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Edited Transcript of NVTK.MZ earnings conference call or presentation 31-Oct-19 1:00pm GMT

Q3 2019 Novatek PAO Earnings Call (IFRS)

Tarko-Sale Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Novatek PAO earnings conference call or presentation Thursday, October 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Anthony Gyetvay

PAO NOVATEK - Deputy Chairman of the Management Board & CFO

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Conference Call Participants

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* Alex Robert John Comer

JP Morgan Chase & Co, Research Division - Research Analyst

* Alexander Burgansky

Renaissance Capital, Research Division - MD and Head of Oil & Gas Research

* Ildar Khaziev

HSBC, Research Division - Analyst

* Karen Kostanian

BofA Merrill Lynch, Research Division - Head of EEMEA Energy Research & Head of the Russian Research Department

* Olga Danilenko

Prosperity Capital Management Ltd - Director of Oil and Gas

* Patrick Sykes

ICIS - Senior Energy Market Reporter

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Presentation

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Operator [1]

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Good day and welcome to the NOVATEK Third Quarter 2019 Financial Results Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mark Gyetvay. Please go ahead.

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Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [2]

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Thank you. Ladies and gentlemen, shareholders and colleagues, good evening, and welcome to our third quarter 2019 earnings conference call. We would like to thank everyone for taking your valuable time this evening to join us.

Before we begin with the specific conference call details, I would like to refer you to our disclaimer statement as is normal practice. During this conference call, we may refer to forward-looking statements by using words such as plans, objectives, goals, strategies and other similar words, which are other than statements of historical facts. Actual results may differ materially from those implied by such forward-looking statements due to known and unknown risks and uncertainties, and reflect our views at the date of this presentation. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. Please refer to our regulatory filings, including our annual review for the year ended the 31st of December 2018, as well as any of our earnings press releases and documents throughout the past year for more description of the risks that may influence our results.

We generated another good set of financial and operational results in the third quarter of 2019, despite weaknesses in the underlying commodity prices across our product range, particularly global LNG prices as well as traditional seasonal fluctuations in demand. Underlying Brent crude oil prices declined by 18% year-on-year from an average of $75 per barrel to $62 per barrel, whereas benchmark natural gas prices, like MDP or TTF, declined by 60%, respectively, during the reporting period. Despite these macro challenges, global LNG increased by 14% year-on-year to approximately 268 million tons for the 9 months ended the 30th of September and by 15% in the third quarter of 2019 to roughly 90 million tons. Growth in LNG demand continues unabated as these positive trends underscore demand forecast for natural gas future role in the energy fuel mix. Moreover, this supports our belief that a prolonged period of low to moderate LNG prices will stimulate demand across many regions of the world, facilitating the transition from coal to natural gas in price-sensitive regions and meeting demands for cleaner-burning fuels.

It is crucial that we maintain our focus on developing our LNG platform to deliver cost competitive LNG to all-consuming markets at one of the lowest landed cost to market. LNG remains a key driver in future global gas demand growth, and our cost-competitive LNG platform positions us to play a leading role in this global transition.

With that said, the third quarter will be a tough reporting quarter for the oil and gas industry, taking into consideration the commodity price declines. Although the LNG market remained stable throughout the reporting period, various signs have been evident for more than 6 months of weak Asian demand, redirecting record volumes of LNG cargoes to Northwest Europe, and prices acting accordingly. The spreads between the Atlantic and Pacific Basin have narrowed significantly this past year, which has ultimately influenced trading and shipping patterns. We expect seasonal prices to strengthen this winter but unlikely we will see a significant price recovery in the near-term due to supply-demand imbalances.

From a regional perspective, China remained resilient, with a 19% increase year-on-year, with LNG imports reaching 44.6 million tons for the 9-month period 2019 as well as robust growth in the third quarter of 15% or 15.2 million tons. Chinese gas demand is expected to grow on average by approximately 4% per annum, driven largely by industrial and building sectors and the Blue Sky transition from coal to natural gas. Japan, Taiwan, South Korea and China represent more than 54% of the global LNG demand, demonstrating the importance of the Asia Pacific region to LNG suppliers.

Europe also had a substantial increase in LNG imports in the third quarter 2019 of roughly 8 million tons or approximately 74%, with anticipation of further increases of LNG imports on an annualized basis. Estimated natural gas storage utilization in EU is approximately 97%, whereas the level of EU LNG storage utilization stood at approximately 80%. This potentially means a risk of limited demand pull to the Atlantic Basin, potentially lowered LNG prices in case of a warmer than normal winter season. We are cautiously optimistic that this present scenario will work itself through the storage buildup and LNG flows will continue unabated to the European markets this peak winter season.

