Russia plows ahead on oil, natural gas

While the rest of the energy world deals with reluctant lenders and insurers, activist investors and pension funds turning away from fossil fuels, politicians and citizenry pushing to accelerate the transition past oil and gas — less so Russia.

An example of how friendly the government remains to oil and gas development — which provided close to 45 percent of the government’s annual revenue pre-pandemic — was seen in a press release Sept. 8 by Novatek, the country’s largest independent natural gas producer.

The company had won an auction — in which it was the only bidder — for licenses to explore, develop and produce from Arctic fields holding an estimated 2.9 billion barrels of oil equivalent, which includes 14.6 trillion cubic feet of gas.

Novatek paid about $180 million for the 27-year licenses, or about 6 cents per barrel of potential, though certainly not all of the 2.9 billion barrels will be pumped from the ground.

The fields are on the Yamal Peninsula, where Novatek in 2017 started up the country’s largest liquefied natural gas production and export terminal; where the company is building a second, even larger LNG project; and where it wants to add a third gas facility.

Designs plans for the third plant, originally targeting LNG production, were switched this summer to ammonia, hydrogen and methanol production, which all require natural gas.

To meet its feed gas needs — in particular to reach a final investment decision on the third plant — Leonid Mikhelson, the CEO and major shareholder at Novatek, earlier this year told the government his company needed access to more gas resources.

The request was granted. Russia wants to become an even bigger player in the global LNG market, in particular profiting from export sales to Asia just as it does with its dominant position as a supplier of pipeline gas to Europe.

The Warsaw Institute, a Poland-based geopolitical think tank with a focus on energy issues, reported earlier this year: “Mikhelson … has friendly ties with the Kremlin. (Russian President) Vladimir Putin has for years asked state authorities to favor the company.”

But there was a problem in the area that Novatek wanted access to develop. The deposits are within the boundaries of a natural reserve, where industrial activities, including oil and gas drilling, are prohibited. According to Interfax, an independent news agency in Russia, Mikhelson asked the Kremlin to instruct the area’s regional government to change the reserve’s boundaries.

The regional government obliged in May.

The borders of the Yamalsky Reserve, at almost 10 million acres, frequently have been adjusted over the years following requests from oil and gas companies, according to a website of Russian government actions and as reported by the independent Barents Observer newspaper, published out of Norway.

With the boxes checked off for additional gas and government support, Novatek continues to look for partners to share in the risks and help provide capital, and raise financing.

Lacking access to U.S. and European lenders, due to western sanctions against Russia and banks pulling away from fossil fuel financing, particularly in the Arctic, Novatek is turning to Japanese and Chinese banks for more help.

Already most of the equity partners in the Novatek-led Arctic LNG-2 project, which is under construction with a 2023 start-up date, are from China and Japan: China National Petroleum Corp., 10 percent; China National Offshore Oil Corp., 10 percent; and the Japan Arctic LNG consortium, comprised of Mitsui and state-owned JOGMEC, formally known as Japan Oil, Gas and Metals National Corp., at 10 percent.

French major TotalEnergies also owns a 10 percent stake. Novatek holds 60 percent.

Seeing a lack of support from European government export credit agencies, Mikhelson earlier this month said Chinese and Japanese lenders may step in where Europe is backing out, and Russian banks could boost their share to 60 percent of the debt, he said.

Normally, government export credit agencies help finance projects when some of the contracts and jobs benefit their country.

Shareholders in Arctic LNG-2 earlier this year approved external financing of $11 billion for the $21 billion development, with the partners to come up with their respective shares of the rest.

In addition to financing from Japanese and Chinese lenders, Novatek is in talks with India’s top energy companies, Petronet LNG and ONGC Videsh, about buying a stake in Arctic LNG-2.

The Indian government is pushing the country to burn a lot more gas than coal or oil to help clean up its air, and the two companies are in talks about acquiring a joint 9.9 percent stake in the venture, according to a Bloomberg news report Sept. 6, leaving Novatek at 50.1 percent.

Adding partners in India to its LNG ambitions would be a smart play for Russia’s efforts to establish itself as a key supplier of the fuel in the region. Building partnerships is about sharing the wealth, and Novatek has given some of the business for the $20 billion Arctic LNG-2 project to a Chinese shipyard.

The first gas liquefaction module was built at Wison Offshore &Marine’s Zhoushan shipyard in China and arrives this month at Novatek’s construction yard north of Murmansk, where it will be installed atop a large gravity-based structure before it is towed to the project site on Ob Bay in Siberia.

There are analysts, however, who question the wisdom of Russia’s bet on long-term profits from fossil fuels. The Oxford Institute for Energy Studies in the U.K. published a paper in February titled, “Is This Russia’s Kodak Moment?”

“In 2003, Kodak was over 100 years old, had one of the world’s most recognized brand names, employed 145,000 people, and had a turnover of US$13 billion. The company believed that digital photography would remain a niche product and decided to stick to traditional photographic film,” the paper said. “Nine years later, Kodak filed for bankruptcy.”

“Is Russia similarly failing to see the accelerating changes in the global energy system brought on by climate policy and energy technology learning curves? Is it prepared for the impact of these changes on demand for Russian fossil fuel exports? As the world’s largest fossil fuel exporter (oil, gas and coal), Russia will be affected by the energy transition more than any other country.”

Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide. He can be reached at [email protected].

09/22/2021 - 2:26pm