Novatek PAO

LSE:NVTK

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the NOVATEK First Quarter 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mark Gyetvay. Please go ahead.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Thank you very much. Ladies and gentlemen, shareholders and colleagues, good evening, and welcome to our first quarter 2021 earnings conference call. We'd like to thank everyone for participating in tonight's call. We know there's a lot of other activity going on at the same time. Thank you very much for participating. But before we begin the specific conference call details, I would like to refer to our disclaimer statement, as is our normal practice. During the conference call, we may make reference 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 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, 2020, as well as any of our earnings press releases and documents throughout the past year for more descriptions of the risks that may influence our results. The group management remains [ vigilant ], and we will take necessary precautions to protect the safety and well-being of our employees, our contractors and their families against the spread of COVID-19 and minimize any disruptions to our operations. We always place the health, well-being and safety of our employees above corporate profits. This represents our commitment to our valued employees. The first quarter 2021 was a period of strengthening hydrocarbon commodity prices and a return back to normal winter weather. We discussed over the past 2 years that one of the fundamental problems impacting the natural gas industry was the high inventory storage due to unseasonably warm winter weather. We finally had a very cold winter season in the Northern Hemisphere and correspondingly, there were rapid withdrawals of gas from underground storage. At the end of the reporting period, underground European gas storage was approximately 35 billion cubic meters or at 31% full. But with the recent draws due to colder weather, the underground storage leverage dipped below 30%. For comparison purposes, at the same period in April 2020, the volume of natural gas and underground storage was 62 billion cubic meters or roughly 55% full according to data from Gas Infrastructure Europe or GIE. This essentially means that we need at least 20 billion cubic meters in natural gas over the upcoming reinjection season to replenish gas storage levels, which theoretically should support gas hub prices throughout the summer season, from April to September inclusive, assuming injection is done evenly throughout this period. Besides replenishing underground gas storage, natural gas prices across Europe have been supported by a whole range of factors, including but not limited to, prolonged cold weather, the high cost of carbon emissions, thus, stimulating the shift from coal to natural gas as well as various force majeure events like the recent blockage of the Suez Canal, unforeseen maintenance work and the continued shutdown of LNG production from Norway. These factors should technically reduce the seasonality effect but we will need to gauge the impact as the year progresses, especially as U.S. LNG exports ramp up and some facilities will undergo scheduled maintenance works. Overall, total gas demand was revised upward for full year 2020 as colder-than-expected weather in the Northern Hemisphere in December and subsequent updates from emerging markets showed that full year gas demand declined only by 75 billion cubic meters or by 1.9% year-on-year from the previous announced lower demand, representing a 2.5% drop in 2020. Most of this revised update is attributable to coal to natural gas fuel switching in power generation. The LNG market grew slightly in 2020 despite the pandemic and lockdowns, with 43 importing countries and 20 exporting countries. Approximately 70% of the LNG demand growth came from Asian importers, an important geographical region which will continue to drive gas demand growth for the foreseeable future and a region where we will focus our marketing efforts. Supply side adjustments were made in the second and third quarters of 2020, with approximately 165 cargo cancellations from the United States to help balance the market. These cargo cancellations most likely won't repeat itself to the same degree in 2021 but we need to see the demand pull from the summer cooling season. The progressive recovery during the second half of 2020 continued in the first quarter of 2021, and we believe this trend will continue to support energy demand in the prevailing market [indiscernible]. Overall, in the first quarter of 2021, natural gas demand in both European and Asian markets increased during the first quarter as compared to the prior year. Based on preliminary data, overall gas demand in China and Europe, including Turkey, increased by 13% and 7%, respectively. LNG demand remained robust, led by strong demand in the Asia Pacific markets as cargoes were shifted from Europe to Asia to capitalize on a higher price arbitrage between the Atlantic and Pacific basins due to the extreme cold in Northeast Asia. The recovery in China from the pandemic has occurred much faster than expected, with LNG imports to China increasing by 33% or roughly 5 million tons to just slightly less than 20 million tons in the first quarter. We already discussed on our annual conference call that the severe cold weather in Northeast China led to the import of 8.8 million tons in January as JKM stock prices spiked to historical highs of $32.05 per MMBtu, but subsequently retreated to more normalized gas price levels around $7 per MMBtu throughout the quarter. Churn imported 5.2 million tons and 5.8 million tons in February and March, respectively. China LNG imports should remain stable throughout 2021, and we anticipate a slight growth by year-end as compared to the record volumes of LNG imported in 2020. LNG imports into developed Asian markets of Japan, South Korea and Taiwan aggregated 