Blog co-authored with: Anastasia Shipetina, Oil & Gas Business Performance Analyst, Schneider Electric
Russian LNG grows, as the future of pipeline gas exports is uncertain.
Liquefied Natural Gas (LNG) became a hot topic for the Russian economy in 2019. The Russia-Ukraine dispute over new gas transit contracts, issues with the Nord Stream-2 export pipeline and Gazprom’s financial difficulties in Europe – all reinforced LNG growth. As this market has developed, it has reached the level where gas carrier ships are actually able to seriously compete and even substitute gas pipeline transportation.
The average price of Russian pipeline gas stood at $246 per thousand cubic meters in 2018. Gazprom expected the price to drop to $230-$235 in 2019. But in the third quarter of 2019, the Russian gas monopoly was selling gas at $169.8: a 16-year low. As a result, Gazprom’s net revenue from sales to Europe and other countries fell by 242 billion rubles (-12%) in the first half of 2019. According to the Energy Information Administration (EIA), Europe was able to meet increasing demand thanks to cheap LNG – so sales doubled last year, totaling 76 million tons.
Gazprom’s problems were not only limited to the price drop. Sales were also declining. Russia didn’t manage to sell the 200 billion cubic meters forecast. Moreover, Poland has now agreed to take Norwegian supplies from 2022, as well as agreeing to transit US LNG to Ukraine. Nothing prevents other European countries from increasing their LNG imports and the US is urgently looking for markets to secure its increasing LNG export capacity.
Having said that, Gazprom is still the leader in pipeline gas exports and its problems cannot only be linked to the geopolitical issues faced by the Russian State. In an attempt to end European dependence on Gazprom supplies, more LNG projects coming from the private Russian company Novatek have emerged. In fact, the volumes exported to Europe from Novatek’s Yamal LNG project has surpassed the US supply of the past two years. Russian gas has even reached the US itself – with shipments from Yamal being sent there through intermediaries.
Key LNG projects in Russia – more to come.
The first Russian LNG plant, Sakhalin-2 starting operating in February 2009. Its initial production capacity was 9.6 million tons per year, growing to 11 million tons in 2020. By starting a third LNG train its capacity will add another 5.4 million tons between 2024-2026. Gazprom owns 50% of the project, 12.5% and 10% belong to Japanese groups: Mitsui & Co and Mitsubishi respectively, and 27.5% is owned by the Dutch Oil Major, Shell. Sakhalin-produced LNG is mainly exported to Japan.
Novatek’s Yamal LNG, built in 2017-2018, is Russia’s second liquefaction project. The private group owns 50.1% of shares, the rest is distributed between the French major TOTAL and the Chinese CNPC. Currently Yamal’s production capacity is at 18 million tons and it is expected to grow by 0.9 million tons in 2020, when the fourth train is in operation. It is important to highlight that additional LNG trains will work only using Russian equipment since sanctions limit the use of foreign technologies.
This year, Gazprom plans to start Portovaya-LNG liquefaction plant located at the Gulf of Finland, and Vladivostok-LNG in the country’s far East. Each project has liquefaction capacity of 1.5 million tons. Other LNG projects to go into operation in the coming years are Gazprom’s Baltic-LNG (2023-2024, 10-13 million cubic meters) and Novatek’s Arctic LNG-2 (2023-2026, 19.8 million cubic meters). 10% of Novatek’s plant is already attributed to Japanese Mitsui & Co and the Japan Oil, Gas and Metals National Corporation (JOGMEC). Before 2023, Novatek will build Obskiy-LNG (in Yamal region) with a production capacity of 4.8 million cubic meters. In September 2019, state-controlled Rosneft announced the Dalnij Vostok-LNG project with capacity of 6.2 million tons, expected in 2025-2027.
At the end of 2019, Russia’s total liquefaction capacity reached 28.5 million tons. If all the planned projects are completed on time, the liquefaction volume will exceed 80 million tons by 2026-2027. By then, Russian producers will control 15%-20% of the global market, depending on the status of foreign LNG projects.
Gazprom vs. Novatek
Issues around LNG supply markets complicate Russia’s promising LNG future. The majority of gas from Novatek’s Yamal is shipped to Europe for logistic reasons. LNG carriers can only travel using the Northeast Passage to Asia for just a few months per year, and the rest of the time – through the Suez Canal. For instance, Yamal’s first LNG shipment only reached Japan in December last year.
Europe remains Gazprom’s key client and continues to rely on Russian pipeline gas. To avoid competition, Novatek planned to ship huge volumes of Yamal’s LNG to Asia. However, 80% of Russian LNG from the Arctic ended up in Europe last year, which boosted Novatek’s European market share by almost 20%, compared to 13% in the US. This also contributed to Gazprom’s decreasing profitability in Europe.
It is important to note that Novatek’s Yamal LNG is operating with several privileges: in fact Novatek will benefit from avoiding Severance tax, property tax and LNG export fees for 12 years. Gazprom has doubts about the Yamal project’s profitability once these perks no longer exist. The conflict between Gazprom and Novatek could seriously reduce Russia’s revenue from natural gas sales, and if the decision is made in favor of pipeline gas transportation, then Arctic LNG profitability is questionable. In order to increase their profitability and avoid competition, the Russian Government is suggesting developing new-generation icebreakers to transport via the Northeast Passage all year round.
Global LNG: is the future bright?
The total LNG export capacity of 47.9 million tons is expected by 2024, if all these Russian projects go as planned. Their capacity could reach up to 120-140 million in 10 years. Strong growth is also forecast in the US, where they expect to become #2 global supplier after Qatar, so leaving the third place to Russia.
According to experts, Russia lacks the LNG technologies due to sanctions, but this is just one of the risks it faces for future LNG developments. The position of Europe, as Russia’s main gas consumer, stays uncertain. In recent years, Europe has significantly increased its LNG regasification capacity and is now able to completely substitute Gazprom’s pipeline supply. Such political moves may cause conflict between EU countries and could hit those European companies who invested in Russian pipelines.
At the global level, new technologies and larger carriers can improve the profitability of LNG projects, but investors remain concerned. At the beginning of 2020, the value of LNG contracts was lower than at any time in the previous year and could hit a five-year low. This could lead to a future LNG shortage, and, as a consequence, to higher prices. That may also boost new project developments, but equally slow down LNG production and markets.