Novatek PAO

LSE:NVTK

Earnings Call Transcript 2020-Q3

[Operator]

Good day, and welcome to the NOVATEK Third Quarter 2020 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mark Gyetvay. Please go ahead, sir.

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

Thank you, Molly. Ladies and gentlemen, shareholders and colleagues, good evening, and welcome to our third quarter and 9 months 2020 earnings conference call. We would like to thank everyone for participating in tonight's call.Before we begin with the specific conference call details, I would like to refer you to our disclaimer statement, as is our 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 these implied by such forward-looking statements due to known and unknown risks and uncertainties and reflect our views as of 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 2019, and as well as any of our earnings press releases and documents throughout this past year for more descriptions of the risks that may influence our results. It's been an unprecedented year so far and one for the history books. We are sure that everyone will be happy when we can put this pandemic behind us, and we can finally revert back to some sense of normality. Unfortunately, we are seeing signs of a second wave of the coronavirus spread throughout Europe, the Americas and, to a lesser extent, the Asian Pacific region. How this second wave impacts economic activities is hard to predict at this point. Most governments have stated that they will not revert back to economic lockdowns as experienced earlier this year, but the spread of the virus combined with the traditional flu season will hinder some economic activities and a reversion back to growth. The group's management will continue to remain diligent and take all necessary precautions to protect the safety and well-being of our employees, our contractors and our families against the further spread of COVID-19 and the disruptions to our operations, while maintaining our commitment to deliver clean-burning natural gas to our domestic and international customers. We will place the health, well-being and safety of our employees above profits. First 9 months of 2020 has been an extremely volatile period for the oil and gas industry. It will be a year bifurcated into the 2 distinct parts: the precipitous crash in commodity prices and the steady recovery.During the first half of 2020, we saw significant volatility in both natural gas and crude oil prices with the onset of the global pandemic and the economic lockdowns. We reached the lows in the energy commodity prices in the second quarter but have since seen a steady recovery in benchmark crude oil prices and natural gas prices at key gas hubs in Asia and Europe, and more recently, a recovery in Henry Hub prices in the United States. Although global gas prices remain lower than pre-COVID period, the recovery in the forward curve prices for the upcoming peak winter season reflect an expectation of colder winter as well as an impact from supply disruptions in Australia and Norway, offset by a gradual recovery in U.S. LNG exports after a very active hurricane season in the Gulf of Mexico. We have always remained optimistic throughout this extraordinary year. We have stated many times that low gas prices were not sustainable and were more reflective of the unseasonably warm winter weather over the past 2 winter seasons, higher than normal 5-year average storage volumes, and to a lesser extent, the unprecedented lockdowns and economic stagnation caused by the coronavirus pandemic. Moreover, we saw significant new LNG volumes come to market over the past several years from the completion of global projects. It takes time for the market to absorb these new LNG volumes as supply and demand is never matched perfectly.No new final investment decisions, or FIDs, have been announced so far in 2020. This marks the first time in the past decade or so that no new FIDs have been made to add new liquefaction capacity. It is unlikely that any significant new capacity decisions will be made this year, although we still have 2 months remaining in 2020. The lack of new FIDs will have future implications to the supply side post-2025. Future LNG supplies will depend on successfully and timely completing the projects already under construction or delayed as well as the operational capacity utilization of LNG plants typically between 80% and 90% globally. These factors raise concerns that we will have potential tightening in LNG supplies if demand remains consistent with industry forecasts. This past year also saw the first series of significant cargo cancellations from the United States, when buyers elected to pay the liquidation fee instead of lifting LNG cargoes. It's important to note that this represented a buyer-induced scenario rather than a supply side problem. There have been around 165 cargo cancellations so far in 2020 but it became readily evident that with recovering global gas prices, buyers will revert back to lifting these cargoes for the upcoming winter peak season. Essentially, the U.S. mainly served to balance the global LNG markets, combined with the supply outages, as previously noted.We remain absolutely committed to our portfolio strategy to deliver up to 70 million tons of LNG by 2030. Equally important, our long-term views of LNG demand doubling by 2040 to more than 700-plus million tons per annum are consistent with that of our major industry colleagues and forecasting firms. We do not see any structural changes to the long-term LNG demand forecast from the pandemic. The energy transition, combined with growing economic activities in the Asian Pacific region, will remain the significant contributing factors to future LNG demand growth as well as supporting natural gas as a primary clean burning fossil fuel within the future total energy mix.Global LNG imports were approximately 86 million tons, representing roughly 3.5 million tons or 3.9% lower than in the third quarter of 2019. For the first 9 months of 2020, total LNG imports aggregated 275 million tons or approximately 4% higher than the comparative 2019 period. The Asian Pacific region as a whole imported about 188 million tons or 2.4% higher than the prior 9-month period as there was good import growth in both China and India as they took advantage of the lower spot prices throughout this period. In the third quarter, China imported approximately 17 million tons, representing an increase of 12% as compared to the prior year, and we saw reasonable strength in Chinese LNG imports throughout the 9-month period ended September 30 as the country's economic activities steadily improved since initial lockdowns in early 2020. China imported approximately 49 million tons or roughly 4 million more tons than imported in the 9 months of 2019.So far, the COVID-19 pandemic has had limited impact on natural gas demand in China in 2020 despite the country's severe lockdowns at the start of the outbreak. As we noted on our last conference call, LNG imports declined by 7.2% year-on-year in February. But by mid-March, LNG imports were restored and the volumes of LNG imports began to steadily rise. Overall, China gas demand is forecasted to increase by about 4% year-on-year, with LNG imports expected to reach approximately 65 million tons. In contrast, the EU imported 16.9 million tons of LNG in the third quarter of 2020 represented a decline of 9% year-on-year as the lockdowns on stagnant economic growth in key important markets, as well as historically higher storage volumes relative to 5-year averages, limited the region's flexibility to import more LNG cargoes. We saw a significant number of LNG cargo cancellations during the months of July and August, and to a lesser extent, in September as weak European gas prices, negative margins and high storage volumes kept the market fully supplied. This market situation has