42.4 million tons, representing an increase of just under 9% as compared to the same period in 2020. This increase was largely driven by colder temperatures in January and February as well as issues with nuclear power, limits on coal-fired power generation and low inventory balances [ over the period ] . There were slight declines in the South and Southeast Asian markets mainly due to the record high LNG prices. Overall, the Asia Pacific region imported 75.7 million tons or 9.8% and 18% higher than 2020 and 2019, respectively. Total glass consumption is forecasted to increase by roughly 5% in 2021, largely due to the rebound in economic activities in the pandemic and a further build-out of gas infrastructure in the Asian region. China is again leading the growth in natural gas demand, followed by India, but it depends on the recent COVID-19 spikes and other emerging Asian markets, but potential declines in gas consumption in Japan is expected to be offset by growth in other gas importers. Most likely, China will overtake Japan as the largest importer of LNG within the next couple of years. In the Atlantic Basin, Europe remains the most liquid natural gas market that serves to balance supply and demand and is the main consuming market for both LNG and pipeline gas. Natural gas demand increased by more than 5% during the 2020-2021 heating season, driven by colder temperatures and declines in both nuclear power output and then power generation. The first quarter was an unusual [indiscernible] in the EU market as LNG demand declined by almost 28% as compared to the prior year period, with overall LNG imports aggregating 20 million tons. Correspondingly, pipeline gas to Europe increased by 22% and amounted to 57 billion cubic meters, mainly due to an increase in Russian pipeline gas in the region as LNG supplies were diverted to the Asian markets. Moreover, as noted earlier, gas withdrawn from underground storage was also used to meet seasonal demand. Some LNG sellers elected to substitute pipeline gas instead of LNG to the EU customers as allowed under the contracts and instead shipped these LNG cargoes to the Asian market to capture the premium Pacific Basin margins. The diversion of LNG supply from the EU was roughly consistent with the growth in LNG imports to Asia and were mainly affected by the price premiums to the region. LNG prices have since reverted back to normal trading ranges and more cargoes are now headed to Europe, especially from the U.S., as arbitrage spreads have narrowed. With strong EU natural gas growth in the first quarter of 2021 up 9% year-on-year, analysts are now forecasting an increase in European gas demand by approximately 3% in 2021, led by higher carbon prices to facilitate a coal-to-gas switch in power generation, robust storage growth, as previously mentioned, and expected growth in industrial demand amid improving economic recovery. In fact, the carbon pricing has increased significantly since the beginning of the year and is very supportive of the coal-to-gas switching in the region. The forecasted growth will obviously depend on avoiding the reoccurrence of mass lockdowns in Europe with the new variants of the coronavirus. As for upcoming price forecast, we believe there are sufficient factors in the market to support reasonable price formation in both the European and Asian markets through the second quarter of 2021 as well as reasonable price expectations during the summer months as natural gas is reinjected into underground storage. We reiterate again that a reasonable price range between $6 to $9 per MMBtu will stimulate demand in all market regions and [indiscernible] from coal to natural gas. Yamal LNG dispatched 66 cargoes in the first quarter 2021, of which 52 cargoes, or 79%, were sold under long-term contracts and the remaining 14 cargoes, or 21%, under spot transactions. In the fourth quarter of 2020, we dispatched 66 cargoes, of which 55 cargoes, or 84%, were sold under long-term contracts and 11 cargoes, or 16%, under spot deals. A total of 4.85 million tons were dispatched in the first quarter, which is reasonably consistent with the volumes that were dispatched in quarter-on-quarter. During the reporting period, Yamal produced almost 5 million tons of LNG and roughly 270,000 tons of unstable gas condensate. Since inception, Yamal LNG has dispatched 690 cargoes for a total volume of 50.4 million tons, along with 102 shipments of stable gas condensate or 3.2 million tons. We reached the milestone of 50 million tons on the 26th of March when a cargo of LNG was loaded on the Arc7 ice-class tanker, Nikolay Zubov, and the shipment represented the 685th cargo dispatched since inception. The recent Suez Canal debacle did not impact our LNG marketing [ efforts ] for either long term or spot sales. Our tankers that experienced minor delays due to the blockage by the container ship, Ever Given, had ample time gaps to meet contractual delivery obligations. In addition, the blockage had minimal short-term impacts to both spot price and shipping rates despite the potential severity of the situation. More importantly, the Suez Canal blockage, and to another extent, the [indiscernible] LNG cargo passage through to the Panama Canal, highlights the potential navigational chokepoints and the need to ensure more options to deliver hydrocarbons via tankers and/or pipelines for security of supplies. We believe that this event, although short duration, proves our long-term strategy to open up the year-round navigational through the Northern Sea Route is the right logistical strategy as well as representing a lower cost transport corridor to deliveries of our current and future LNG to the important Asian consuming markets. We will again use the Northern Sea Route to maximize LNG shipments to Asia. And as of March, we have already scheduled 25 deliveries with upcoming navigation season, inclusive of 6 cargo redirections, but the opening of this route depends on the intended ice conditions, and this past winter