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Sovcomflot banks on LNG-fuelled future, says finance chief

Russian shipowner is scaling back crude and product tanker exposure as it expands to gas carriers, amassing a $4bn orderbook of 22 liquefied natural gas carriers

Sovcomflot chief financial officer Nikolay Kolesnikov tells Lloyd's List he expects no problem in financing the liquefied natural gas carrier fleet, highlighting that loan documents for prior LNG-fuelled vessels were based on Poseidon Principles

SOVCOMFLOT, the Russian shipowner, said it does not expect difficulties raising funding for its $4bn newbuilding programme to provide liquefied natural gas-fuelled vessels linked to Arctic gas and oil projects.

Chief financial officer Nikolay Kolesnikov said in an interview that the absence of any cleaner alternative to the fossil fuel “this is obviously as good as it gets.”

“We will be able to convince the banks to support us just as they did when we did the first series of our LNG-powered vessels,” he said.

Sovcomflot was the second borrower to introduce the Poseidon Principles in loan documentation two years ago to finance these ships, based on a club deal with a number of banks, of which only one was a signatory, according to Mr Kolsnikov.

“There was no shortage of demand from banks to finance these [ships]; they all labelled them as green and environmentally friendly, they basically wanted some brownie points for doing that type of financing.”

The Poseidon Principles allow banks to align ship finance portfolios against climate change objectives when assessing borrowing to support decarbonisation.

Mr Kolsnikov said: “Our experience suggests so far that we are never facing a lack of finance for any of the projects that we have undertaken in the past, nor have we had to compromise on the cost of debt financing.”

The company is raising its exposure to the LNG shipping sector and scaling back its long-held role as transporter of crude and refined products at the same time as opposition to LNG as a transitional marine fuel is intensifying, amid greater scrutiny of its decarbonisation credentials and methane emissions.

In the past month a World Bank report urged against funding LNG bunkering projects, Danish shipowner Maersk labelled use of the fuel ‘borderline greenwashing’ and an Organisation for the Economic Co-operation and Development submission with Norway warned LNG could lock shipping into a higher-carbon pathway.

Sovcomflot owns seven LNG carriers and is building another 22 over the next five years, according to its investor reports, in addition two aframax shuttle tankers and three medium-range product tankers. All are fuelled by LNG.

The shipowner has long-term charter agreements tied to seven ice-class LNG carriers with Mitsui OSK Lines. It has a 30-year lease on most of the 14 vessels ordered at Russia’s Zvezda shipyard under a joint venture with energy company Novatek, which is leading the Arctic LNG 2 project.

Another LNG carrier, with an option for a further two, was signed with France’s Total in January, with whom Sovcomflot also has long-term charters agreed on three recently delivered ships.

“We’re all in favour of decarbonising the world, increasing the share of renewables in the energy mix,” Mr Kolsnikov said. “There will be very much a gradual shift with reduction of fossil fuels in the energy mix, and we can see that for the next decade or two, fossil fuels will continue to account for more or less the same share in the energy mix.

“However more polluting fuels such as coals will increasingly be replaced by cleaner fossil fuels, and natural gas does include that cleaner fuel.”

The choice of Zvezda shipyard to build the highly specialised 14 LNG carriers was the customers’, he said.

All are ice-class vessels for the Arctic LNG 2 project led by Novatek, with a 60% share, as well as 10% shares each for China’s China National Petroleum Corporation and China National Offshore Oil Corporation, Total, and the Mitsui and Japan Oil, Gas and Metals National Corporation consortium.

The additional steel and technology required for the ice-breaking vessels to operate in Arctic waters meant they cost one-and-a-half times normal prices based on the cost of prior Sovcomflot vessels built at South Korean yards Mr Kolsnikov said. Ship prices are around $260m and $290m based on the company’s prospectus versus about $190m to $200m expected cost.

Mr Kolsnikov acknowledged there would be an additional shipbuilding premium to transfer technology to Zvezda.

“Whether it’s a higher or lower capital expenditure for this or that type, it will have to be fully recouped through the pricing of the contract,” he said. “Some of these orders have been placed at the new shipbuilder Zvezda up the Russian Far East. That was our customer’s choice.

“We just want to make sure that Zvezda is capable of building these vessels because these are highly technically advanced and sophisticated vessels. We built the first ice-breaking LNG carrier at the Daewoo Shipbuilding & Marine Engineering [South Korean shipyard] because these vessels have specific requirements for the Arctic conditions … to withstand temperatures of down to minus 45 degrees.

“You need to have specific skills to weld those steel plates and even a very advanced yard like this, they struggled on them. First and foremost, it’s about a shipyard’s capability of delivering; delivering in terms of quality in terms of schedules, in terms of cost.

“In the case of the Russian shipyard Zvezda, we are taking comfort from the fact that they in turn have partnered with a leading South Korean shipyard as technological partners. What we will see is a joint construction project with gradual increase on the localisation of production in Russia.”

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