recently improved with stronger seasonal gas prices as we enter the upcoming winter season. We have already seen a drastic drop in cargo cancellations for the month of October and November.Europe remains a very liquid market and an important gas region for both pipeline gas and LNG imports. For the first 9 months of 2020, Europe imported slightly more than 67 million tons of LNG, representing a 6.8% growth. We expect full year 2020 LNG imports into Europe will be at least comparable to prior year volumes of about 80 million tons or potentially slightly higher. In view of the above, we believe overall global LNG consumption can potentially reach around 365 million tons in 2020, which is about 2% or 8 million tons higher than in 2019. A positive development considering the global pandemics and the economic impact from the COVID-19 lockdowns. Natural gas prices in key gas hubs rebounded from the lows in the second quarter with gas trading around $2.70 per mmbtu in Europe during the third quarter. Forward curves for the upcoming winter months are above $7 per mmbtu in Asia and around $5 to $5.50 per mmbtu in Europe. As a quick reminder, TTF traded at its lowest point at around $1.18 per mmbtu and is now trading at $5.08 per mmbtu. JKM's lowest price point was $2 per mmbtu and is now trading around $7 per mmbtu. And Henry Hub's lowest price point was $1.48 per mmbtu and is now trading at more than $3 per mmbtu. This represents solid price recoveries at major gas hubs as we enter the upcoming winter peak season. The seasonal rebound in natural gas prices will be limited by the speed of production recovery, meaning more supplies, and the resumption of U.S. LNG exports. The upcoming winter weather will play a key role in price recovery and storage drawdowns. However, we believe the price arbitrage between the Atlantic and Pacific basins will remain tight range-bound from historical norms.Yamal LNG loaded and dispatched 61 cargoes or 4.34 million tons of LNG in the third quarter 2020, of which 39 cargoes or 64% were sold under long-term contracts and the remaining 22 contracts -- the cargo, excuse me, or 36% of the volume dispatched were spot sales. Although we increased our percentage of long-term contracts in the reporting period, we did not achieve our targeted split between long-term contracts and spot sales in both the second and third quarters of 2020. We had some seasonal divergence of long-term offtake contracts for the upcoming winter months. In addition, Yamal LNG's liquefaction trains operated at 107% of its nameplate capacity during the third quarter and roughly 113% above nameplate capacity over the first 9 months of 2020. Yamal LNG also dispatched 6 cargoes of gas condensate totaling 249,000 tons.During 2020, we have seen about a 2% drop in the Brent slope indexation, which means that today LNG spot prices are trading higher than crude indexed contracts. For example, with the average Brent oil indexation at roughly 10.2%, oil indexed contracts are selling lower than spot prices to the Asian Pacific market. Selling more spot cargoes today is actually okay in the current environment. Looking forward, at long-term forecast, the 10% indexation slope is not sustainable and has trended upwards to the 12.5% level due to the lack of new LNG projects coming online in the 2023 to 2026 time period, which corresponds to the launch of our Arctic LNG 2 project.The number of LNG shipments since inception, as at the 30th of September, totaled 558 cargoes of LNG or roughly 41 million tons, along with 91 shipments of stable gas condensate totaling slightly more than 2.7 million tons. Yamal LNG has been a resounding success. We are actively working on optimizing our logistical model to improve our netback margins, reduce transit cost and time and deliver some of the lowest landed LNG to the growing Asian Pacific region. We achieved a couple of significant milestones during the reporting period. Yamal LNG became the fastest LNG project globally to reach its 500th cargo on the 5th of July, and we officially opened up the 2020 navigational season on the Northern Sea Route, 1 month ahead of the tradiotional start of the summer navigation season. We sent 4 eastbound cargoes in 2018, 17 cargoes in 2019. And for the 2020 season, we initially plan to send at least 25 cargoes across the Northern Sea Route. We now believe we will reach about 30 voyages this year. We completed 20 voyages so far this season and already surpassed the number of voyages from last year's navigational season. We plan to complete the last voyage this navigational season by the end of December. We rely on our Arc7 ice-class tanker fleet to transit the Northern Sea Route during the summer navigation period. However, in September, a new MOL-owned conventional LNG tanker, named Phecda, transited the ice-free waters along the Russian coast in the eastern part of the Northern Sea Route. The LNG carrier is a non-ice-class vessel and recently followed an Arc7 ice-class tanker from Asia back to the Sabetta port to complete its maiden voyage on the 8th of October. Another important voyage recently occurred using an Arc4 ice-class tanker called Clean Planet that passed the Northern Sea Route on the 26th of October and is headed to the port in China under a long-term cargo for Total. This marks the first Yamal LNG cargo headed eastbound to the Asian Pacific region using an Arc4 LNG tanker. While on the topic of shipping, we would like to make some comments on the tanker fleet for the Arctic LNG 2 project. We signed construction contracts for 15 Arc7 ice-class tankers from the Zvezda shipyard in Russia, and 6 more Arc7 ice-class tankers from DSME in South Korea for a complement of 21 Arc7 ice-class tankers for Arctic LNG 2. We require more Arc7 ice-class tankers for the Arctic LNG 2 project than the 15 ice-class tankers used at Yamal LNG because we will produce more liquefied natural gas and we plan to ship around 80% of the LNG volumes to the important Asian Pacific region. The new ice-class tankers will have a narrower width, a hull form optimized for ice breaking and increased propulsion output. The first tankers will be commissioned by the beginning of 2023 and ready for the first cargoes of LNG from Artic LNG 2. We also contracted with DSME to build 2 floating gas storage tanks of 360,000 cubic meters capacity each for our Murmansk and Kamchatka transshipment terminals expected to start up in the 2022-2023 period. Each floating storage unit will be able to store 2 Arc7 tankers. The boil-off gas from the floating storage units will be captured at the time of transshipment operations for liquefaction, approximately 190,000 tons per annum for use in Murmansk and Kamchatka. In November, we plan to perform the first ship-to-ship transshipment from an Arc7 ice-class tanker to a conventional tanker in the Murmansk region. Previously, these ship-to-ship operations were conducted in open waters in Northern Norway and are performed to minimize the number of round-trip days travel between our Sabetta port and the transshipment complex. We would also like to mention that the world's most powerful nuclear icebreaker, Arktika, officially joined the Russian nuclear fleet on the 21st of October and will commence ice-breaking services along the Northern Sea Route commencing in December 2020. The Arktika icebreaker is capable of breaking through ice up to 3 meters thick or 9 feet. It's estimated service life is 40 years. Many investors have asked about the LNG contracting environment considering the current situation of market oversupply and weak commodity prices. We would like to make a few comments on our marketing efforts for Arctic LNG 2. First of all, Arctic LNG 2 has lower capital cost than the Yamal LNG project. And then after completing the transshipment complexes, we will also have lower transport cost to market. This supports the project sponsors in their current contract