season was very cold in the Arctic region. We also completed 8 ship-to-ship transshipments in the Kildin Strait of the Barents Sea . This process ensures the efficient needs of our ice-class tanker fleet at the most optimized cost to transport LNG westbound. We will continue to utilize the ship-to-ship transfer system for the upcoming transport season. All 15 Arc7 ice-class tankers operated during the reporting period, including 2 Arc7 condensate tankers and 11 conventional tankers, which are used to supplement our fleet of ice-class tankers. The overall progress on Train 4 was slightly more than 96% complete, with over 1,200 personnel still working at the construction site. The main construction activities for the project are essentially completed, but some seasonal work activities were performed in the first quarter that did not impact the commissioning stage. We have now produced several thousand tons of LNG [ under the ] cool-down method, using the main heat exchanger designed to handle commercial volumes, and the full commissioning and start-up of equipment and systems to design those is currently underway. You can theoretically say that the volume already produced during the commissioning phase and sent to storage tanks have been sold, but we are anticipating formal commercial production within the upcoming weeks. Our other LNG facility, Cryogas-Vysotsk, had another strong operating quarter that was a carryover from the strong fourth quarter 2020 despite maintenance work done on Trains 1 and 2 during the quarter. We operated the facility at roughly 100% capacity utilization and produced 162,000 tons, representing a year-on-year increase of 35%. NOVATEK Gas & Power offloaded 17 tanker shipments for 79,000 tons, while NOVATEK Green Energy took 290 cargoes by truck to 5,300 tons. The remainder of the LNG volumes were taken under a third-party off-take agreement. Presently, we have 12 LNG refueling stations in operations, with 9 in Germany and 3 in Poland, and we plan to construct and open another 30 LNG retail stations. Since commencement of retail operations, we have marketed approximately 12,500 tons of LNG through our European retail station. And in the first quarter of 2021, we sold 5,300 tons through a sevenfold increase year-on-year. We also had solid growth in our carbon neutral LNG refueling station in Rostock, Germany, which sold 826 tons in the first quarter, and at this current run rate, the station has the potential to sell almost 3,000 tons on an annualized basis. This compares to the average European LNG refueling station that sells roughly 1,000 [indiscernible] tons per year. As for Arctic LNG 2, the partners have financed approximately 39% of the total planned capital expenditures as or the 31st of March. All work activities at both the GBS construction yard and the Utrenneye field development have been successfully carried out without any delays or disruptions due to COVID-19. We are in the final stages of financing structure for Arctic LNG 2 and plan to secure approximately [ 11,000 billion ] equivalent at terms and conditions more favorable than the financing arranged for Yamal LNG. We are in advanced stages of final negotiations with the consortium of international banks. Project financing will come from Russian banks, from Chinese banks and from Japanese and European banks. The financing terms and conditions will be more favorable than the financing obtained by Yamal and do not require us to procure long-term offtake agreements as marketing from our impending 2 transshipment points in Murmansk and Kamchatka will facilitate and support our LNG marketing efforts. Yesterday, Arctic LNG formally announced that they have concluded the loan negotiations with a consortium of Russian banks for a U.S. equivalent of $3.1 billion. The remainder of the project finance is expected to be finalized in the near term with an international consortium of banks. The overall project is now 39% complete at the end of the first quarter, with progress on the first GBS estimated at 53% complete. We made great progress towards launching the GBS #1 as planned in 2023 and estimate that roughly 80% of the concrete casting or 140,000 cubic meters of concrete has already been poured for GBS #1 at dry dock 1. At [indiscernible], we have poured approximately 85,000 cubic meters of concrete for GBS #2 and estimate that this process is about 49% completed. Overall, about 5,400 construction workers for the GBS contractors are presently on site in Murmansk. The first set of modules for GBS #1 are expected to arrive in Murmansk at this upcoming September 2021, as previously reported, and we now have a target date to receive the first set of modules for GBS #2, which is preliminarily estimated to arrive in Murmansk in May 2022. About 15,000 workers have been mobilized for the module construction works in China. And as of today, we see no problem in meeting our timetables for delivery. Work activities at the Utrenneye field and the Utrenneye terminal are also proceeding according to planned schedules. We are roughly 40% complete with the first phase of infrastructure work at the Utrenneye field, employing approximately 9,500 workers, and we drilled and completed another 6 production wells for a total of 29 production wells to date for the first GBS training. At the Utrenneye terminal, we have completed approximately 72% of the work activity, including the works on administrative areas. More importantly, the construction works on berths #1 and #2 are now completed and are used to receive and offload materials and supply. All dredging works under the state contract were completed as planned for the 2020 season, with dredging down to 15 meters in the water surrounding berths 1 and 2. The start of the next dredging season is planned for August 2021. The construction of the [ ice barrier wall ] is also underway and is also proceeding according to work plans. As for the new airport terminal on the Gydan peninsula, the runway and perimeter fences are 