India is emerging as an important LNG destination as the country slowly transitions towards natural gas. This important transition to gas and away from coal is evident by recent news stories regarding India's investment in regasification terminals and pipeline infrastructure investments as well as various announcements of project investments and supply agreements. India has announced its intention to increase gas use to 15% of its primary energy consumption, up from 6% currently. We believe this represents an enormous market opportunity but highly price sensitive.

As of today, there are approximately 550 LNG carriers representing the global LNG fleet, with a new book build order of approximately 115 to 120 new LNG tankers. Spot LNG carrier prices spiked during the quarter, with charter rates reaching over $130,000 per day because of the unexpected U.S. sanctions on subsidiaries of Costco but fortunately, this issue was resolved last week with OFAC.

Yamal LNG received notification from TC LNG shipping, the joint venture owning some of the Arc7 tankers, that the joint venture is no longer a block person under OFAC rules. The resolution means that Yamal LNG will utilize all of the Arc7 ice class tankers owned and operated by TC LNG. We had no disruptions to our LNG shipments in the normal course of business, and we are glad that this issue was resolved in a timely manner between the respective parties. There are 13 Arc7 ice-class tankers in operations. In addition, we have 2 Arc7 condensate tankers in operations, and we supplement our fleet with 7 conventional tankers. The 14th Arc7 tanker named Georgiy Ushakov has completed all ship tests and will arrive in Sabetta by month end. We expect this tanker to receive its first load during the first week of November. The 15th Arc7 tanker named Yakov Gakkel is presently in South Korea, finalizing the vessel sea test. We expect the final tanker to arrive on-site before year-end. This means that all 15 Arc7 tankers will be in operations by year-end.

We will also use ship-to-ship transfers as we did this past year, as this process improves margins and the profitability of westbound shipments. Yamal LNG loaded and dispatched 188 cargoes, or 13.6 million tons of LNG during the 9-month period, as well as 35 shipments of gas condensate, totaling 939,000 tons. In the reporting period, 62 shipments were dispatched, totaling 4.5 million tons as well as 8 cargoes of gas condensate, or approximately 300,000 tons. Since inception, the project dispatched 304 cargoes for a total of 22.2 million tons, along with 65 shipments of gas condensate or 1.7 million tons. The project is dispatching a tanker about 1 every 35 hours. So this demonstrates the success and efficiencies of the load-in and dispatch in operations.

The 3 liquefaction trains produced 13.6 million tons of LNG over the first 9 months of 2019, equating to roughly 110% of the facility's nameplate capacity as well as 1,410,000 tons of unstable gas condensate. All 3 liquefaction trains operated above nameplate capacity during the period, and we believe this will remain the case, except during planned periods of a maintenance. Globally, the LNG liquefaction utilization rate was roughly 85%, again, highlighting the exceptional performance of Yamal LNG relative to global LNG projects.

We estimate the construction progress for Yamal LNG's fourth train at approximately 61% as compared to 51% completed at the end of the second quarter. There are more than 2,200 workers on the construction site. The main work activities continue to center on the gas treatment and the gas liquefaction units. We provided a comprehensive update on the last conference call, and there is nothing new to report at this particular time. Overall, progress was good. We will start final commissioning activities during the first quarter of 2020. With the projected low operating and capital costs of Train #4, we will decrease the average cost of the whole Yamal LNG project by 3% to 4%. Our present tanker fleet is capable of serving all of the output of Train #4 as well as the LNG output above nameplate capacity for the existing 3 LNG trains.

The big corporate news in the third quarter centered on Arctic LNG 2. We successfully closed our partner consortium by selling 40% of Arctic LNG 2 to a partner group consisting of Total, CNPC, CNOOC and a consortium of Mitsui/JOGMEC. Each partner has a 10% participation interest in the project, and in our third quarter results, we reported the financial impact of the final 30% transaction, excluding Total's stake. Equally important, on the 5th of September, at the Eastern Economic Forum in Vladivostok, we made the final investment decision, or FID, to proceed forward with this project. Although a formality, Arctic LNG 2 is the largest LNG project globally to make an FID decision so far in 2019.

