Gas-rich Russia is working to boost its liquefied natural gas production to capture 20% of the global market by 2035.
According to the report Russia’s New LNG Strategy: Breaking the Ice, released by IHS Markit last year, the country aims to create a whole new industry to benefit multiple sectors of the domestic economy by marketing its untapped Arctic mineral resources via a route which thus far has mostly been inaccessible.
The route
As climate change melts the Arctic icepack, Moscow has eyed a shortcut to make shipments quicker, through its very own territorial waters: the Northern Sea Route (Nsr), also called the “Polar Silk Road,” Kallanish Energy notes.
“The Russian view is the main incremental market in the world for gas is Asia, and the only way to reach these markets (aside from China, which will receive Russian piped gas) is with LNG,” said Matt Sagers, executive director at research firm IHS Markit, in an email.
“The main flow is planned to use the Northern Sea Route to reach these markets from a cluster of LNG producers on Russia’s Arctic coast,” he added.
Running from Murmansk near Russia’s border with Norway, to the Bering Strait near Alaska, the northern route cuts travel times to Asia by 10 days compared to journeys via the Suez Canal. While via the latter, container ships need to make deliveries to customers along the way to cover costs, LNG and oil tankers can serve single markets without stopping on the way when using the northern route.
It’s part of the comprehensive plan for the modernization and expansion of trunk infrastructure approved by the government last summer, and quickly kick-started on many fronts.
The companies involved
In December, a new law vested state-owned nuclear corporation Rosatom with powers to develop and operate infrastructure in the Nsr and adjacent territories.
Earlier this year, Russian President Putin formed the new Ministry of Far East and Arctic Development to develop and implement state policy in the area, while the Norwegian foundation Center for High North Logistics (Chnl) inked pacts with partners from Japan, China, South Korea and Norway to research shipping.
Last month, Rosatom signed a non-binding agreement to develop the Nsr with Russia’s sovereign wealth fund RDIF, Russian producer of palladium and nickel Norilsk Nickel and global port operator DP World.
According to Chnl, the total development is estimated to cost $9.3 billion – with the government investing $4.3 billion. Capital expenditures (Capex) in 2019 will be $700 million, mostly coming from the Russian federal budget.
Cargo volume will increase from 9.9 million tons per annum (Mtpa) in 2018, to 92.6 Mtpa in 2024, Rosatom said – with gas accounting for 41 Mtpa and coal for 23 Mtpa.
By the end of the decade, capacity could soar up to 20 Mtpa, thanks to a nuclear-powered icebreaker fleet sailing alongside containers.
The focus is on natural gas, as there are environmental concerns if oil leaks into the sea.
“Currently, only some small crude oil tankers shuttle in the westernmost area of the Arctic, where the ice condition is not heavy even in the winter due to warm ocean currents,” said Ryuichi Shibasaki, associate professor at the University of Tokyo, in an email sent to Kallanish Energy.
Novatek’s vision
This is why Russian producer Novatek is the star of the show, looking to expand from domestic consumers to foreign markets, with the goal to account for half of the overall Russian LNG growth.
Last year in August, the company delivered the first cargo of LNG from its Yamal LNG project via the Nsr, taking 19 days to move from Norway to South Korea.
It was delivered by the tanker Christophe de Margerie, commissioned by Russian company Sovkomflot, which was the first commercial ship to transit the Arctic without an icebreaker escort.
The Christophe de Margerie was designed to overcome ice thickness up to 6.9 feet, utilizing a propulsion capacity of 45 megawatts (MW), comparable to the capacity of a modern nuclear-powered icebreaker. During this trip, it plowed through ice fields up to four feet deep on separate sections of the route.
Novatek also leads the massive Arctic LNG 2 project, which involves construction of three LNG trains each with a capacity of 6.6 Mtpa employing Siberian gas resources, for a projected investment of between $20 billion and $21 billion.
“According to our estimates, the Arctic region is capable of producing up to 140 million tons of gas per year,” said Chairman Leonid Mikhelson, in a release.
The venture attracted foreign capital, as Chinese NOCs China National Oil and Gas Exploration and Development Co. (Cnodc) and China National Offshore Oil Corp. (Cnooc) and French supermajor Total each acquired a 10% stake earlier this year.
Another Chinese NOC, China National Petroleum Corp. (Cnpc), signed a Share Purchase Agreement last month in relation to a 10% stake acquisition.
A consortium made by Japanese companies Mitsui and Japan Oil, Gas and Metals National Corporation (Jogmec) acquired another 10% interest last week. Japanese automotive manufacturer Mitsubishi is rumored to be next to buy-in.
The joint venture is building a transshipment terminal in Kamchatka, which will create a new independent center for pricing of LNG in the Asia-Pacific region.
This will speed up year-round navigation eastward, expected to begin in five years, as at the moment the quantity of ice only allows it to be traversed in the summer months.
Moreover, it will reduce transportation costs, one of the main challenges in the Nsr development.
The facility will allow LNG to be transferred to “standard” vessels that are less costly to operate than ice-class vessels, saving 10% of the total transportation costs to Asian markets (excluding icebreaker fees) compared with using ice-class vessels for the entire route.
In fact, icebreaker costs alone seem comparable with the costs of transiting the Suez Canal, according to IHS Markit.
A geopolitical choice
Once the development is optimized, Russian LNG will be a cheaper choice than U.S. product for Asian markets, according to Xi Nan, senior analyst at research company Rystad Energy.
“With the Western sanctions against Russia, a closer relationship between Moscow and Beijing would benefit Russia’s LNG strategy,” she said, in an email to Kallanish Energy.
“Therefore the Polar Silk Road is not only an economical solution, but also a geopolitical thinking,” she added.
