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The World’s Next Great LNG Project

According to Shell, global demand for LNG will grow by 11 percent in 2019. Primarily, it will be consumers in China and India that will drive the expanding LNG industry. In the context of increasing demand, risks are emerging on the supply side that could negatively impact the transition to cleaner sources of energy. These supply fears are driving 2019 to be a record year for LNG projects across the globe.

Historically, Russia has produced and exported massive volumes of gas to Europe through pipeline infrastructure built during the Cold War. However, since the Ukraine conflict, an awareness of Europe’s overdependence on Russia has become prevalent within the EU. As a result of this anti-Russian sentiment, Moscow’s reliance on European customers has become a security issue for the country. Diversification, therefore, has become increasingly important for energy security in the country. In order to achieve this diversification, Russia is aiming to create a domestic LNG sector that can rival the biggest producers in the Middle East and Australia.

Novatek’s Yamal LNG facility was finished in December 2017, completed both within budget and on time despite the extreme environment in the Arctic region. For Russia to become an LNG superpower, significant expansion of capacity is required. Novatek, therefore, has been planning for another project in the Arctic region called Arctic LNG 2.

(Click to enlarge)

French energy giant Total is Novatek’s partner in the Yamal LNG facility and owns 20 percent of the shares. The decision has been made to continue the successful cooperation into an agreement concerning Arctic LNG 2 where the French company will take a working interest of 10 percent in the project. Furthermore, Total also has an overall stake of 19 percent in Novatek itself. 

Originally, Arctic LNG 2 was planned to be based around the Utrenneye gas field. However, Novatek recently discovered a significant deposit of gas in the near vicinity of the facility called the North Obskoye gas field which was the largest discovery in the world in 2018. The original deposit contains two billion cubic meters of natural gas and 100 million tons of natural gas liquids while the most recent discovery adds the equivalent of another 960 million barrels of oil. The North Obskoye gas field would improve the project’s profitability as more gas can be exported over a more extended period.

Related: Saudi Aramco CEO Rebukes Peak Oil Demand ‘Hype’

Recently, the consortium has been awarding preliminary contracts worth billion to subcontractors for the construction of the facility. Among these companies are Saipem and Renaissance Heavy Industries who have signed a $2.5 billion agreement to supply the engineering, materials, construction, towing, and installation of several platforms. According to Alexander Fridman, a senior member of Novatek’s board, “Arctic LNG 2 will utilize new technological solutions and employ domestic manufacturers. The supply contract envisages new prospects for localizing the compressor equipment fabrication for the LNG industry, which is consistent with our strategic aim of creating and developing an LNG Centre of Excellence in Russia."

Also, Siemens has joined the ranks of potential suppliers. The German engineering firm was also involved during the Yamal project. The contract includes three feed gas compressors and six boil-off gas compressors. The equipment will be manufactured locally to create domestic knowhow to support an independent Russian LNG sector. 

Although the FID has not been made yet, the ever-increasing ecosystem of subcontractors increases the likelihood of an announcement. Also, interest from global investors such as Korean KOGAS and Saudi Aramco’s intention to buy 30 percent of the multi-billion facility boosts the likeliness that the project will materialize.  

By Vanand Meliksetian for Oilprice.com

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  • Mamdouh Salameh on March 02 2019 said:
    Having established itself as the world’s largest exporter of natural gas, Russia is now setting its sights on becoming the world’s largest producer and exporter of LNG.

    While Russia can maintain its dominance in piped natural gas exports well into the future, its plans to become also an LNG superpower could face tough competition from Qatar, Australia and even the US. However, no one should underestimate Putin’s resolve once he has set his mind on a certain objective. The completion of the Russian gas company Novateck’s Yamal LNG facility and the plan to develop the Arctic 2 LNG plant in cooperation with French oil giant Total are no exception.

    Yamal LNG facility was finished in December 2017, completed both within budget and on time despite the extreme environment in the Arctic region.

    The viability and profitability of Arctic 2 project is assured by Novateck’s discovery of the North Obskoye gas field which was the largest discovery in 2018 with two billion cubic meters of natural gas (bcm) and 100 million tons of natural gas liquids. Another most recent discovery in the same area adds the equivalent of another 960 million barrels of oil.

    The Arctic LNG 2 project with an estimated price tag of US$35 billion is expected to start operations in 2022-2023. At full capacity, it will produce 19.8 million tons of LNG per year. And in case of US sanctions complicating the financing of the project, Russia’s sovereign wealth fund can, in effect, finance the project on its own.

    Just recently Russia’s gas giant Gazprom announced that the Power of Siberia gas pipeline will be operational by the 1st of December this year with an annual delivery of 38 billion cubic metres a year (bcm/y) for China for the next thirty years. The pipeline capacity can be increased to 61bcm/y if Putin decides to cut the shipment of natural gas to Europe in favour of China.

    And with the eventual completion of Nord Stream 2 and the Turk Stream gas pipelines which will carry Russian gas supplies to the European Union (EU) under the Baltic and the Black Seas by December this year, Russia’s dominance in the EU fast-growing gas market will be unassailable.

    Still, Russia is aware that its reliance on European customers has become a security issue for the country. That is why it has been planning a diversification of export destinations and also the creation of a domestic LNG sector that can rival the biggest producers in the Middle East and Australia.

    The completion of the Power of Siberia will send a huge signal to the EU that Russia is not vulnerable to economic or geopolitical pressure on the gas price or supplies as it could easily switch its gas supplies from the EU to China.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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