100% complete. The commissioning of this airport equipment is underway, and the facility is preparing for its initial test flight. The airport building and the terminal areas are being finalized, so overall, good progress on the total infrastructure projects for Arctic LNG 2. We spent approximately $4 billion in 2020 and estimate that capital spending requirement for this year will be about 50% more, or roughly $6 billion, as the construction process intensifies to meet the scheduled launch dates. On April 9, 2021, our Ust-Luga Complex reached a milestone of processing 50 million tons of stable gas condensate into refined petroleum products. The complex has been an integral part of our liquids value chain since its launch in June 2013 and a big contributor to product diversification and value-added margins. We recently made the final investment decision to expand the processing capacity from 6 million tons to 9 million tons with the third stage expansion. As a reminder, we have estimated the construction budget of RUB 18 billion, and we plan to complete this expansion by the end of 2023. We are now executing the FEED stage of the work and in the first quarter 2021, passed initial governmental expertise reviews, such as the ecological review and now are getting ready for the technical expertise review. We are also constructing the hydrocracker unit, and this project is expected to be completed by year-end. After the initial commissioning phase, we expect this unit to be operational within the first half of 2022 and accordingly, the new unit will allow us to process lower value fuel oil into higher-margin products. This aim is consistent with our strategy of enhancing margins in our total product line and correspond to the decarbonization trend as outlined in ISO 2020. More ships will convert to using LNG or hydrogen as bunker fuels. We will also use LNG to replace fuel blend oil products for our future bunkering vessels at our transshipment complexes. The use of LNG as bunkering fuel complies with the stricter ISO requirements and lead to cutting CO2 and NOX emission by roughly 27% and 76%, respectively. There are a series of other development activities ongoing on our asset portfolio, but not much has changed since our recent conference call. We increased our production drilling by 8% and completed 35 production wells during the quarter as well as maintained our development activity at the North-Russkiy cluster, particularly the impending launch of the Kharbeyskoye field scheduled in the fourth quarter. We will continue to update on these activities throughout this year. We believe exploration work is necessary to unlock our resource base and develop future projects. All of our exploration activities for 2020 were completed as planned, and we increased both seismic work and exploration drilling. For 2021, our current budget is 50% higher than that planned for 2020 and is consistent with our prior guidance. We plan to drill and test 13 exploration wells and run [indiscernible] 2,600 square kilometers of 3-dimensional seismics on our LNG licensee areas, as well as drill and test 6 exploration wells and run slightly more than 1,400 square kilometers of 3D seismic on fields and license areas for our domestic production. In addition, we will drill 2 offshore exploration wells as part of our exploratory commitment in Montenegro, with Eni as the operator. We will also continue our exploratory works to assess the reservoirs to inject and store CO2 at Yamal LNG, Arctic LNG and future LNG projects in the Gydan and Yamal peninsulas as well as develop the lower horizons, including the Achimov and Jurassic layers at our legacy fields. We concluded the drilling of well # 6407 at the [indiscernible] targeting the Achimov layers, and this well represented the longest well ever drilled one of NOVATEK's fields with a total well length of 5,910 meters, vertical depth of 3,822 meters and the horizontal section of 1,539 meters long. Testing is forthcoming. Moreover, we have conducted preparatory work at Arcticgas' well # 7703, also targeting the Achimov layers with a 20 stage hydrofracking. This represents a record high number of frac stage for us. We will provide details on later conference calls. For 2021, our production guidance for natural gas and liquids is approximately 1% growth for liquids and up to 3% for natural gas over the 2020 levels. We are actively engaged in marketing our future LNG volumes. And as reported on the last conference call, these negotiations are proceeding according to our commercial marketing plans. We have already signed several binding contracts for the sale of LNG from Arctic LNG 2 and will announce these contracts in due course. We are targeting at least 80% of our future LNG sales to the Asian markets. We also announced yesterday that we have concluded the signing of the sales and purchase agreement with all of the project participants with offtakes in proportion to their equity stake on an FOB Murmansk and FOB Kamchatka basis with price formulas linked to international crude and gas benchmarks. The Arctic LNG project is essentially derisked as we previously reported. Our financial and operational results were strong during the first quarter '21, which was consistent with the recovery in hydrocarbon prices as well as a very cold winter weather, supporting natural gas consumption and the withdrawals of gas from underground storage. This strong macro trend continued to sequential quarter-on-quarter improvements in our financial results starting from the weak second quarter 2020 as a result of the onset of the coronavirus pandemic, economic lockdowns, a collapsing hydrocarbon prices and a warmer winter season. We've once again demonstrated the resiliency, stability and cash-generative nature of our core domestic gas business, and we remained profitable throughout the reporting period. Brent crude oil prices increased by 22% year-on-year from an average of $50 per barrel to $61 per barrel, whereas benchmark natural gas prices