negotiations as well as improving slope indexation. Today, there is an expectation gap between buyers and sellers, and as a result, fewer long-term contracts have been concluded. The buyers see a market with low prices and try to secure long-term volumes at such prices. In contrast, we do not want to commit to these low prices for long-term volumes. Thus has become a challenge to come to mutually satisfactory terms. The example of the Brent slope indexation highlights this challenge. Between 2015 and 2019, 63 long-term supply contracts were signed on average each year. This was not unusual as new volumes are coming online, FIDs were being secured by contracts and prices were not extremely volatile. In 2020, only 32 long-term contracts or roughly 50% of the average yearly contracts have been signed. Moreover, not only the number of long-term contracts have been impacted, but the quantity of LNG volumes secured is also lower. In 2018, 70 million tons were contracted; in 2019, about 55 million tons; and in 2020 to date, only about 26 million tons. It's a challenging market for those companies trying to secure long-term contracts to make FIDs and/or get financing to move construction forward. We have been active discussing long-term supply contracts, and we believe this expectation gap between the buyers and sellers will be overcome with a more balanced market as we launch Arctic LNG 2. To us, it's only a matter of time. As a reminder, our Arctic LNG 2 project has already sold 100% of its output to the project sponsors as equity offtake. And the project participants' marketing entities have entered into binding Heads of Agreements to offtake their respective share, either FOB Murmansk or FOB Kamchatka with agreed pricing formula. We are finalizing the sales and purchase agreements for these long-term offtake volumes with our partners based on these executed HOAs. We are confident that we will soon announce some of our own concluded SPAs.We plan to complete the construction works at train #4 at Yamal LNG by the end of the year, but we will start the facility's commissioning over the upcoming weeks. At Obskiy LNG, we are working on the pre-FEED engineering work but are more focused on closing the Arctic LNG 2 financing at this time. We will consider the Obskiy LNG in more detail in 2021 as we consider some changes to the project parameters based on the engineering works to date. We will keep everyone apprised of any changes and further progress.At the end of September 2020, the overall construction progress for Arctic LNG 2 is estimated at 27%, up from 21% at the end of June. The first train's overall progress, including platform construction, module fabrication,and facilities on-site is roughly 39% completed. We began installing the steel structures that are used for the module installations on top of the first GBS. We also continued concrete works for the second GBS platform at dry dock #2 as well as a concrete bottom slab for the LNG tanks. Overall, approximately 3,300 construction workers are mobilized at the Murmansk LNG construction yard.Equally important, we expect no delays in deliveries of LNG modules as about 7,000 workers are mobilized at the module construction sites in China. These yards are producing at full capacity and preventative measures have been taken to reduce and/or eliminate the impact of COVID-19 virus spread on specific work schedules. The first modules for GBS #1 are expected to arrive in Murmansk around September 2021. Accordingly, the launch of GBS #1 is scheduled for 2023 and we see no delays in meeting this target. We also see no delays in launching GBS #2 and GBS #3 in 2024 and 2026, respectively, according to our commissioning schedule.We also made good progress on the production drilling program at the Utrenneye field. We drilled 6 production wells in the third quarter for a combined total of 17 production wells drilled today. This represents approximately 1/4 of the field's development drill and plan to meet the launch schedule for the first GBS unit. Work at the field is being performed by 3 drilling rigs for production drilling as well as one drilling rig for exploration drilling. As mentioned on the prior conference call, 2 additional drilling rigs are being mobilized for production drilling commencing for the beginning of 2021, and an additional 2 drilling rigs will be deployed for drilling exploratory wells for the upcoming 2020-2021 exploration program.There are about 6,500 people working at the Utrenneye field and we estimate the completion rate of the field's infrastructure facilities for the first stage at approximately 34%. Construction progress at the Utrenneye terminal at the end of September, is approximately 68% completed, including ongoing construction work on the administrative area and completing Berth 1 with the first GBS structure. Work activities were dredging Ob bay and for the construction of the terminal's ice protection structures, under state contract, is underway without delays. We are presently on schedule for all construction activities at both the Utrenneye field and the Utrenneye terminal.As of the 30th of September, about 28% of the total project's capital program has been already financed by the shareholders, and we contracted more than 84% of the project's total capital expenditures. We made good progress to secure the project's external financing, and we are confident that this important phase will be completed by mid-2021 or earlier. During the third quarter, we ran 245 square kilometers of 3-dimensional seismic on the part of the Utrenneye license area located in the shallow waters with the Ob bay, essentially part of the South Dome. But by the end of the quarter, we had not processed this seismic. We have determined that we have enough good reservoirs to inject and store CO2 as we fully understand the geology of this area, but the questions remain as usual, the volumes to be injected and the economics of the process. We maintained our development drilling program throughout the reporting period and completed 37 production wells in the quarter versus 38 wells in the prior period. Post the reporting period in October, we completed the first 3-bore Valanginian production well, well number 7102 at the Ust-Yamsoveyskoye field with a record total penetration through 3 horizontal drill cores, reaching across 4,500 meters of productive formations. This field was part of the ALROSA gas asset acquisition and is considered a greenfield development project. We drilled and completed 99 production wells in the 9-month period as compared to 109 in the prior period. The decline was largely focused on reducing wells drilled for crude oil at the East-Tarkosalinskoye field and some slowdown in work activities due to the coronavirus. We maintained focus on developing the North-Russkoye cluster and made good progress for ready commissioning of the Kharbeyskoye field over the next 2 years.So far, our natural gas production is trending slightly higher than initial guidance. But we remain committed to our prior forecast of increasing natural gas production by approximately 2% or slightly higher, while maintaining relatively flat with our liquid production as in 2019, and we complied with the OPEC+ production agreement by decreasing our crude oil production, and we remain committed to adhering to the prescribed production targets. Our gas condensate production is not impacted by the OPEC+ production agreements, and we will increase our gas condensate output this year, namely at Arcticgas and the North-Russkoye cluster, essentially offsetting the declines in crude oil output. As always, our primary goal is to ensure that our processing facilities run at 100% of their respective operating capacities. We will maintain plateau levels at both our Purovsky Processing Plant and the Ust-Luga Complex. The third quarter and 9 months 2020 financial results were reasonably good