As a recap, Arctic LNG 2 will consist of 3 liquefaction trains using gravity-based structures, or GBS, with overall LNG capacity of 19.8 million tons per annum, or 6.6 million tons per GBS. The scheduled launch of the first GBS is 2023, with the second and third GBSes launched in 2024 and 2026, respectively. The estimated capital expenditures to launch this project at full capacity is $21.3 billion equivalent. Participants will offtake LNG long-term in proportion to the respective ownership interest, either FOB Murmansk or FOB Kamchatka. As of today, the consortium has financed approximately 10% of the total project's capital program. More than 1,500 construction workers are currently on site, constructing well pads, road infrastructure, water and energy infrastructure as well as a contractor's camp. We have 2 drilling rigs on-site and have started production drilling. Currently, we are mobilizing 2 more drilling rigs, and these rigs will commence drilling in the first quarter of 2020.

We received the main governmental approval to construct the Utrenneye terminal and accordingly, construction activities at the terminal have begun. Dredging works have begun, and we have already completed about 90% of this activity as of early October. We have contracted more than 80% of the planned capital program as well as concluded the main EPC contract for this particular project. We will provide updates on future earnings calls as work progresses.

Moving ahead, we presently have 1,900 construction workers at the Murmansk LNG construction yard. We installed 8 train tower cranes at Dry Dock #1 and provided these cranes to the SAREN joint venture. Berths #1 and #2 are now completed. We will use Berths #1 to receive materials for the GBS construction site and Berths #2 to offload materials used at the concrete batch plants. We commence construction works for the hydrotechnical structures, both Berth and bank protection, for the Topside Module construction site. This work includes building foundations for all production workshops and warehouses. We have completed 14 living camps for 200 people each, and of which 6 of these living camps were provided to SAREN.

Our exploration activities yielded good results. As you know, exploration drives future development activities but it is crucial to prove up our resource base on new licenses to support future LNG projects. We will continue to invest capital in our exploration program to achieve our long-term strategic goals. We've shifted our focus from geological and geophysical works to more exploration drilling over the first 9 months of 2019. Notably, we drilled, completed and tested well #65 at the Geophyzicheskoye field in shallow waters of the Ob River, with a vertical depth of 2,600 meters. We encountered 3 production layers at depths between 1,000 meters to 2,600 meters, with well flows of 500,000 to 700,000 cubic meters of natural gas per day. The well allowed us to expand our knowledge of the field's production perspective and reserves, which ultimately should influence positively our year-end reserves at this particular field.

We also drilled Well #450 at the Trekhbugornoye field to a depth at 3,100 meters, and we found 3 production layers that were tested. The well flowed natural gas at more than 400,000 cubic meters per day. We acquired a new license at the Gydan peninsula via auction that includes the Soletsko-Khanaveyskoye field. As previously reported, the license area has estimated hydrocarbon resources of 2.2 trillion cubic meters of natural gas and 212 million tons of liquids, or approximately 16 billion barrels of oil equivalent, according to the Russian resource classification system. The license term is 27 years, and we incurred a one-time payment of RUB 2.6 billion. In 2020, we will perform 3-dimensional or 3D seismic work at the field and drill 1 exploration well.

We highlight specifically these 3 exploration activities because they represent the future resource base for Artic LNG #1, a project with the potential capacity equal to that of Arctic LNG 2. We will eventually connect the production sales via pipeline to the liquefaction trains located at the Utrenneye terminals. This demonstrates 1 more example to monetize our massive hydrocarbon resource base on the Yamal and Gydan peninsulas and create shareholder value. Moreover, our future LNG projects are highly attractive to potential partners as we offer scalable, low-cost LNG platform.

We maintained an active development drilling program throughout the third quarter 2019. We drilled and completed 38 production wells in the reporting period versus 26 production wells in the corresponding 2018 period, representing a 46% growth in drilling completions. We plan to drill approximately 161 wells in 2019 according to our development plans. And as of the first 9 months, we have completed 109 wells or 68% of the planned program. Our focus remained on the North-Russkoye field as we prepare this important field to commence initial production by year-end.

Despite weaker natural gas prices in Europe and Asia, our results for the 9-month period were reasonably strong as we increased natural gas revenues and netbacks by 27% and 37%, respectively. Seasonal volume adjustments affected our quarter-on-quarter results but overall, we were satisfied with our financial and operational results in the third quarter and for the first 9 months of 2019 as we see the positive margin expansions with the success of Yamal LNG.