like the National Balancing Point in the U.K. increased by 116% and the Title Transfer Facility, Netherlands, by 113%, respectively. The average domestic gas tariff increased by 3% in the reporting period, so a very strong recovery in hydrocarbon prices throughout the reporting period. The year-on-year increase in total natural gas revenues by RUB 12 billion, by 12%, were largely driven by increases in both domestic gas sales and international LNG revenues of 13% and 10%, respectively. Our quarter-on-quarter natural gas revenues increased by 4.6% or roughly RUB 4.9 billion, largely due to stronger growth in quarter-to-quarter LNG prices by 43% in Russian ruble terms per mcm, as well as the average 3% increase in the domestic tariff, but slightly offset by lower seasonal demand between the fourth quarter and the current porting period. We sold 21.5 billion cubic meters in the first quarter, of which 19.6 billion cubic meters of natural gas was sold on the Russian domestic market and 1.9 billion cubic meters in equivalent LNG sales during the reporting period. Our combined sales volumes increased by 743 million cubic meters, or by 3.6%, but was offset mainly due to the 24% reduction in spot sales from Yamal LNG as more volumes were sold under long-term contracts. As for our quarter-on-quarter sales, we had a slight seasonal decline in domestic volumes sold but was offset by an increase in LNG volumes sold by 3.6% or 65,000 tons. Our LNG sales on international markets represented 8.7% of our total natural gas volumes sold and accounted for 25% of our natural gas revenues versus 26% and 21% year-on-year and quarter-on-quarter, respectively. In the first quarter 2021, our average LNG netback was more than 4.3x higher for LNG volumes sold internationally than netbacks received on the domestic market and was relatively consistent with the quarter-on-quarter netback ratio based on stronger gas prices and netbacks in the regions where [indiscernible] our LNG volumes. Our local revenue for reporting period totaled RUB 130 billion, representing a significant increase year-on-year of RUB 46 billion, or by 55%, as well as a strong increase quarter-on-quarter by RUB 21 billion, or by 19%. We achieved better prices in the majority of our liquid hydrocarbon products with stronger underlying benchmark prices in both USD and Russian rubble terms. We also had 330,000 tons in transit at period end as compared to 127,000 tons year-on-year and 190 (sic) [ 190,000 ] tons at year-end. These transit volumes will be recognized in the second quarter. Overall, our oil and gas revenues increased consistently with the strong growth in hydrocarbon commodity prices, and to a lesser extent, growth in volumes sold in the reporting period. Our operating expenses increased by RUB 32 billion, or by 22%, mainly due to increases in prices paid for purchases from our joint venture but offset by lower spot volumes purchased from Yamal LNG. Purchases significantly increased by RUB 28 billion, or by 43%, as the downward trend in 2020 has reversed itself over the past 2 quarters with a strong recovery in benchmark prices. Our quarter-on-quarter purchases increased by RUB 21 billion, or by 29%. Our other operating categories were relatively consistent with our expectations for all the reporting periods and represented some seasonal adjustments, salary indexation and bonus accruals. The large reversals in the change in inventory operating expense line item year-on-year and quarter-on-quarter was driven mostly by higher prices for liquid purchase and adjustments to realize profits and, to a lesser extent, volumes. We spent roughly RUB 42 billion in cash on our capital program, representing a marginal increase of less than 1% versus the prior year and a quarter-on-quarter decrease of RUB 21 billion, or by 33%. We invested more cash in the fourth quarter 2020 as commodity prices improved through the second quarter -- through the second half of 2020 of the year. Most of the capital spend was consistent with prior year activities and mainly focused on our LNG projects and the Murmansk LNG construction yard as well as development activities at the North-Russkoye cluster. Our capital expenditure program guidance in 2021 is RUB 200 billion, which is broadly consistent with the announced spend in 2020. As always, this CapEx guidance is subject to revisions, dependent on the macro environment and changes to specific work programs. Our normalized EBITDA totaled RUB 144 billion for the first quarter '21, increasing year-on-year by 43% and quarter-on-quarter by [ 14% ]. The increase on our normalized EBITDA was largely attributable to strong performance from our subsidiaries, mainly from the recovery in liquid sales from a stronger macro environment as well as good contributions from all our joint ventures, particularly Yamal LNG and Arcticgas. We generated positive free cash flows of RUB 32 billion during the reporting period versus positive free cash flows of RUB 18 billion in the comparative period and negative free cash flows of RUB 3 billion in the fourth quarter of 2020. Our balance sheet remained very strong throughout the reporting period despite the fact that we used cash to repay our 10-year 2021 Eurobond at its stated maturity date. Our fundamental credit metrics support our international and domestic credit ranges, and we continue to believe that a sound and conservative financial position is important in volatile times. Both Moody's and S&P confirmed our investment-grade ratings after our recent annual reviews during the reporting quarter. The first quarter was a very good financial and operational quarter for the oil and gas industry, and this should be reflected in the solid financial results during this upcoming reporting season. Underlying commodity prices across the full range of hydrocarbon products [indiscernible] were strong throughout the period as improved economic activities support the fundamental drivers for energy consumption. As for natural gas, despite the short