considering the tough external macro environment and relative weakness in hydrocarbon prices, although we did see improvements in commodity prices in a reporting period as well as stronger prices based on the forward curve for the upcoming winter months, essentially the fourth quarter 2020 and the first quarter 2021.Brent crude oil prices declined by 31% year-on-year from an average of $62 per barrel to $43 per barrel, whereas benchmark natural gas prices like National Balancing Point in the U.K., declined by 21%, and Title Transfer Facility, TTF, in Netherlands by 18%, respectively, during the quarter. Conversely, the average Russian domestic tariff increased year-on-year by approximately 2.8%, thus reiterating our previous message that we have a very resilient domestic gas business generating positive revenues and cash flows.During the reporting periods, sales of natural gas domestically accounted for 79% and 77% of our revenues in the third quarter and 9 months 2020, respectively, as compared to 66% and 62% in the prior reporting period. The change is largely attributable to the drop in our spot LNG volumes sold as Yamal LNG commenced more long-term contract sales and the significant decrease in average global LNG prices in 2020. Total natural gas revenues declined 11% year-on-year but increased 2% quarter-on-quarter. The year-on-year drop in gas revenues were largely driven by declines in international gas revenues of 46% as a result of the sharp decrease in international gas prices at gas -- major gas hubs. Our quarter-on-quarter revenues increase as we had a 3% domestic tariff increase on the 1st of August, more ex-field sales as well as a roughly 1% increase in international gas sales as global LNG prices improved. We sold 14.4 billion cubic meters of natural gas on the Russian domestic market and 2.2 billion cubic meters in equivalent LNG sales during the reporting period, accounting for a combined net decrease of 137 million cubic meters or by less than 1%. During the 9-month period, our combined natural gas sales volumes declined by 6%, which were mostly impacted by the change in spot LNG volumes sold by us directly to long-term volumes sold directly by Yamal LNG under contractual commitments. Our quarter-on-quarter combined gas sales volumes declined by 338 million cubic meters or by 2%, which was mainly driven by an 11% decline in international gas sales but a marginal decline domestically. Our total LNG revenues declined year-on-year by RUB 13.8 billion, mainly from a 28% reduction in volumes sold and a 34% reduction in average LNG prices. Domestically, our combined sales volumes from end customers and wholesale traders increased by 699 million cubic meters or by 5.1%, resulting in domestic gas revenues increasing by RUB 3.9 billion or by 6.8%. LNG sales on international markets represented 13% of our total natural gas volumes sold and accounted for 21% of our natural gas revenues for the third quarter 2020. Our average netback remained more than 2.7x higher for LNG volumes sold internationally than netbacks received on the domestic market. This netback ratio improved slightly in the third quarter over that reported in the second quarter as we had relative improvements in gas hub prices in the current reporting period. Accordingly, LNG volumes sold internationally contributed positively to our revenues and netbacks for natural gas despite weaker pricing and lower volumes sold and complemented the resiliency and stability of our domestic gas business. We see improving LNG prices for the remainder of 2020 and for the first quarter 2021 as we approach the peak winter season.We sold 3.8 million tons of liquids in the reporting period, representing year-on-year and quarter-on-quarter decline of 5.7% and 9.5%, respectively. The declines in liquids were largely the result of increase in volumes in storage and transit during the period. For the 9 months 2020, we sold 11.9 million tons, representing a decrease of 1.4% as compared to the prior period, with the decline mostly related to us reducing crude oil sales to meet the OPEC+ commitments.We exported 52% of our total liquid volumes during the quarter versus 58% year-on-year and 60% quarter-on-quarter. Our liquid revenues for the reporting period totaled RUB 83.3 billion, representing a decrease year-on-year of 16% and but a strong increase quarter-on-quarter by 30%, which mainly reflects the volatility of liquid prices over the reporting periods and, to a lesser extent, the decline in volumes sold. We had stronger prices for all our liquid hydrocarbon products in the third quarter than in the second quarter. Our operating expenses during the reporting period declined by RUB 15 billion or by 11%, due to the reduction in purchases from joint ventures as a result of lower commodity prices but were offset by increases in G&A expenses, materials and services, DD&A and exploration expenditures. Purchases declined by approximately RUB 19 billion or by 27%, as this trend has been consistent throughout 2020 with lower benchmark prices. Our other operating categories were relatively consistent with our expectations for the reporting period and represented some seasonal adjustments, salary indexations and bonus accruals.We spent RUB 39.8 billion in cash on our capital program, representing an increase year-on-year of RUB 3.3 billion or 9% and a decrease of RUB 20 billion or 33% quarter-on-quarter. Our capital projects remained consistent throughout the year with the majority of our capital spent on future LNG projects, the Murmansk construction yard, Obskiy LNG as well as capital spent to prepare future LNG fields. We also allocated capital to the North-Russkoye license area and to complete our ongoing administrative projects. There are no more changes to our capital guidance for the remainder of 2020. Our normalized EBITDA totaled RUB 94 billion for the third quarter of 2020, decreasing by 10% over the prior period, but significantly improved quarter-on-quarter by RUB 23 billion or 32%. In general, our financial results improved over the second quarter 2020, which was one of the weakest quarters we had since we went public in 2005 due to the factors noted. We had reasonable EBITDA contributions from Yamal LNG despite the weaker global LNG prices and despite having sold more LNG volumes on the spot market during the quarter. Moreover, the EBITDA contributions from both the subsidiaries and joint ventures improved quarter-on-quarter as we had stronger overall liquid commodity prices. We generated positive free cash flows of RUB 9.5 billion, which was down 46% year-on-year but a significant reversal of the negative free cash flows in the second quarter of RUB 57 billion, which represented our first quarter of negative free cash flow since 2013. The net cash provided by our operating activities decreased by 9% during the reporting period, reflecting the decrease in our liquid sales volumes and lower commodity prices than the pre-COVID period. Our balance sheet remained very strong during the first 9 months of 2020. Our fundamental credit metrics supports our international and domestic credit ratings, and we continue to believe that a sound and conservative financial position is important in these tough economic times, particularly when we see significant increases in bankruptcies and debt defaults. We ended the third quarter 2020 in a net cash position as we received the second tranche of $2.1 billion in July from the prior sale of 30% to our partners in Arctic LNG 2. It became quite evident over this past year that the energy markets remained extremely volatile and commodity price swings, both negative and positive, will have profound impacts on the financial results as well as the general stability and profitability in the oil and gas industry. Bankruptcies and impairment write-downs remained significant in 2020, and most likely, we will see some structural shifts