The main story in the third quarter was the overall decline in global commodity prices. We managed to increase our natural gas and liquid sales volumes by 7.1% and 1.7%, respectively, while weaker prices offset our results. Our oil and gas revenues totaled RUB 187 billion, or 14% lower than in the third quarter 2018, with natural gas representing 40% -- 46% excuse me, of our total oil and gas revenues and liquids accounting for the remaining 54%. We produced 145 million barrels of oil equivalent in the third quarter or approximately 1.58 million barrels of oil equivalent per day. This represented a daily production increase of 5% year-on-year but a seasonal decline of 4% quarter-on-quarter. We sold 13.7 billion cubic meters of natural gas on the Russian domestic market and slightly more than 3 billion cubic meters in equivalent LNG sales during the reporting period, accounting for a year-on-year increase of 1.1 billion cubic meters or by 7%.

Our combined average natural gas price of RUB 5,257 per mcm decreased year-on-year or about 10%. This reflected the higher mix of LNG sales in our gas portfolio, which had a significant decline in spot LNG prices during the quarter. As a result, our natural gas netbacks, domestically and internationally, decreased year-on-year and quarter-on-quarter by 12% and 4%, respectively.

Our international LNG sales revenues decreased year-on-year by RUB 6 billion, or by 16.5%, despite a significant increase in volumes sold by 1.2 billion cubic meters. Our volume growth was offset by a 50% decrease in the average realized prices in Russian ruble terms. Our quarter-on-quarter LNG revenues declined by RUB 7.7 billion, which resulted from a combination of volume and price decreases and an increase in our average transport costs. Domestically, we had a slight decrease in year-on-year volumes sold, but an average increase of 5% in our realized prices. Domestic gas revenues increased by 4% year-on-year but declined seasonally 7% quarter-on-quarter.

In the respective reporting periods, LNG sales on international markets represented 18% of our total natural gas volumes sold and 34% of our natural gas revenues. Our average netback was 3.7x higher for LNG volumes sold internationally than domestic -- than netbacks received on the domestic market, as compared to the prior year and was relatively consistent quarter-on-quarter. Even with weak spot prices, LNG volumes sold internationally contributed significantly to our revenues and netbacks for natural gas. This demonstrates the importance of expanding our LNG platform despite increased volatility in pricing.

We sold 4 million tons of liquids in the reporting period, representing a year-on-year increase of 1.7% but a quarter-on-quarter decrease of 3.1%. We exported 58% of our total liquid volumes, or 2.3 million tons, which was the equivalent in percentage terms to the liquid volumes exported year-on-year and quarter-on-quarter. Our average commodity prices were lower for our product range due to the weak underlying contract prices relative to the prior year period and quarter-on-quarter. Correspondingly, liquid revenues decreased year-on-year and quarter-on-quarter by 21% and 14%, respectively.

Our operating expenses during the reporting period were consistent with our expectations, with overall costs declining by more than 10% year-on-year and quarter-on-quarter. Purchases declined both periods, reflecting the lower commodity prices paid for our natural gas and liquids to joint ventures and third parties. Most of the remaining operating expenses, including G&A, were consistent with our expectations for the particular reporting period.

We generated RUB 17.8 billion in positive free cash flows during the current reporting period, despite the fact that we increased our cash used for capital expenditures by 47%. Our positive free cash flows for the 9-month period totaled RUB 117 billion. We spent RUB 36.5 billion in cash on our capital program, representing an increase of RUB 11.7 billion, or 47%, over the prior year period. The increase year-on-year in capital expenditures related to 2 main projects: the LNG construction yard in Murmansk and the North-Russkoye license area. These main projects accounted for RUB 20 billion, or 57%, of our total capital expenditures in the current reporting period. We allocated the remaining capital spend over a range of development projects across our portfolio.

At the end of the 9 months 2019, our capital expense totaled approximately RUB 123 billion, inclusive of RUB 115 billion for exploration development projects; RUB 4 billion on acquisition of mineral license; and RUB 4 billion on the right-of-use assets, namely vessel charters. Our capital program for 2019 was up -- was revised upward last quarter to approximately RUB 200 billion based on new work activities at the old LNG project. We will realize all of our investment projects as planned. However, there will be some seasonal shifts in spending, so it's most likely that we will have some carryover expenses in 2020.

Our normalized EBITDA totaled RUB 105 billion for the third quarter 2019. This was lower than the prior year and the second quarter, mainly due to the significant decline in the commodity prices as already discussed. Our operating cash flows exceeded our cash used to finance capital expenditures by 1.5x, despite the fact that we increased our cash spend on capital expenditures year-on-year by the 47%. We generate sufficient operating cash flows to fund our capital programs, service any debt payments or liabilities as they become due and disperse semiannual dividends to shareholders.

