Russian LNG - China and Asian Markets?
LNG Market | Western Sanctions Challenges | Technology and Markets
Dear BWR Subscribers,
“Barbershop Whispers….Russia” begins with “My Takeaways” on the main topic, followed by the main topic discussion. The last two sections of “Barbershop Whispers…Russia” are “Follow-ups” regarding previous publications and “Quick Bites” briefly addressing emerging events.
In last week's BWR, I discussed Europe and Russia's changing natural gas market, specifically the changing demand for pipeline natural gas from Europe and Asia.
In this week’s BWR, I will discuss Russian LNG export markets, including the manufacturing, logistics, and market competition challenges for Russian LNG producers.
Takeaways:
RUSSIAN ADAPTATION: Russian LNG producers are spending billions in capital as they target China and other Asian markets. While Western sanctions present challenges to accessing the technology needed for LNG production, financing for the plants, and off-take agreements, it is unlikely to stop Russia from increasing its market share in the Asian market. Russia may pay a higher cost due to sanctions, but as with the Russian oil price cap, the sanctions will have workarounds.
CHINA DEPENDENCE: Russia is becoming more dependent upon China for markets and technology, strengthening China’s relationship in the Russia/China relationship. This is evidenced by China supplying turbines to the Arctic LNG -2 project and the possibility of taking over the construction of LNG tankers for Russia.
Background
For decades, Russia profited handsomely from inherited Soviet-era pipelines that shipped gas to Europe — Russia’s biggest market — up until the Kremlin’s second invasion of Ukraine. From the Kremlin’s view, European dependence and its growing thirst for cheap gas warranted the construction of Nord Stream 1 and 2 pipelines at a combined cost of €17B. In 2021, total pipeline gas to the EU reached 120 bcm. Today, with Nord Stream 1 and 2 disabled due to the underwater explosions, pipeline gas along Soviet-era pipelines has trickled to 21 bcm.
Putin’s war has resulted in Russia losing its biggest market for pipeline gas and Europe losing its primary source of cheap gas. Europe quickly adapted—albeit at a material cost to German industry—by substituting Russian pipeline gas with alternative energy and gas sources. Still, Russia is struggling to replace the European market.
Russian Pipeline Gas Substitutes
Two of Europe’s primary alternatives to Russian pipeline gas in 2023 are Norwegian pipeline gas and US LNG. The European Council statistics show Norway’s pipeline gas to the EU was 87.8 bcm, accounting for 30% of all EU gas imports. While US LNG was 56.2 bcm, accounting for 19.4% of all EU imports and 48% of all LNG imports. Norway has replaced Russia as the EU’s biggest pipeline gas supplier, and the US is now the biggest LNG supplier to the EU. The EU’s second- and third-biggest LNG sources are Qatar and Russia, respectively.
Another critical source for EU pipeline and LNG gas is Africa. The Medgaz and TransMed pipeline from Algeria has long been a reliable gas source for Italy and Spain, the two entry points for the pipelines on the European continent.
Global LNG Market
As I was told for this piece by a global energy investor:
“Humans will use fossil fuels until the last drop”
Until alternative energies deliver an unequivocal and compelling economic case, there will continue to be a global demand for fossil fuels, and Russia will be at the center of this market.
According to global commodities research group Kpler, the global LNG export market in 2023 was 412.44 million metric tonnes (mt), of which the US accounted for 86.15 mt, or 21% of global exports. The US was the biggest global LNG exporter for the first time, surpassing Qatar and Australia. Russia came in fourth, accounting for about 32.3 mt in 2023, 8% of global exports.
According to Shell Energy, global demand for LNG will reach between 625-685 million metric tonnes per annum (mtpa) by 2040. According to a Shell Energy executive:
“China is likely to dominate LNG demand growth this decade as its industry seeks to cut carbon emissions by switching from coal to gas…with China’s coal-based steel sector accounting for more emissions than the total emissions of the UK, Germany, and Türkiye combined, gas has an essential role to play in tackling one of the world’s biggest sources of carbon emissions and local air pollution."
Russia’s LNG Market Challenges
Russia faces three significant challenges as it repositions itself in the global LNG gas market: technology, logistics, and competition.
Russia has seven LNG projects, five currently operating, and two are under construction. Gazprom and Novatek-led consortiums own two and four LNG projects, respectively. Sakhalin Energy, a consortium of foreign energy companies led by Gazprom, owns the first LNG plant in Russia, launched in 2009. When completed, the seven plants will have a total production capacity of 62 mt.
Technology
Novatek’s Arctic LNG-2 is Russia's newest and largest production capacity (19 mtpa) LNG facility. Its shareholders include China National Offshore Oil Corporation (CNOOC), French energy giant TotalEnergies, and Japan’s Mitsui. The facility began production in 2023 but has not yet shipped product. It is scheduled to be fully operational by 2026. However, this date looks questionable because US sanctions have delayed the project. The Western shareholders have suspended participation in the project – financing, technical expertise, off-take contracts, etc. – resulting in Novatek declaring force majeure over supplies from the project.