in long-term strategies and further industry consolidations. Moreover, the ForEx movements have also become more extreme, which impacts our reported net profit and requires many adjustments below the operating profit line.The COVID-19 pandemic has had a negative impact on the global economy and a devastating effect on the lives of many people. This pandemic remains with us today as we are seeing a second wave across many regions of the world. How this will impact the energy markets in the upcoming quarters remains unknown. Moreover, the natural gas market would benefit by a return to normalized winter weather to reduce excess storage and revert back to normalized seasonal fluctuation patterns of inventory fill and draws.Over the last several quarters, we discussed the importance of our Russian domestic gas business in terms of stable volumes sold and less volatile prices. The domestic gas business remains an important cornerstone of our business strategy. And then in July, we successfully launched our first 40,000 ton per annum, small-scale LNG project in Murmansk -- excuse me, in Magnitogorsk to create incremental gas demand for modal transport. We are now selling more than 6,000 tons of LNG per day versus 1,000 tons at the beginning of 2020 and 0 in 2019. In the third quarter, 87% of our total sales volumes or 14.4 billion cubic meters was sold on the Russian domestic market, whereas the remaining 13% was sold internationally as LNG. Our domestic sales were not negatively impacted by the overall decrease in global spot gas prices, although international gas hub prices improved quarter-on-quarter when their lows this past spring. Our Russian gas business insulates us both price and volume volatility in global markets, and more importantly, remains quite stable and cash generative. Despite the COVID lockdowns, we saw global LNG demand increase during the first 9 months of 2020 by 4%, and important import markets, like China, by almost 10% and India by 21%. We are confident that the Asian Pacific region will serve as a cornerstone for LNG imports for many decades, and our future LNG projects are focused on serving these growing markets.We made great progress with our Arctic LNG 2 project and we are confident that we will deliver another world-class LNG project at a time when the market will require more LNG supplies. Our ability to lower our transport costs by constructing the Kamchatka terminal as well as establishing a benchmark FOB price will increase our trading -- LNG trading activities in the Asian Pacific region.We know there are many challenges ahead as the global markets transition to more clean and burning energy and governmental mandates to reduce CO2 and methane emissions played a larger role in determining future winners and losers in this energy transition. Issues such as a proposed carbon tax in the European Union need to be addressed. But we are confident that natural gas will play a major role in the energy transition and remain a viable energy source to power the world economies for many decades. We have fielded many questions from investors about hydrogen and its future role in the energy mix. We stated previously that hydrogen was an interesting prospect for us and that we are currently studying its commercial and economic viability. This process is ongoing and will take some time before any firm investment decision is made. Many of our industry colleagues are also studying hydrogen, whether blue or green hydrogen, but the consensus is the same as many have commented that a transition to a hydrogen-based economy is not likely in the short or midterm.We understand that renewables and hydrogen will play a significant role in the future energy mix. We already use some renewables for our own needs and will eventually produce some hydrogen for internal consumption once the Ust-Luga hydrocracker unit is completed. Today, we are studying several new projects, including carbon capture and storage at Yamal LNG, as well as additional renewable energy projects. We are also considering the most economically and environmentally efficient project for commercial-scale hydrogen production, and we fully support and look forward to participating in the Russian government's new hydrogen initiative. Our focus is to become a leader during this energy transition by implementing our future LNG projects and increasing our LNG output to up to 70 million tons by 2030. Our strategy alone will contribute positively to reducing CO2 emissions. We can reduce more than 170 million tons of CO2 emissions by replacing coal with our LNG output. This represents a notable contribution to climate change for many years.We have lofty ambitions to grow beyond 70 million tons with future LNG projects as our vast hydrocarbon resource base in Yamal and Gydan peninsulas support additional growth opportunities. Moreover, our corporate strategy favors clean burning natural gas and its environmentally friendly fuel already accounts for 83% of NOVATEK's combined hydrocarbon production. We have no doubt that the future of natural gas looks promising.We will participate actively in the future growth of natural gas by delivering some of the lowest landed LNG costs to key importing markets. Natural gas is the only fossil fuel that is projected to grow with increased demand across all projected scenarios for upcoming decades. And this fact will again confirm recently by the IEA's new energy outlook. LNG will serve as a key driver in future global gas demand growth as the developing economies shift away from coal consumption.We strive to be a leader in providing affordable, secure, sustainable energy to key consumer nations for many decades. Our LNG is already one of the greenest in the world and we are developing measures to further reduce our emissions. Unlike most of our competitors, we control the full LNG value chain, from upstream to end consumer deliveries, but ultimately price is a determinant factor in contract awards. There is a perception that green LNG may be seen as a premium product but very few customers are willing to pay a premium for this product. This may change in the future, but this represents the reality of the market as we see it today.We recently published our 13th sustainability report at the end of August, and at the same time, approved a number of ecology and climate change goals within our long-term business strategy. At the beginning of October, we joined the Methane Guiding Principles initiative, which is a voluntary international multi-stakeholder partnership between industry and nonindustry organizations. Yamal LNG is already one of the cleanest LNG plants in the world in terms of greenhouse gases and CO2 emissions. We are now considering a CO2 capture and storage project at Yamal LNG, making the project even cleaner and greener. This new project may be realized as soon as in 2022. The principles of ESG are an important element embedded into our corporate ethos. We once again were confirmed as part of the FTSE4Good Index. And finally, we received all the necessary approvals and documentations from the financial institutions to formally release us from our DSU commitments. We can now adjust our dividend policy and increase our dividend payout as promised. Our dividend payout in the first half 2020 was 48% of our normalized IFRS profit, which contradicted the trend of many of our industry competitors who either cut or eliminated their dividend distributions. We are committed to increasing our dividend payout for the full year 2020 results and beyond, and this question will be on the agenda at the upcoming Board meeting -- Board of Directors meeting, excuse me, in December.We would like to thank everyone again for attending tonight's conference call and for your continued support of NOVATEK. We hope everyone remains safe and healthy.We are now ready to open tonight's session to questions and answers. Thank you.

