Doha, September 2021
Russia Zooms in on its Arctic Reserves and Trade Routes to Become LNG Giant
Russia’s Arctic LNG projects have among the lowest production costs in the world. Several new plants are planned, to add to Yamal LNG, which was completed in 2017, and Arctic LNG 2, which should begin production in 2023. The low costs may provide an advantage for Arctic projects as they compete for funds with other liquefaction projects, as will Russia’s target of a 20% share of the global LNG market by 2030.
Russia has the world’s biggest gas reserves at around 1700 trillion ft3 (a quarter of the world’s total), and much of that gas is located in several huge fields along the coast of Arctic Russia, particularly around the Ob estuary. These fields are the second-largest conventional gas source in the world, behind the single super-giant North Field/South Pars field that lies in the Arabian Gulf, between Qatar and Iran. North Field contains 1785 Tft3, most of which lies in Qatari waters - which is in the order of five times the size of the world’s second-biggest field, Urengoy in Arctic Russia and ten times the size of Russia’s nearby Yamburg field. While they have already been tapped for pipeline gas and liquids, their size means huge volumes of low-cost gas remain available, providing a solid basis for Arctic LNG developments.
The area is already home to Novatek’s 16.5mn t/yr Yamal LNG plant, which was completed in late 2017 on time and within its $28bn budget, and draws on gas from the Urengoy field, and several more projects are planned for the region (see below). Overall, Russia estimates it can supply LNG to the global market at a cost of $3.7-7.0/mn Btu. Existing and future Arctic LNG plants on the Ob estuary are likely to be at the bottom end of that range at around $4/mn Btu, which is still higher than Qatar's estimated costs – where gas costs are priced at around minus $1/mn Btu, according to McKinsey, due to the high liquids output. However, the Russian prices do not include credits for condensate which will reduce Russian prices somewhat. For example, in the US, with Henry Hub above $5/mn Btu, baseline LNG costs are nearer $6-7/mn Btu. Unlike Russia’s export pipelines, LNG can tap any market in the world via the increasingly ice-free Arctic Ocean. This will improve flexibility longer term, given that Russia’s two biggest export markets, Europe and China, have both set mid-century net-zero targets, and the EU’s proposed plan includes a carbon border tax that could hit Russian energy imports. It may have to develop new markets over time, and/or switch from LNG to hydrogen and green power exports.
Focus on the Asian Market
Most of the LNG from Arctic projects is expected to head to China and other Asian markets, where countries are looking to reduce carbon emissions by replacing coal with gas and need LNG imports to make up for falling domestic gas output and rising energy demand. Asian buyers, including China, Pakistan and Bangladesh, have reportedly purchased at least 20mn t/yr of LNG in the last 10 months spread over various time periods, with much of that coming from Qatar. Term prices have now started to firm, although long term contracts are still cheaper than short- or medium-term deals. It is unclear what impact Japan’s plans to cut gas demand to 20% of power generation by 2030, announced in its 6th Basic Energy Plan in July, will have – its decision may mean less liquefaction capacity gets built.
Russia’s Production Targets
In March, Russia approved a long-term LNG development strategy that targets a 20% share of the global market by 2035. However, some of the less commercial projects envisaged by the government and developers may be difficult to get off the ground without at least the same support that Yamal enjoyed, which included medium-term exemptions from the mineral extraction tax (MET) and property tax, and a reduced rate of tax on profits. Yamal also pays no export duties on its LNG, and receives additional regional tax breaks. If Russia were to be as generous with all its LNG plants, then the state may miss out on its share of revenue from the exploitation of national assets.
According to the IGU, if all planned plants are built, Russian capacity additions will represent the fourth biggest new source of new LNG liquefaction capacity over coming years, after Qatar, the US and Canada (no new resources are currently planned for Australia). A steady flow of new Russian capacity is in the pipeline. Novatek commissioned a 0.9mn mt/yr fourth train at Yamal LNG in January that is primarily designed to assess Novatek’s troubled Arctic Cascade liquefaction technology, which attempts to use low Arctic winter temperatures to increase efficiency. And currently under construction is the 19.8mn mt/yr Arctic LNG-2 facility, in which Novatek has a 60% interest, alongside Total, Japan Arctic LNG company, CNPC and CNOOC - all with 10% each. Located on the Gydan peninsula, Arctic LNG 2 will be supplied with low-cost gas from Novatek's nearby Salmanovskoye (Utrenneye) and Geofizicheskoye fields. The large train size at 6.6mn t/yr each also helps keep costs down. The first train is due to begin production in 2023, the second in 2024 and the third in 2025 – a year ahead of earlier plans, according to Novatek in May. In April, Novatek said that it had concluded 20-year LNG sales deals covering Arctic LNG-2's entire production, with Chinese buyers accounting for the biggest slice.
Arctic LNG 2 is also understood to have also received generous government support. The estimated cost is US$21.3 billion, of which 73.43% will be paid for by Novatek and 26.57% by the Russian Federation. In March it was reported that Russian President Vladimir Putin had introduced into law fresh tax relief (a zero-rate extraction tax) for new LNG projects in the Arctic.
Novatek is also planning the smaller 5-6mn mt/yr Obsk LNG plant close by. A final investment decision is due this year, and the plant could start up as early as 2024. The company has chosen LNG technology from Germany’s Linde, over both US company Air Products, which supplied Yamal LNG, and its own troubled Arctic Cascade LNG technology. Novatek is also building a gas chemicals plant near the Yamal LNG project that will produce low carbon ammonia, hydrogen, and other gas chemical products, with the help of carbon capture and storage.
Aside from the smaller Obsk plant, Novatek is planning two more big export plants in the area – Arctic LNG 1, and Arctic LNG 3. An FID is due on Arctic LNG 1 in 2023 or 2024, according to reports in early July, although other recent rumours suggested Novatek was considering revising plans to produce low carbon blue hydrogen and possibly ammonia instead. In any case, the 19.8mn t/yr (or the hydrogen equivalent) Arctic LNG-1 plant will use gas from fields on the Gydan peninsula, according to Russia’s LNG strategy. Development would likely start after Novatek finishes construction of Arctic LNG2, and the company is currently seeking partners for 40% of the project. Arctic LNG3 would then follow in the 2030s, also with 19.8mn mt/yr capacity. It would be supplied by shallow water fields in the Gulf of Ob, where Novatek found a lot more gas in 2018.
Other proposed Arctic projects include Gazprom's 20mn mt/yr Tambey LNG and 30mn mt/yr Shtokman LNG projects. In addition, Rosneft is planning the 30mn mt/yr Kara LNG and 30-50mn mt/yr Taymyr LNG projects, further east along the Arctic coast. Despite low-cost gas, these projects currently look some way off and would rely on continued growth in global LNG markets after 2040 to be viable. Russia also produces LNG on Sakhalin Island in the far East of Siberia and, joint marketing synergies may become apparent with both Sakhalin and pipeline exports to both Europe and Asia.
Russia clearly has the potential to become one of the world’s leading LNG exporters, as it has in pipeline gas, but it faces some challenges to achieve its goal. It is difficult to predict how many of the projects classified as probable, possible and potential will be implemented; and if so, on what scale and within what timeframe. Furthermore, Ministers will have to develop effective strategies for how to deal with both current (Qatar, Australia and the US) and rising (countries of Sub-Saharan Africa) competitors.
However, with the Arctic LNG 2 project under construction and other projects by Novatek, the improving Northern Sea Route (NSR), which links Asia and Europe via waters off Russia’s northern coast and growing worldwide demand for LNG, has a solid base from which to greatly strengthen its positions in both the Asian and European markets in the coming years.