Our balance sheet remained very strong during the 9 months of 2019. We again improved all of our credit metrics during the period and demonstrated, without question, an exceptional strong balance sheet to support our international and domestic credit ratings. Our net debt-to-EBITDA stood at 0.05x, down from 0.4x at year-end 2018.

We concluded another good quarter of operational and financial results in a period of weak natural gas prices in key consumer markets. The decrease in global gas prices, including spot LNG, represented the biggest news stories for the industry as concerns focused on the economic viability of future LNG projects and delays in FID decisions. We expect that the lower LNG prices will persist in the near term, although the future markets indicate a seasonal recovery in the upcoming winter months. Global gas prices will remain the central topic in many of the ongoing industry discussions, but this present situation is not realistically sustainable if the industry plans to commission new projects and bring on-stream new gas supplies during the next LNG cycle. We already see delays and/or potential cancellations in projected LNG projects. Our low-cost position clearly demonstrated that we remain profitable despite the decline in the underlying commodity prices.

Yamal LNG delivered above-market expectations as we most likely will produce around 18 million tons of LNG in 2019, or about 1.5 million tons above the stated capacity. It is evident that the facility can produce even higher outputs than the 18 million tons per annum, but we must factor ongoing plant maintenance. We averaged around 110% of the plant's capacity, and as I said, this compares to the utilization rate of LNG plants in 2019 of around 85%. Yamal LNG is exceptional in this regard.

We have dispatched 304 tankers, representing more than 22 million tons since the commencement of LNG production in December 27, with our gas molecules consumed in more than 26 countries. We have concluded the LNG target shareholder structure and reported the final transaction in the third quarter results. We are now discussing the financing structure and have begun construction and fabrication works. We continue working on optimizing our logistical model and will soon conclude eastbound shipments this season via the Northern Sea Route. We have made good progress on our potential partner discussions regarding the Murmansk and Kamchatka transshipment facilities, and we will use ship-to-ship transfers this upcoming season to support our marketing efforts and reduce transport costs. NOVATEK remains highly competitive in the Asian, Latin American and European markets.

We understand that the present volatility concerns many investors. It is equally frustrating for us as an operator of these large-scale energy projects, but we understand that LNG prices will remain volatile throughout the lifecycle of our projects. This same volatility also holds true for benchmark crude oil prices and their underlying refined products. Commodity prices, by their nature, are volatile and cyclical. This represents the reality of our business.

The most important aspect we highlight with investors and the area where we can exert influence is our cost structure. We have built an LNG platform, both domestically and internationally, that is one of the most cost-competitive in the industry. The fact is crucial, as price volatility remain a part of our business and being a low-cost supplier means we can (technical difficulty) cash flows, profitability and high project rates of return. A high-quality, long-life resource base, combined with a low operating model represents our biggest competitive advantage vis-à-vis our industry competitors.

LNG consumption has historically doubled every decade, and we believe this positive trend will remain in place for the near future. When we went public in 2005, there were 15 countries importing LNG. In 2018, there were 41 countries importing LNG and recent market forecast predicted this number will reach 57 by 2030. We have an enormous opportunity to capture market share and emerge as one of the leading suppliers of global LNG. Our resource base supports this assertion, and the scalability of our LNG model is highly attractive to potential industry partners. We want to be at the forefront of the next wave of global LNG projects.

Climate change is also important. It is the defining topic of this generation, and we take this issue very seriously at the company. We recently issued our twelfth sustainability report and embedded ESG goals as an integral element of our corporate strategy. We believe that natural gas is an important part of the climate change solution. We consider our long-term goal of increasing LNG production to 57 million to 70 million tons per annum by 2030 is fully consistent with the Paris Climate Arrangement, and it allows us to deliver affordable, secure and clean-burning natural gas for many decades ahead. Replacing coal with natural gas will be part of the solution to reduce greenhouse gas emissions. We will do our part and positively contribute to this goal.

The first 9 months of 2019 have been exciting for us as we made tremendous strides in our transition to the global gas player. We are on schedule to launch the North-Russkoye field by the end of the year. We will continue our exploration activities to expand our resource base. We will commission Train #4 at Yamal LNG using our proprietary, patented Arctic Cascade liquefaction technology, and we have begun constructing the first GBS unit at Arctic LNG 2.

