Russian producers press forward in face of sanctions

  • Russian President Vladimir Putin, center, speaks to employees as he visits the Yamal liquified natural gas plant in the port of Sabetta on Dec. 8, 2017. Yamal owner Novatek is moving toward an investment decision this year on its next Far North gas project, Arctic LNG-2. At 19.8 million tonnes annual capacity, it would be larger than Yamal’s 16.5 million tonnes capacity. (AP Pool Photo/Alexei Druzhinin)

Russia’s big gas producers, Gazprom and Novatek, have been busy with plans for new liquefied natural gas projects, expanding their market reach and attracting foreign investment.

If it all comes true, Russia could enter the mid-2020s with capacity to make almost 70 million tonnes of LNG a year, more than 20 percent of last year’s global demand.

Russian gas is well positioned to reach new markets in Asia and the Atlantic Basin, a Shell executive said March 20 at an LNG conference in Moscow. Stuart Bradford, Shell’s senior deal lead, said Russian supplies could come from the Arctic, the Far East and Baltic Sea.

Shell, the world’s largest seller of LNG at 22 percent of the market last year, is a partner with Gazprom in LNG export projects in the Baltic and Far East.

The proposed Baltic terminal would be in the northern Leningrad region, with capacity of 10 million tonnes per year. The plant would get its feed gas from West Siberia. The cost is projected at slightly more than $11 billion — at the lower range of the global per-tonne average. Start-up is tentatively planned for 2023, depending on a timely investment decision.

The 10-year-old Shell/Gazprom Sakhalin-2 terminal in the Far East, with Japanese partners Mitsui and Mitsubishi, has a nameplate capacity of 9.6 million tonnes per year. The owners want to add a third liquefaction train at 5.4 million tonnes per year, at a cost of $5 billion to $6 billion, but they still need to resolve gas-supply issues.

In addition to investing in LNG capacity, Shell said in February it had created a new 50-50 venture with Gazprom to use Shell LNG’s expertise to develop Russian technology for liquefying gas. The venture would help insulate Russia from any new U.S. sanctions on LNG technology.

Also in the Far East, ExxonMobil and state-controlled Rosneft, Russia’s largest oil producer, are moving closer to building their own liquefaction plant, Sakhalin-1, on the same 589-mile-long island as the Shell/Gazprom terminal.

Reuters reported March 20 that ExxonMobil’s Russia unit may make a decision this year to start front-end engineering and design work for the gas project with partner Rosneft. Sakhalin-1 has been producing oil and reinjecting its gas since 2005. The companies reportedly are looking at a $15 billion project.

Gazprom/Shell, however, would prefer that Rosneft/ExxonMobil ship or sell their gas to Sakhalin-2 instead of building a new terminal, but they have not succeeded in those negotiations.

Russia’s largest non-state-controlled gas producer, Novatek, is focused on the Arctic, where it led a consortium with Chinese and French partners that started up the $27 billion Yamal LNG project in December 2017.

Novatek is moving toward an investment decision this year on its next Far North gas project, Arctic LNG-2. At 19.8 million tonnes annual capacity, it would be larger than Yamal’s 16.5 million tonnes, but reportedly would cost 10 percent to 20 percent less to build with modular components towed into place.

The company will be able to deliver Arctic LNG to Europe at half the cost of U.S. Gulf Coast cargoes, Novatek Chief Financial Officer Mark Gyetvay said in February. The company would build equipment and technology in Russia to protect itself.

“We will not hold ourselves hostage to U.S. sanctions,” Gyetvay told the International Petroleum Week event in London.

China, which helped finance almost half the cost of Yamal, also is looking at investing in Arctic LNG-2, as are Saudi Aramco and Japanese companies. France’s Total already has signed on as a 10 percent partner.

“Arctic LNG-2 fits into our strategy … based on giant, low-cost resources primarily destined for the fast-growing Asian markets,” Total CEO Patrick Pouyanne said March 5.

The Japanese government is pushing Mitsui and Mitsubishi to decide whether they want to take a stake in Arctic LNG-2, according to a March 4 report in the Nikkei Asian Review. The Japanese government sees it as an opportunity to make progress on a long-running territorial dispute with Russia over a set of islands annexed by Moscow after World War II.

While the trading houses understand the project’s significance as a new source of LNG, U.S. gas is starting to arrive in Asia and the companies also could decide that expanding Sakhalin-2 is a better investment.

Expanding its partnership reach to the Middle East, Novatek CEO Leonid Mikhelson said he has been talking with Saudi Arabia Oil Minister Khalid al-Falih about an investment in Arctic LNG-2.

“I think we will get something concrete in the coming months,” Mikhelson was quoted by Reuters on March 17.

Currently, Yamal LNG travels directly to Asia aboard expensive ice-class gas carriers when sea ice allows transit through the Northern Sea Route. But when that’s not possible — even with icebreaker escorts — the gas heads to Europe for sale or reloading aboard conventional LNG carriers for the longer voyage to Asia. Novatek would like that to change.

“Our plan is to keep the Northern Sea Route open 12 months a year by 2023-2025 with 100-megawatt-hour nuclear icebreakers,” Chief Financial Officer Gyetvay told delegates at an energy conference in Moscow. He did not provide further details.

Rather than competing, Gazprom and Novatek should develop an integrated strategy against challenges from other suppliers, Tatiana Mitrova, director at the Skolkovo Energy Center in Moscow, said at an LNG conference in Moscow on March 16. The global market is a “cruel battlefield,” she said, naming Qatar, the United States and Australia as Russia’s competitors.

Gazprom holds a monopoly on pipeline gas exports from Russia, while Novatek sells its LNG into the same European market. Mitrova gave that as an example where the companies could work together, perhaps with pipeline gas providing baseload supply and LNG meeting demand peaks.

Meanwhile, Gazprom said it is on target to start deliveries to China in early December through its new Power of Siberia pipeline. The plan is to start at 500 million cubic feet per day next year, ramping up to full capacity of 3.6 billion cubic feet per day by 2025.

At full capacity, the pipeline would about equal China’s pipeline gas imports from Central Asia, mostly Turkmenistan. Those combined pipeline imports would about equal the amount of gas imported as LNG last year.

Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide.

03/27/2019 - 11:20am