[Operator]

[Operator Instructions] We will take our first question from Karen Kostanian of Bank of America.

[Karen Kostanian]

As I was wondering, in this environment, whether you had made any progress of indicative interest for progressing towards FIDs of additional LNG projects over your 70 million ton goal by 2030. Could you just briefly update us on we stand on future projects?

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

Well, first of all, thank you, Karen, for your question. As of today, I mentioned that we're working and we're spending capital on ready and future LNG fields. In line in our strategy up to 2030, obviously, we have Arctic LNG 2, which is projected to be launched in 2023, '24 and '26. Post the launch of Arctic LNG 2, most likely it will be Arctic LNG 1, which will be launched post '27, '28, '29, '30 type period. Also within this frame, we will launch the Obskiy LNG project. Post-2030, we are working on and we expect to drill another well, I believe, in 2021, [indiscernible] field for Arctic LNG #1. As you know, we already successfully completed the first exploration well, where we -- for the single well were prescribed resources, improvement resources of about 320 billion cubic meters, which makes it -- which made it at the time in 2018 the largest discovery in the world, according to Wood Mackenzie's statistics. It's also equally interesting to know that, that field and that discovery is also equal and as significant a discovery that you hear out of Turkey more recently, but obviously has not gotten the same type of press. What we plan to do right now, as I said, we'll spend capital over the next several years to ready these fields and move forward with the future LNG projects. And I think there's other satellite fields like Shtromovoye fields, et cetera, that are in the pipeline. But as of today, obviously, no FIDs have been made for these particular projects, but we're spending capital to ready these fields for future decisions.

[Operator]

Our next question will come from Ron Smith of BCS.

[Ronald Paul Smith, Senior Oil and Gas Analyst]

I'd like to go to your core onshore activities. It sounds like the North-Russkoye project is working well. And you mentioned that you're going to continue to try to load the Purovsky and Ust-Luga plants more or less at capacity. Are you considering any further increases in capacity at Purovsky in particular? I mean, do you have the geological capacity to materially expand to sustain higher production over a longer term to justify that? Or is it better, do you think, just to stick with the fully loading Purovsky for an extended period of time?