The sanctions have also led to equipment changes and technology withholding. For example, the American company Baker Hughes supplied four of the 21 turbines needed for power generation and gas liquefaction process before the US Treasury designated Arctic LNG-2 as a Specially Designated National (SDN). Once sanctions were in place, Baker Hughes canceled its contract. The remaining turbines are being supplied by the Chinese company Harbin Guanghan Gas Turbine Co. Western sanctions also restrict Western LNG technology related to the liquefaction process. In response, Novatek is applying its own small-scale liquefaction technology called Arctic Cascade, which has been used since 2021 by other plants. While the technology is less efficient than Western technology, it does the job and will be perfected over time, as per a Russian Novatek executive.
Arctic LNG-2 is expected to cost $25B once fully operational.
Logistics
Novatek’s three other LNG facilities are on the Kara Sea and will ship product year-round through the Northern Sea Route (NSA). The NSA is an essential route to Asian markets, reducing shipping time by 40% and improving the project's economics. In 2019, Novatek contracted South Korea’s Samsung Heavy Industry for 15 LNG tankers with icebreaker capabilities for $300M each. Three have been delivered, and two are under construction. The two under construction, and the remaining ten on the order book will likely never be delivered due to Western sanctions. In this case, Novatek may turn to Chinese shipbuilders who have begun building LNG tankers.
Today, 777 LNG tankers are sailing the seas, compared to 738 in 2022. By 2028, the global number of LNG tankers will be greater than that of crude oil tankers.
The growing number of LNG tankers demonstrates the increasing importance of the Global LNG market.
Russian Export Markets
Putin’s war triggered what may be the EU’s permanent shift away from Russian gas – pipeline and LNG – to alternative gas sources and energy. The EU imported 121 mt of LNG in 2022, an increase of 60% compared to 2021. Russia represented 6.1% of the EU LNG imports.
For Russia, this means new markets and new infrastructure needed to replace the EU market. As discussed in BWR’s issue “Russia Struggles with Changing Gas Markets”, gas pipeline infrastructures to China continue to be expanded – Power of Siberia 1 and 2.
Russian LNG producers are focusing on the Asian market, mainly China, and building multi-billion-dollar plants and infrastructures. In 2023, China became the biggest importer of LNG, at 71.3 mt, and Australia and Qatar delivered 61% of this demand. Russia represented 12% of Chinese LNG imports, and this is expected to significantly increase over the next ten years as Chinese demand for gas—pipeline and LNG—continues to grow.
The IEA forecasted Chinese LNG imports to increase by 15% in 2024. This increase is expected to be supported by several new regasification terminals, which will come online by the end of 2024.
With Western sanctions in place and the Kremlin’s war on Ukraine continuing, Chinese and other Asian buyers may be reluctant to take cargo from sanctioned projects for fear of secondary restrictions. However, as with what happened with the Russian oil price cap and other Western restrictions on Russia, buyers are likely to find ways around the restrictions, but this will also come at a financial cost to Russia in the form of higher delivery transaction costs and product discounts.
Conclusion
Novatek’s Arctic LNG -2 illustrates the manufacturing, logistical, and market challenges Russian LNG gas producers face as they seek new markets in the face of Western sanctions. Nevertheless, as was the case with other Western sanctions, Russia will work with other sanctioned countries—Iran and North Korea—as well as opportunists and entrepreneurs outside of sanctions jurisdiction to create workarounds.
Follow-ups & Quick Bites:
Follow-ups:
No follow-ups this week
Quick Bites
Noon Election Protest Against Grandpa in the Bunker
Defying Kremlin warnings against election day protests, voters showed up at noon across the country to stand in line and leave or vote for any candidate but Putin.
Yulia Navalnaya reminded supporters to protest the upcoming presidential “election” in a YouTube video.
Russian Opposition Leader Leonid Volkov Brutally Attacked in Vilnius
Lithuania has blamed Moscow for the bloody hammer attack on a longtime aide to the late Russian opposition leader Alexei Navalny outside his home in Vilnius.
Leonid Volkov was in hospital briefly after he was attacked with a hammer by an unknown assailant on Tuesday night in the Lithuanian capital.
“The man attacked me in the yard, hit me on the leg about 15 times. The leg somehow is OK. It hurts to walk … However, I broke my arm…They literally wanted to make a schnitzel out of me…Vladimir Vladimirovich….no one is afraid of you.”
Ukrainian Drones Light Up Refineries Deep Inside of Russia
Last week, Ukraine launched the largest drone attack to date on targets deep inside of Russia, striking oil refineries in Kstovo (Nizhny Novgorod Oblast) and Ryazan, more than 1,000KM and 200KM from the Ukrainian border, respectively.
The NORSI plant in Kstovo produces nearly 6% of Russia’s refined crude.
Vol 2, No 14 - BWR 17.03.2024
Thank you for reading “Barbershop Whispers....Russia” written by Adam A Blanco! “Barbershop Whispers…Russia” is a product of e8Q Technologies, a consultancy with insights on all things Eurasia. Subscribe for free to receive new posts.