Russia's vast Arctic gas project aims to avoid Ukraine deep freeze

Spread across the frozen whiteness of the Russian Arctic, the ambitious $27 billion Yamal gas megaproject aims to defy both the extreme temperatures and the Ukraine crisis impacting its funding.

Some 2,500 kilometres (1,600 miles) northeast of Moscow, the Yamal site -- a joint venture by Russia's Novatek, France's Total and China's CNPC -- is eventually meant be one of the world's biggest liquefied natural gas (LNG) projects and ship deliveries to both Asia and Europe.

But not long ago the area drew only a handful of geologists and explorers whose neighbours in the virgin territory were polar bears and foxes.

"There was nothing. Just tundra," said Dmitry Fonin, a veteran of industrial projects in the Russian north who is at the helm of construction of Yamal LNG.

Over two years later development is in full gear and around 9,000 workers are toiling away in often fiercely inhospitable conditions to launch the massive facility by 2017 that aims to produce some 16.5 million tonnes of LNG per year.

"It's rather warm now, -10 degrees (Celsius, 14 Fahrenheit)," Ruslan Mikhailov, who captains an icebreaker tasked with keeping the waters around the port navigable, told journalists during a recent press trip.

"The average here in the winter is -30 and it goes as low as -56."

- East-West ambitions -

Plans for the Yamal LNG project date back about 10 years, long before Russia's current standoff with the West over Ukraine and punishing sanctions imposed by the United States and European Union after Moscow's annexation of Crimea.

Russia hopes the location of the plant will allow it to diversify energy exports and ship both to European markets and Asia, via the northern route, the shortest passage between European Russia and the Pacific Ocean though navigation there remains highly seasonal.

Fears have swirled over the future of the vast project, however, as international ties nosedived over the Ukraine crisis and the West slapped tough sanctions on Russia that led to some major energy ventures involving Western and Russian firms being shelved.

Although the vast project was not directly targeted by the sanctions -- and Total and CNPC still remain onboard with 20 percent each -- the economic tit-for-tat has hit the venture in other ways.

In mid-July Novatek was put on the blacklist by the US Treasury, and even though the joint venture is not directly under sanctions, the punitive measures from the West are closing off huge swaths of potential cash.

The project still needs $18 billion of investment and the funding issue has been exacerbated by the current reduced price of oil that has cut down industry revenues.

Gas prices are often linked to crude oil prices.

"(If) we would not have this question of sanctions, the financing would have been done already, let's be clear," Total CEO Patrick Pouyanne said said during a recent visit to the site, adding thought that he hoped it would arrive "in a matter of weeks."

"Because of the sanctions we cannot use dollars, we use financing through Chinese banks, European banks and other Asian banks," said Pouyanne.

Beyond the facility itself, subcontractors and suppliers suffer sanctions too, said Novatek chief Leonid Mikhelson.

"There are technical difficulties with the money, though they can be overcome," he said.

Russia has granted long-term loans worth 150 billion rubles ($2.7 billion), half of which has already been provided.

An employee of a European company present at the facility confirmed potential investors are hesitant: "Banks take time to make sure they don't violate sanctions, and they wonder whether the sanctions will be tightened further. It creates stress."

- Contracts already signed -

Despite the current hitches the energy bosses remained upbeat on the project and insist that it will be seen through to completion.

"We can supply the European market and the Asian market," Pouyanne said, describing it the venture as a "launchpad for growth" in Russia.

Total's commitment to Russia was spearheaded by Pouyanne's predecessor Christophe de Margerie, who died last October when his plane collided with a snowplough in a Moscow airport.

And all sides insist the viability of the project is in no doubt once it gets going.

"We have contracts for almost 100 percent of the gas," Novatek chief Leonid Mikhelson said recently. "Of course large volumes will go to the Asia-Pacific region."

For Russia, analysts say projects like Yamal are vital, as Moscow needs to start tapping new fields beyond its current maturing sites.

So keeping the project on track is a must whatever the obstacles may be in the near future.  

"LNG projects are likely to face significant delays, due to high costs, geopolitics and financial sanctions," analysts with energy association Cedigaz said in a recent note.

"But (they) could eventually develop on a significant scale in the next decade."