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

I mean right now, as you know, we're producing more volumes out of Purovsky than are being fed into Ust-Luga. And one of the things that we've talked about doing at one time was potentially expanding the operations at Purovsky given that we felt that we had additional reserves to -- and liquid production to develop. So in one of our slides that we provide as part of the conference call pack, you can see this quite distinctly, is that in the third quarter, for example, we delivered almost 3 million tons of liquids to Purovsky, but the output of Ust-Luga was about 1.6 million tons. So we're still selling condensate -- stable gas condensate after we stabilized it at Purovsky.So I think to answer your question, I think it'll be more prudent at this particular point in time to focus on the expansion that we're working on and we will plan to do at Ust-Luga so we can better match the volumes that are going into Purovsky to the output at Ust-Luga because we would prefer to see that we we fractionate those volumes of stable gas condensate into higher-value products and sell it as refined -- stable gas refined products. So I think that would be more sensible decision to make at this particular point. But if we decide to change that on, we'll surely let everybody know that -- if we're going to increase Purovsky.

[Operator]

Our next question will come from Alex Comer of JPMorgan.

[Alex Robert John Comer, Research Analyst]

Mark, you mentioned in your presentation that you continue to have complete faith in longer-term demand dynamics for LNG. But obviously, we've seen China commit to net 0 in 2060, Europe in 2050. And if I look at some of the sort of sustainable development forecasts out there, it doesn't look like gas is going to escape this energy transition and LNG, maybe not quite as a solid long-term outlook as maybe we thought. So just could you maybe just give us a little bit your wisdom on why you continue to believe very strong in demand.

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

Can you hear me?

[Alex Robert John Comer, Research Analyst]

Yes, I can hear you.

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

Okay. Can you -- you cut off at the point of escape in something...

[Alex Robert John Comer, Research Analyst]

Okay. So just to apprise you. I mean, there's a lot of forecasts around at the minute sort of suggesting that LNG demand isn't going to be as great going forward as maybe we thought. We've had a couple of countries, big countries, Europe and China, come out with net 0 commitment. So why are you so confident in future demand?

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

Largely -- I mean, if you look at the this question on the energy transition, right, it's a question between moving away from coal to natural gas. We're moving away from coal to a combination of natural gas and renewables. And we've seen, obviously, discussions, and I know you've been very interested in some of your write-ups about what's happening in the world of hydrogen. And we've seen some sort of pretty dramatic swings in forecast on the extent of how much hydrogen will take over in terms of potential gas. And then it really comes a question of whether it's blue or green, right? So I just believe, and I think we believe as a company, and I think we're supported by many of the forecasters. I mean, if you even look at the IEA's scenarios, they still use natural gas. They still show that natural gas maintains it's 20 -- mid-20% range. And I know when you talk about sort of China go in 2060 and EU going net 0 in 2050, I mean, there's still room for natural gas in this energy transition to maintain relatively strong volumes. And then when we look at within the natural gas world and we look at how gas is becoming more globalized, it's obviously going to play better for LNG because it allow us for the transport to be done globally. So I'm not -- and we're not pessimistic about what natural gas' role would be. And as I mentioned, at the outset in the prepared text, we see no change in the longer-term forecast. And I've said and spoke at many conferences recently with my colleagues from whether it's independent U.S. producers or some of the IOCs and it's basically the same consensus that gas will remain strong and LNG will remain at -- gas growing about 2% and LNG growing in the 4% range within this sort of 2040 time frame.And I just want -- I want to throw a number to you because I think it's important because we're looking at this question really like between a developed and developing world. I think if we frame it between that scenario and you say, well, look, India is now at 6% and it wants to go to 15% in natural gas -- from coal to natural gas. China is 8% and it wants to go to 15%. And it's almost like -- I think I was told that 1% change in coal consumption to natural gas is the equivalent of almost 30 million tons of LNG per annum consumption. That's significant. So you have to also ask yourself a question on whether or not these countries will stay at just 15%. I mean, because even that 15% gas as total primary source, that still makes one of the lower in terms of the developed world. So I actually think that you have a higher upside potential for transitioning away -- more away from coal. But this question comes in -- the ultimate question is going to come into is how successful hydrogen is going to take its role in this energy mix because it's relatively something that people just started talking about. But I think we're very confident that demand for natural gas will remain a significant part of the energy fuel mix and LNG will play the principal role in the growth of natural gas. And it's not a view shared solely with NOVATEK. I think it's a view shared collectively with our industry colleagues.

[Operator]

[Operator Instructions] We will take our next question from Henri Patricot of UBS.

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

A couple of questions for me. The first one, I was wondering if you could comment around dividends versus buybacks, given the potential upcoming decision around dividend but also given the recent pressure on the share price. What do you think about the 2?And then secondly, can you give us some sense of the upcoming additional cash injections to Arctic LNG 2 from your side?

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

On the second question, you talked about cash injections or...

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

No, equity. Yes, more from your side...

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

Yes, I'm not following you on your second question. Can you repeat or at least make it a little clearer.

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

Yes. So the additional cash injections from the partners and from your side, many additional runs to Arctic LNG 2.