but non-sustainable spike in the GPM spot prices in Asia in January, February, we had a reasonably strong recovery in [ gas oil prices ] as well as significant reduction in underground gas storage in the cold winter season. Moreover, crude oil prices have remained quite strong and provided strong support for pricing for our whole range of liquid products. NOVATEK enjoyed a strong reporting period, and we believe the remainder of 2021 looks positive for our operations with relatively stronger commodity prices throughout the year and continuing economic improvements. Asian demand remained strong in the first quarter of 2021, especially in LNG imports in China by 33%; and Japan, South Korea and Taiwan by 8%, which was offset by a decline in India LNG imports by approximately 11%. The significant moves in recent JKM and TTF prices reflect strong demand fundamentals for natural gas in power and industrial consumption as well as an underperformance in renewables. Moreover, the late cold spell this spring meant more natural gas was withdrawn from underground storage, and this should support gas prices in the upcoming reinjection season. The recent 12-month forward curves for both JKM and TTF looks strong for improved netback margins in 2021 and increased by 17% and 15%, respectively, over the past month as well as resiliency and strength in the benchmark crude oil prices. We expect strong earnings throughout 2021 with higher liquids and gas prices. In March 2021, the Russian government approved Russia's energy strategy to 2035 that envisions produce [indiscernible] to 140 million tons. We would also like to remind everyone that according to a presidential decree signed in October 2020, LNG production in the Arctic region should reach 64 million tons per annum, and the Tambey field are included into the resource base for future LNG production. As customary, we do not comment on market speculations concerning M&A activities. We are performing extensive exploration work on the Yamal and Gydan peninsulas, and we see the opportunity to capture at least 1/2 of the LNG volumes outlined in the LNG strategy to 2035. Our LNG projects are cost competitive in comparison with any of the global LNG projects. And with increased LNG demand, we see the need for more Russian LNG projects which supports our efforts to localize industrial manufacturing and improve the terms and conditions with domestic suppliers. Climate change is a major global issue that requires full international cooperation to address the issue of decarbonizing society. NOVATEK will play a key role in the energy transition to a low-carbon society. We addressed this topic on our annual conference call and talked about climate change and our commitment to decarbonization. We published our environmental and climate goals to 2030, and we believe our targets are reasonable and reflect the low CO2 and greenhouse gas emission intensity already in our operations. But generating cash flows and profits are also important and should not be overlooked. We must deliver sustainable profits to our shareholders and create total shareholder value in a responsible manner. Without profit, we don't have a sustainable business, and we can't distribute the dividends that investors seek. NOVATEK's pathway forward to a decarbonized world is through delivering more clean-burning natural gas via LNG and other low-carbon energy to the emerging Asian economies. We believe natural gas has a major role to play in the future global energy mix despite calls to reduce fossil fuels. The Asia Pacific region will experience rapid economic growth over the next several decades and will consume more fossil fuels, not less, to ensure economic prosperity and improve standards of living for their people. Clean-burning natural gas will fuel this economic growth, not solely renewables. We are also studying the possibility to expand low-carbon energy by producing ammonia and hydrogen with carbon capture and storage technologies. We will also use hydrogen as a fuel mix with natural gas, and we will work with our partners, Baker Hughes and Siemens to achieve this goal. Natural gas will play a leading role in the energy transition towards a low-carbon society for many decades, providing stability and reliability to the electricity power grids as well as ensuring affordable energy for growing populations. There are still about 1 billion people without access to affordable and reliable electricity, and the world is expected to add another 2 billion people, reaching more than 9 billion people by 2050. Equally important, we see an expanding middle class population in Asia, and the majority of these new [indiscernible] want to improve their standard of living, and this improvement will only come on consuming more energy, not less. ESG is an important part of our underlying core business philosophy, and we will continue to expand our sustainability exposure as well as our ongoing engagement with our stakeholders, our employees and the communities in which we operate. We are committed to a high ethical standard to underly our effective corporate government strategy as we expand our operations domestically and internationally. Our shareholders just approved the full year 2020 dividend at last week's AGM. We are committed to increasing our dividend each and every year, if possible and increasing our total shareholder return in a social and ecologically sustainable manner. We have a strong foundation of building a world-class natural gas company over the past 25 years, and our ongoing mission is to build trust with our communities, create long-term value and deliver sustainable cash flow growth for our shareholders. NOVATEK unequivocally supports the global community's aspirational goals of a net 0 emissions and a low-carbon future by 2050 and beyond. We would like to thank everyone again for attending tonight's conference call and your continued support of NOVATEK. We are now ready to open tonight's session to questions and answers. Thank you.