These are exciting times for the company. We have a tremendous future ahead of us at NOVATEK, with our high-quality portfolio of projects. We would like to thank everyone for attending tonight's conference call and for your continued support of NOVATEK. Thank you.

We now open the session to questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question here from Karen Kostanian with Bank of America.

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Karen Kostanian, BofA Merrill Lynch, Research Division - Head of EEMEA Energy Research & Head of the Russian Research Department [2]

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Yes. And of course, congratulations on the decision on settling the issue with COFAC. We were worried about that. Since this issue is settled now, I just have 2 questions for you. First one, when do you anticipate that your dividend policy may change and when you anticipate you're going to be informing the market about that? And also, when do you think that the amount can start paying dividends as well?

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Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [3]

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We will pass the final shipment and marketing test when we have all of the 15 ice-class tankers in our possession, which we expect before the end of this year. Then we will work on removing the non-financial guarantees. After withdrawal of these non-financial guarantees, we will reconsider the level of our dividend payments. The decision on increasing the payout ratio will probably be made in the second quarter of 2020.

As for Yamal dividends, as you see from the financial results, we are already receiving the repayment of cash for the loan payments. And so it looks like, given the cash flow estimates from Yamal LNG, it looks like we should start receiving the payments of dividends from about 2021.

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Operator [4]

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And we'll take our next question here from Alex Comer of JPMorgan.

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Alex Robert John Comer, JP Morgan Chase & Co, Research Division - Research Analyst [5]

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Congratulations on a good quarter. Just looking at it, it looks like your JVs did quite well in the quarter, relatively speaking. Obviously, a lot of that is going to be down to Yamal. I'm just wondering, do you guys know how much in terms of volumes was still on contract in the quarter? And how much -- sorry, how much was on spot? And how much was on contract? And how will that progress in Q4? And maybe can you give us an indication of what slope those contracts are like to average?

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Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [6]

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Alex, I mean, on the last part of your question, we talked many times before that we do not disclose the commercial aspects of our trading business, so I won't be able to answer that question. But on the other questions, let me just give you a sense of what we're doing. As everybody knows is that we ramped up these projects earlier as we had the early volumes. The early volumes were being sold on a spot basis. Train #1 is essentially now on contract basis. Train #2 is on contract basis. And what we can see for the 9 months of this particular year, if we look at the total 9 months of the year and we look at the volumes sold, it represented about 38% of the output was sold under long-term contracts. But if we look at specifically the third quarter, it's about 45%. So you can see the transition has already started to move towards more of the long-term contracts. As we go into Train #3, we've always advised the market that, that early volume should come off about April of next year. So we still have early volumes sold.

So in terms of looking at the whole output of Yamal, it's just important to understand that when we initially talked, we said about 96% would be long-term and about 4% would be spots. And there's going to be -- even when we go into a long -- medium to long-term contract, we still have an unlimited spot. Train #4 comes on-stream sometime in the first quarter of next year as we start commissioning work. That will be all spot as well as any volume that sold over and above the nameplate capacity will also be spot volumes. So I just wanted to -- just so we clarify that, there is this combination.

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Alex Robert John Comer, JP Morgan Chase & Co, Research Division - Research Analyst [7]

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Okay. So maybe just between -- in terms of quarter 4, is there an ongoing lift up in terms of percentage. If you're at 45% in Q3, what should we expect for Q4? Was it just flat until the...

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Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [8]

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I don't have that number in front of me, but the answer should be yes. You should see it continually move towards more long term.

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Operator [9]

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And we'll take our next question from Olga Danilenko with Prosperity.

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Olga Danilenko, Prosperity Capital Management Ltd - Director of Oil and Gas [10]

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I have a couple of follow-up questions. The first one on the current macro environment and the quite low gas prices. How do you -- since you just mentioned that you made the FID on Arctic 2 LNG, how do you plan to get the marketing strategy for the gas in this environment? Do you plan to make any long-term arrangements now? Or will you wait? And on your existing Yamal LNG contracts, do you see any attempts by the customers to renegotiate the existing long-term contracts in terms of pricing? Or -- and if you're aware if any attempts at renegotiations is present in the market, maybe not for you, but for some other players?

And my second question goes to, again, to this environment, you just mentioned you have more...

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Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [11]

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(multiple speakers) [Olga, maybe] (inaudible) I can just break these questions because you're asking me multiple parts in one question. So why don't we address the first part of your question, and then we can come back and ask another one, okay please? Because I can't write down -- I won't be able to write down all of your questions and answer it intelligently.

