companies signed an equity purchase agreement for the Arctic LNG 2 project with Russia's largest independent natural gas producer. This comes just over 40 days after the two companies signed the cooperation framework agreement for the project.

On June 7, China National Offshore Oil Corporation (CNOOC, 00883.HK; NYSE:CEO; TSX:CNU) announced that CNOOC and its wholly-owned subsidiary CEPR Limited have signed an equity purchase agreement with Joint Stock Company Novatek ("Novatek") and its wholly-owned subsidiary Ekropromstroy Limited Liability Company. Under the agreement, CNOOC's subsidiary will acquire a 10% stake in Arctic LNG 2 LLC ("Arctic LNG 2"), a limited liability company established in the Russian Federation and responsible for the development of the second major onshore conventional gas project led by Novatek, the Arctic LNG 2 project, located on the Gydan Peninsula in Russia.

According to Novatek's announcement, the company also signed a Share Purchase Agreement with a subsidiary of China National Petroleum Corporation (CNPC) for a 10% interest in the Arctic LNG 2 project on the same day. Novatek, founded in 1994, is currently Russia's largest independent natural gas producer. The company is primarily engaged in the exploration, production, processing and marketing of natural gas and liquid hydrocarbons, with over 20 years of operating experience in the oil and gas industry in Russia.

The Arctic LNG 2 project, located on the Gydan Peninsula in the Russian Arctic, is Novatek's second major liquefied natural gas project in the remote Arctic region, following the Yamal LNG project, which is the largest LNG project in the world. The project includes the development and production of the Utrenneye gas field and the construction and operation of three LNG production lines.

The Arctic LNG 2 project has an annual production capacity of 19.8 million tons of LNG, equivalent to 535,000 barrels of oil per day. It will also develop over 7 billion barrels of oil equivalent resources from the Utrenneye onshore gas and condensate field. The project will construct three gravity-based platforms in the Gulf of Ob and install three liquefaction trains, each with an annual capacity of 6.6 million tons. The project's output will be transported to international markets by a fleet of ice-class LNG carriers via the Northern Sea Route. The final investment decision for the Arctic LNG 2 project is expected in the second half of this year, and the first liquefaction train is expected to be commissioned in 2023.

Just over a month ago, during the Second Belt and Road Forum for International Cooperation held in China, the Chinese and Russian companies signed a framework agreement on the aforementioned equity acquisition. CNOOC stated on April 25 that the company had signed a cooperation framework agreement with Novatek, intending to acquire a 10% interest in the Russian Arctic LNG 2 project. CNPC also announced that its wholly-owned subsidiary China National Oil and Gas Exploration and Development Corporation (CNODC) had signed a cooperation framework agreement for the Arctic LNG 2 project on the same day, under which CNODC will acquire a 10% interest in the project.

With these agreements, Chinese oil and gas companies have now secured a 20% stake in the Arctic LNG 2 project. Additionally, Total, the world's fourth-largest integrated oil and gas company, has acquired a 10% direct interest in the project.

In the announcement, CNOOC stated that the completion of the acquisition is subject to the satisfaction of certain conditions precedent, including obtaining approvals from the relevant government authorities in China and Russia. The acquisition is expected to be completed in the near future.

China is currently the world's second-largest liquefied natural gas buyer after Japan. In 2018, China's LNG imports exceeded 53 million tons, accounting for 60% of its total natural gas imports, reaching a historic high.

Novatek plans to retain a 60% stake in the Arctic LNG 2 project, with the remaining stake to be sold to other investors. In March this year, Total announced that it had signed a final agreement with Novatek to acquire a 10% direct interest in the Arctic LNG 2 project. With Total holding a 19.4% stake in Novatek and Novatek intending to retain a 60% interest in the project, Total's total interest in the project is estimated to be around 21.6%. If Novatek decides to reduce its direct shareholding to below 60%, Total's direct interest could potentially increase to up to 15%.

After Total's investment, the remaining 30% stake has attracted a lot of competition, with companies such as Mitsui Corporation of Japan, Saudi Aramco, and Korea Gas Corporation expressing interest in joining the project. The negotiations between Novatek and CNPC have been ongoing, and the Russian side has repeatedly stated its desire for Chinese companies to participate in the Arctic LNG 2 project.

In November 2017, the two companies signed the "Strategic Cooperation Agreement between China National Petroleum Corporation and Novatek", proposing in-depth exchanges and comprehensive joint exploration of the feasibility of developing the Arctic LNG 2 project. During the 4th Eastern Economic Forum in Russia last September, CNPC Chairman Wang Yilin and Novatek President Leonid Mikhelson held a working meeting, where the two sides had in-depth discussions on further strengthening cooperation in the Yamal LNG project, actively participating in the construction of the Arctic LNG 2 project, and cooperating in the LNG downstream sector in China.