[Operator]

[Operator Instructions] We'll take our first question from Angelina Glazova of JPMorgan.

[Angelina Glazova, Research Analyst]

I just have a follow-up question with regards to the plans to produce ammonia, as you mentioned. Could you clarify whether LNG production and ammonia production in the context of the [ Ust-Luga ] project? Are alternatives an [ initial exclusive option ] or [indiscernible] can consider both options just to understand.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Why do we know we would get asked this question because people have been speculating about those comments for quite some time now. Mr. Mikhelson said recently at the AGM that we will continue forward with Obskiy LNG. What we have done in that regard is spent a significant amount of money today on developing the future resource base at our 2 fields supporting the Obskiy LNG project. These 2 fields are already at advanced stages, and we are looking presently at different opportunities to monetize the resource base, particularly a gas chemistry project at Sabetta to produce new aluminum. And so this is what you're alluding actually. We may internally decide to move forward with this project in 2021 with a potential FID decision in 2022. This will allow us to develop an ammonia hydrogen export-oriented target on the Yamal peninsula to produce low-carbon energy. But as we see today, we are still studying this question. And so I would ask you to just be a little bit more patient, and we will address this question over the next several conference calls as we have a chance to conclude the internal review of this particular [indiscernible].

[Operator]

We will take our next question from Kirill Bakhtin with Gazprombank.

[Kirill Bakhtin, Senior Analyst]

I have a question related to the sale of 10% interest in Arctic transshipment entity. That's the [indiscernible] the company to finance for the construction of LNG terminal?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Well, [ as we noted yesterday ], we made this announcement that we are selling a 10% stake through our partners [indiscernible]. As we point right now, the purchase price has not been announced, and we'll discuss that a little later in the year in agreement with our partners on the disclosure of the purchase price. As we speak today, we've had and we've actually indicated many times in the past that we had very, very strong international interest in our transshipment complexes, particularly as we look at Kamchatka in the Far East. We've had strong interest from Japanese as well as Chinese partners. But dependent on further discussions that we have throughout this year, we will consider options for that particular terminal. And at this particular point in time, as I mentioned, as we go in with the question possibly later of the Tambey field, at this particular point in time, we don't comment on speculation relating to M&A activities. And so I think it's -- that's the wait until we formally announce these particular plans to further sell additional stakes in our transshipment complex. So I think this is another question that will be [ shared ] in due course on future conference calls.

[Operator]

[Operator Instructions] We'll take our next question from Henri Patricot with UBS.

[Henri Jerome Dieudonne Marie Patricot, Associate Director and Equity Research Analyst]

[indiscernible] question for me just on the production guidance for the year [indiscernible] first quarter, I'm guiding to your production over the course of the year. So if you could actually give a sense of some of the moving costs with regards to this year production because its guidance implies some decline from [indiscernible] despite [indiscernible].

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

You're talking about overall guidance for [ overall picture of gas ]?

[Henri Jerome Dieudonne Marie Patricot, Associate Director and Equity Research Analyst]

Overall production [indiscernible].

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Yes, production per year. That's -- and that's -- and as I said, we guided 2021 up 3%, with year-on-year on that [indiscernible]. That's really about all we can say at this juncture. I mean we look at this throughout the year as a normal course of business. And a lot of the ability to determine exactly what the year-on-year increase really depends on the launch dates of the particular fields. I mean, it makes logical sense that if you were to launch a field in first quarter, you're obviously going to produce more through the year, so you have a higher rate of growth. But if you launch a field or wells in December, obviously, its impact to the production growth will be minimal. And so I think it's really a function of when wells get put on stream that we actually can make that determination on a natural basis. But the plan is, for 2020, is a 1% growth in our liquid output and a 3% growth in our gas [ outlook ]. So that's all I can say at this juncture.

[Operator]

We'll take our next question from Ildar Khaziev with HSBC.

[Ildar Khaziev, Analyst]

A lot of my questions have been answered actually. But one maybe. I think you might have [ talked about this ], but in January, you signed an agreement with NLMK and Uniper about some of the decarbonization projects you might work with them. And maybe you could comment a little bit more. I mean, do you think sort of some [indiscernible] which could be made in Russia actually [indiscernible]. Is there something actually you can then deliver something already like in next [indiscernible]? [ Is it fairly possible ]?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Again, it's a question that we are studying right now in terms of working with our partners, Uniper and NLMK. And I think it's, again, a little premature to be able to give you specific details on what exactly these particular projects will entail in terms of reducing carbon emissions at this point. But in any [indiscernible], if you look at our total value chain, our what we call LNG value chain, our liquid valuation, or gas -- domestic gas value chain, and work with our customers as best as we can to determine how we can reduce sort of this carbon footprint because right now, the Russian government is also looking at this issue very closely and just recently announced some of their targets in terms of reducing [indiscernible] greenhouse gas emissions and methane emissions, et cetera. And so obviously, it's an important area for the country itself, in particularly. And I think this is a question that I get over the course of the year. We may not even have sort of tangible information to provide you at time -- even over the course of this year. But this is something that we're working with, with our partners. And I think -- although you're probably going to see other announcements over the course of the year as we further work with our partners to try to best determine how to sort of reduce the emissions from our operations. So I don't have any concrete time line for you, and I don't have any concrete specific projects that I can share with you tonight, but I assure everybody on this call, as has been customary within all our conference calls at NOVATEK, is that we will endeavor to provide as much detail on the upcoming projects as soon as they're given to me and everybody feels comfortable in that we have done enough studies and have done enough work in a particular area to disclose something. Because we don't want to disclose something to you [indiscernible], and then we can't deliver it. I think we just need to -- we need to come up with a plan first, study whether or not that plan is feasible and does it make sense from an investment perspective, does it hit the needs of our customers. And we use these particular projects to create sort of carbon credits, et cetera, for ourselves. And so I just think this is another question, unfortunately, another question that I think is it would only be answered to probably your satisfaction and to other people on the call satisfaction with the passage of time. So I would just wait a little bit more. And as soon as we have updates on projects that we're working with our partners across the full range, we will provide that information to you as, like I said, is customary for our business.