So let me -- let's start with the first part. How do we market the gas? I mean, as I mentioned in the text, each partner will take off a portion, respective to their ownership interest. It will be FOB Kamchatka or FOB Murmansk, right? So each party is going to be responsible for his own marketing of its natural gas. Right? We, at NOVATEK, since we're taking 60%, we already have started the process of discussing potential offtakes on, what I would say, long-term contracts now with some parties, and we've already preannounced some of these earlier. So I don't want to repeat those again. But we have talked about this in the past about some of our marketing activities.

We look at it, in this situation, I guess, I would say that we look at -- initially, we thought we'd be about 50% spot, 50% long-term. And -- so that means 6 spots if long term. But I think we also now are looking at how do we bring gas into projects further downstream. So I don't have an index for you, but we're working on between what we would plan to sell spot, what we would sell long-term and potentially what we would bring into further downstream-type integrated projects. So I think it's a little premature to go into more depth in that at this particular point.

The second part of your question, you were asking me about is any renegotiations coming on with Yamal LNG, et cetera, and the answer is no. Is it affecting some of the market players? It had. I don't think we're seeing much renegotiations, excuse me, as we speak today. But about a year -- 18 months ago, we saw some players in the market try to renegotiate some of the particular contracts, but I don't think we've seen any recently.

Okay. Now you can [resume] with your second question.

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Olga Danilenko, Prosperity Capital Management Ltd - Director of Oil and Gas [12]

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I appreciate it. My second question is can you, in this environment, get any additional discounts on equipment for Arctic 2 LNG? So I would assume that some projects may be delayed or even canceled, too.

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Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [13]

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I mean, like I said, we've already executed over 80% of the contracts. So there's a possibility. I mean we will not rule that possibility out to say, but definitively, we can't give you an exact answer today. But your logic is proper in thinking that projects that are being canceled, there might be some spare capacity and room to negotiate further. And if there is one, just rest assured, we will do that.

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Operator [14]

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And we'll take our next question here from Patrick Sykes with ICIS.

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Patrick Sykes, ICIS - Senior Energy Market Reporter [15]

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I had quick question on the transshipments. You mentioned for this winter, does that mean they will continue as before at [Heinsberg], and therefore, the previous contracts for that has been extended?

And secondly, you mentioned production above nameplate capacity on the trains at Yamal but also maintenance. Has there been any maintenance on Train 2 or 3 since start-up?

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Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [16]

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Okay. Patrick, first of all, we generally don't take questions in this particular conference calls from the past. But since I did, I mean, I will answer your questions. So in terms of your ship-to-ship transshipments, I will not say it's all in Murmansk -- or in Norway, excuse me. We basically say we will use -- we will consider the options of using ship-to-ship transfers in both Norway and Murmansk, and we haven't finalized that process yet. I assume what you're alluding to in your question is that the agreement had certain number of transshipments that were scheduled, and we did not -- I think it was like 100 -- roughly about 160, and we only completed about 123. So there is scope to extend that particular contract. We are considering both options as far as what I can say right now.

And on your second part of your question, it's just -- it's hard to give you a definitive answer at this particular point in time. So I think I would rather not answer the second part of your question at this time. Okay?

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Operator [17]

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And we'll take our next question here from Alexander Burgansky with Renaissance Capital.

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Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [18]

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I have two questions, please. So one, if you could possibly provide any outlook on production for 2020 for the company as a whole? And also, if you could perhaps highlight your expectations for the North-Russkoye field for 2020 and how the ramp-up is planned?

And secondly, if you could possibly share your expectations for the CapEx guidance for the next year? And perhaps separately, but it's not included in the CapEx guidance, your views on the overall amount of loans that you will be providing to your associated companies next year?

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Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [19]

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Okay. Thanks for the questions, but I think it's premature at this conference call. We generally provide the guidance after we finish the business planning process. And the business planning process requires that we go through a management Board and a Board of Director approval before we make any announcements in terms of production outlooks as well as CapEx. So I think it's a little early right now to do that, and we generally do that either we'll make some statements towards the end of the year after the Board approves the plan, and we generally announce that sometime in the first quarter. But I would refrain from answering any of the forecast for 2020 at this time.

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Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [20]

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Okay. I understand. Could you possibly talk about your expectations for the North-Russkoye field for the next year?