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

All right. Thank you. On the first one, like I said, the dividend payment that we will make and change in the upcoming Board decision will really be a function of what the macro environment is. I mean I think we prize to the upside of what we paid out already in the first half and the intent is to continue to increase and pay out as much as we can. I mean, we're no longer restricted by this DSU and so I think it's just going to be a function of what the macro environment is during this respective period of time.On the buyback, we have a buyback program and the buyback program has been in place for many years and we use it from time to time. But -- and I'm not going to signal to anybody whether we're going to be in a market buy-in, when we're going to be in a market buy-in. But for example, when we see these precipitous drops in the marketplace, as we see over the last couple of trading days, I think we generally take advantage of those situations to increase the share through the buyback program. And I just want to -- while I'm on that point, I just want to make -- I mean, the last couple of days, it's been extremely volatile. And it's not just Russia. It seems to be a global selloff right now because people are concerned about the second wave of COVID. And there's really nothing that we can do internally from a management perspective to change that, and we just continue with our development plan. We continue with our operations, et cetera, to ensure that we deliver our projects on time as we committed. But I just have to say that from a perspective of being patient, I mean, we can't tell everybody what to do. But obviously, these generally represent great buying opportunity if you have a belief in the company's story. I mean, I think it's an opportunity when you see these extreme volatility in the share price. So -- but I'm not going to signal when we'll go in the market sort of other than the fact that we generally do look at these situations and make a strategic decision to come in at certain times. I mentioned to you in the text on the second question is that about 28% of the capital program has already been financed by the shareholders. And I think it's getting to the point where I believe that the external finance and project finance will come into play pretty soon. And we use mid-2021 or earlier, it could be much earlier, it just depends on the timing of these particular meetings. But as you know, I'm not involved in -- with the sanctions, et cetera, I can't be involved in that. But I think what I understand from the team is that they're making actually good progress. But I suspect that we won't be significantly more contributed directly by the shareholders as we're getting close to that sort of threshold that we want to reach in terms of the proportion between debt and equity financing.

[Operator]

We will take our next question from Kate O'Sullivan from Citi.

[Katherine O’Sullivan, Analyst]

Thanks for the update, Mark. So my question is, last month, we saw proposed oil tax changes in the draft Russian budget with withdrawal tax incentives. And just as a read across to this, do you see any changes in the discussions that you're having in terms of the support impacting NOVATEK? And I'm particularly referring to your LNG projects, which benefit from a number of fiscal incentives.

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

Yes. It's definitely valid...

[Katherine O’Sullivan, Analyst]

Yes, I was just going to clarify that's not that tax law [indiscernible]

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

I mean, it's a valid question, obviously, as you see the government discussion changes in the tax regime, how that plays out among those various companies, et cetera. And I think so far, we see that the tax has been essentially levied on changing in the oil -- crude oil markets. And so I think in addition to what we're producing in natural gas and gas condensate, we also produce crude oil and quite -- and just like everybody else, we're subject to these changes in the tax law. We have seen no changes in the MAT mineral extraction tax for gas condensate or gas. So I think it's really, at this particular point, there's nothing that we can speculate or comment on that particular topic at this moment because all we're doing is just speculate, so we prefer not to do that.On your question on the LNG side and the concessions that we have received, I would think it's contrary to that. I mean, let's look at it broader from a perspective that LNG is a significant part of Russia's strategy to develop the Arctic region as well as also continue with the development of the Northern Sea Route in terms of the cargoes expected to be delivered. So I think as of today, we don't see any risk with the government removing taxes or introducing any new ones. In fact, what we see is that the government continues to make concessions such as I think we just saw the Advanced Special Economic Zone in the territory of the Murmansk region. So I think it's contrary to that point. I think the government is continually making these concessions to the arctic zone for further development. So I don't see any risk to the LNG taxation and the concessions received. And I'd just like to also mention an important element that our tax concessions are embedded in the governmental agreement between China and Russia and not likely to change. And all of our taxation related to this will be under the same structure. And so I think it's very low risk.

[Operator]

[Operator Instructions] At this time, we have not received any further telephone questions. I would like to hand the conference back to our speakers for any additional or closing remarks.

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

Okay. Well, look, I was just saying to Henri of UBS, the market has been extremely volatile this past week with the spread of the second-wave COVID virus, and we're looking at it at the same real time as everybody on this call is looking at it in the same real time. And we're trying to understand what governments are going to do. We hear things that there will not be any economic lockdowns. We're also in the midst of the U.S. presidential election next week, which could have profound changes to the oil and gas industry, depending on which party, whether Democrats or Republicans win, I think there's quite a difference in terms of the platforms related to energy. So we just want everybody to just remain patient. I know it's hard sometimes to do that. But when we see this market volatility, we try to step in from time to time to balance out the market, but it's hard when you get these severe price wins. All we can say at this particular moment in time is that the company is doing everything possible to ensure that our operations remain safe and secure. As I mentioned at the outset, we took all the precautionary measures to manage the COVID spread as best as possible for our contractors, workers and family members. And we'll continue to deliver our projects. I think it's important to look at, that we see strengthening of prices. We've seen some very, very low prices in the spring that we always felt was not sustainable. And now we see strengthening the prices as we move into the winter first quarter, so winter peak season. And when we look at La Niña effect on weather or we look at forecast by some of the weather meteorologists, it looks like they're anticipating a colder-than-normal winter, so we hope that we will see a reversion back to a normal winter weather. And so we can remove some of this excess storage, which has plagued pricing for the last 2 seasons. So we're optimistic. It looks good for the fourth quarter, first quarter numbers look should look good.And I guess at this particular point, we'd just like to say to everybody is just remain safe and healthy, and we look forward to addressing everybody in I guess, early February, for the full year results. So thank you again for attending tonight's call. I'm sure we'll discuss with individually, et cetera, at these upcoming conferences over the next couple of months. But we look forward to answering any questions and don't hesitate if you have any questions or concerns to reach out directly to Alexander in the IR department. It's at [e-mail]. We're here to help you. We're here to answer your questions. So again, thank you very much, and we look forward to addressing you in the future.

[Operator]

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.