[Operator]

We'll take our next question from Alexander Burgansky with VTB Capital (sic) [ Renaissance Capital ].

[Alexander Burgansky, MD and Head of Oil & Gas Research]

I believe for my question was already answered. I just wanted to ask you to elaborate on your ammonia and hydrogen projects and some specific data on that, I mean some time line figures. But I believe you are not willing to share this information so far.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Yes. Again, like I said, I think it's premature because we are working on something that I think is of strong interest to our investors and actually a strong interest for the industry. And I would say that we're not the only ones under this situation where we need to look at how best we can deliver energy and particularly low carbon energy, and ammonia is of the areas that we're focusing on. I mean, if you look at hydrogen, as an example, because hydrogen, last year, 2020, received an enormous amount of interest from investors, people asking questions, we see information on conferences, in studies, et cetera. But it's kind of one of those commodities that's also very sensitive in terms of -- you have to liquefy it down to, I believe, it's minus 250-plus Celsius. It's very energy intensive. We don't have the [ infrastructure ]. It's very volatile. We don't have the infrastructure. So one of the things that we were considering as part of this kind of sort of adding ammonia to the [indiscernible] is that we believe, while using ammonia, like we can actually transport hydrogen more effectively to the marketplace. And we know already that, for example, the Japanese market is very interested in consumption of ammonia in their marketplace. But it seems like we have to look at the carbon capture [ and storage ] first, the technology first. So there's a series of processes, a series of investments, series of studies that need to be completed that actually encompasses this whole area that we're talking about, low carbon LNG. Like I said, carbon capture and storage, hydrogen-ammonia production, et cetera, whether or not we will increase sort of renewables into our process, i.e., wind or more solar, et cetera, to make some of the inputs greener. And so this is just going to take a little while. So as we go through the process of looking at how best to build and execute this strategy because we also still have to look at things like where exactly will a plant be based. Onshore, offshore plants like on a GBS structure, et cetera, since we're building out the construction lines that we're doing. Because I could tell them, sell too much yourself. And to the new people who are listening on our call tonight, we are looking at this seriously, and we are in discussion with our partners, with contractors, et cetera, as we move forward because it would be better to wait until we have a little bit more information to share with you because I think this year, 2021, will be a year of [ movement ] in terms of decision processes that we will make as we look to update our longer-term strategy, as we promised we would do. And the update on the strategy is to take the climate and ecological goals and [indiscernible] goals [indiscernible] and see if that impacts our business. And in order to do that, we have to now incorporate into the strategic discussions these other types of projects, as I mentioned, carbon capture and storage, reforestation, so which is the nature-based carbon, ammonia, hydrogen, et cetera. So I can say it needs a little bit more time for us to come up with sort of a feasible plan that's been clearly vetted amongst our internal groups that are working. We have a new department that is basically looking at new energy type projects. And they're working diligently as we speak, to look at all these different options that we have on the table today. But they're not the types of projects that we can make a rash decision or jump into something that we don't fully understand yet and that we need to do some studies. But let me make one comment that I think that to provide some kind of relevance to this whole process. What we're talking about is gas chemistry, right? And Russia is very well adopted to gas chemistry. And so we know that we can do this. It's just a function of time and additional work that we need to do to iron out a plan and the economic analysis before we make a formal decision. So again, this is another one of the answers that I just ask everybody to please bear with us, be a little patient, but we are working on this, and we're working on this diligently [indiscernible] because we are in the process of looking at this area in the range of updating our strategy. So please bear with us now, please.

[Operator]

That concludes today's question and session. I would now like to turn the conference back over to today's speakers for any additional or closing remarks. .

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Look, I just like to say again, thank you, everyone for taking the time. And I know that it's a very, very busy day today, and I don't want to hold you up too much, but thank you for your support and we look forward to addressing each and every one of you at these upcoming conferences, et cetera, investor meetings and also at our annual process of doing the quarterly conference calls. So thank you very much, and we look forward to addressing you in the future.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.