OREANDA-NEWS. The announced Yamal LNG project finance deal with major Chinese banks clears the last major hurdle for the project and is credit-positive for Yamal LNG's shareholders, including OAO Novatek (BBB-/Negative) and Total SA (AA-/Negative), Fitch Rating says. The long-awaited funding has reduced the likelihood of significant project delays, and we believe that further capital injections from the partners are now much less likely to be needed to support the project.

AO Yamal LNG, which will operate a16.5 million tons per annum (mtpa) LNG project in the Russian Arctic, signed two euro- and renminbi-denominated 15-year credit lines equivalent to around USD12.1bn with the Export-Import Bank of China (Exim, A+/Stable) and China Development Bank Corporation (CDB, A+/Stable) on 29 April 2016. Together with more than USD12bn already invested by the partners, and the previously announced deals, including funds borrowed from the Russian state-affiliated banks (USD4.1bn) and the Russian Welfare Fund (USD2.4bn), we expect the lines to be more than enough to cover the project's USD27bn capex needs. Novatek, which owns a 51% stake in Yamal LNG, expects the first train of the project to come on-line in 2H17. Other project partners are Total SA (20%), China National Petroleum Corporation (CNPC; A+/Stable; 20%), and China's Silk Road Fund (9.9%).

The USD12.1bn deal has cemented the status of China as a major lender to Russian energy companies after their funding options were significantly reduced since mid-2014 on the back of western sanctions and political tensions between Russia and the west. Over the last two years, the Chinese banks granted Russia's PJSC Gazprom (BBB-/Negative) two loans for a total amount of around USD3.7bn. But the clear leader is Rosneft Oil Company, which attracted tens of billion dollars in long-term oil supply prepayments from CNPC.

At the same time, the Yamal LNG funding took longer than originally assumed to finalise, underlining our view that the Chinese may be tough negotiators and are therefore unlikely to fully replace western investors over the long term. They also tend to lend to projects where Chinese companies have an interest, a condition some potential borrowers may find difficult to satisfy.

Novatek and other partners are providing completion guarantees against the USD12.1bn credit lines and other recently raised project finance funding. We do not add these guarantees to the financial leverage of Novatek and Total since we assess Yamal LNG's completion risk as moderate and do not expect any material cash outflows associated with the guaranteed debt. This assessment is supported by the project's progress (with the first train being 65% complete), fairly low geological risks and sound economics due to moderate production costs. The project also benefits from state support, as Russia is providing assistance to the infrastructure build, including the Sabetta sea port, and offering tax rebates.

Yamal LNG should transform Novatek's business profile by significantly increasing the company's scale of operations, and by providing diversification into LNG production. The project is also an important part of Total's upstream growth strategy, and should help the company achieve its aim of boosting upstream production to 2.7 million barrels per day (including equity affiliates) by 2019 from 2.3 million in 2015. Being Russia's second LNG project, Yamal LNG is also set to take Russia to the league of largest global LNG producers, increasing the country's capacity to 26.5mtpa from the current 10mtpa, or 11% of 2015 global LNG production.