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Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [21]

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On the -- I said we're starting production. And we -- I think we said previously that the field is expected to be launched and then ramped up over the next 3, 4 years. The expectations, I don't have the exact launch date, because if you remember, North-Russkoye, a cluster contains 4 fields. And I believe the one that will be launched in the near-term will be the North-Russkoye field and the East-Tazovskoye field. Okay. And then I don't know exactly when the launch dates of the Kharbeyskoye field and Dorogovskoye field, right? Yes. So I would just hold back on that, and we'll address that after the field has launched this year. We'll come back in the first quarter and provide you some more guidance on the development plan. Okay?

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Operator [22]

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And we'll take our next question here from Ildar Khaziev with HSBC.

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Ildar Khaziev, HSBC, Research Division - Analyst [23]

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This is Ildar Khaziev from HSBC. Mark, I have a question about the number of MOUs, which you've signed with partners, possible partners in India and Japan, that's investing -- that did investments in the gas market and gas generation and bunkering. I was just curious how significant do you think these investments and demands could become? And whether you sort of target any particular coverage of your offtake volumes for Arctic LNG 2? Or should we think differently about this? So that's my first question.

And then related one is about LNG bunkering. I know it's a tiny portion of lower demand business for you. I was just curious what -- if you can share any observations of the market in the Baltics after you launched the first terminal, if that market is growing at all and what you expect?

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Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [24]

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On your first part of the question, I mean, there's a series of the little projects that have been discussed. MOUs have been signed. Like, for example, PETRONET, recently, and -- discussions with them are essentially small-scale LNG operations inside of India. We talked about marketing arrangements with Sinopec, et cetera in China. We have -- we're looking at terminal facilities, potentially in Japan. So there's a whole series of these sort of -- part of like when we saw the integrated projects that we're looking at. But again, it's a little too premature. I mean we have -- when the MOU turns into concrete projects that we're going to actually do, we'll make that formal announcement. But right now, there's still -- some of these are still in the early stage of the discussion. So I really don't have anything concrete to tell you tonight on those other projects. They're there. A lot of those projects are there to sort of further our -- push on LNG as we move downstream a little bit. But I think, it's like I said, it's a little premature to give you specifics on the projects that we announced.

On the second part of your question, the Cryogas-Vysotsk projects, in 2020, we start the IMO 2020 rules. And we see that there's -- it's pretty -- it's going to take a while to build up the marketing element of this as vessels transition from a diesel or fuel oil to LNG or a combination thereof, depending on what the vessels are actually going to be using. But you can see from the build-outs, there's more and more ships are converting over to natural gas as the main primary fuel source. But in the Baltics right now, I would say that it's going to take a little while to build up this business. And that's the reason why we basically have withheld the upgrade to the second phase of the Cryogas project until we get a better understanding of what the full market demand is. I mean we're selling all our volumes. That's without question. But we need to make sure that the market keeps growing as we forecasted or as the industry forecasted before we make the investments to invest further into the Cryogas project.

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Operator [25]

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And at this time, we do not have any other questions. (Operator Instructions)

And we have no other questions.

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Mark Anthony Gyetvay, PAO NOVATEK - Deputy Chairman of the Management Board & CFO [26]

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Okay. There's no other questions. Okay. So no other questions. I would just like to end tonight's call on a personal note. Many of you have had the pleasure of working with Oleg Maximov over the years in his role as an oil and gas analyst for Troika Dialog, and subsequently, with Sberbank. Oleg was an all-star analyst in Russia and one of the best oil and gas analysts globally. He has followed NOVATEK's story from the pre-IPO through recently at his role investing in natural resource companies with the Oppenheimer Funds in New York.

Oleg was a true professional in every sense of the word. And his research work was insightful, informative and impactful. Everyone I have met over the years from the investment community referenced his research at NOVATEK, and he was a great supporter of our business operations and our future LNG platform. He truly understood the intrinsic value of our business, and [I have note] and he frequently discussed his views of NOVATEK with many of the analysts on the call tonight. Oleg and I communicated almost daily for more than 8 years. So I considered him a close friend as well as a trusted professional colleague to discuss and debate global gas topics. Oleg unexpectedly passed away a few days before we made the FID decision on Arctic LNG 2. We talked about this event excessively and what it meant for NOVATEK, but I was only able to confirm this important event when I gave a eulogy at his funeral in New York. So I would like to dedicate tonight's conference call in his honor. Thank you very much.

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Operator [27]

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And this concludes today's call. Thank you for your participation, you may now disconnect.