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Are Oil Prices Heading Back To $120?

Are Oil Prices Heading Back To $120?

Last week’s sell-off by speculators…

Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Is Russia’s LNG Push Too Little Too Late?

Russia is planning a major foray into LNG that needs to be completed by 2030, while LNG projects are still profitable. This is not a rumor circulating the Kremlin corridors but part of Moscow’s official energy strategy. And it could see the country produce 140 million tons of LNG annually by 2035.

Building facilities producing liquefied natural gas is an expensive undertaking. They cost billions and tens of billions and need long-term buying commitments to make economic sense. Right now, several U.S. producers are facing an uncertain future because of the lack of such long-term agreements as a result of the pandemic and demand uncertainty that has spread from oil to all energy commodities.

According to a report by Russian opposition daily VTimes, the rush to build LNG capacity as soon as possible, however, has nothing to do with the pandemic and its effects. It has to do with the energy transition spearheaded by European governments that now seems all but inevitable despite the economic fallout from the pandemic.

The report cites a draft energy strategy that estimates renewable energy will have become so cheap by 2030 that it will begin to displace liquefied natural gas in terms of cost, making any project launched after 2030 unprofitable. Unless Russia builds its LNG capacity by that year, “the monetization of the resource base will become high-risk and practically impossible.”

Annual LNG production of 140 million tons would be more than four times the 2019 output of Novatek and Gazprom, VTimes’ Alina Fadeeva notes. It would also be close to double the current production capacity of the world’s largest LNG exporter, Qatar. Most importantly, however, these 140 million tons of LNG may turn out to be more than the world will need at that time.  Wood Mackenzie earlier this year forecast that global demand for LNG will rise at a healthy rate over the next ten years, but added that capacity will also be rising during that time at a rate greater than demand. With demand reaching 550 million tons in 2030, the world would need additional production capacity of 120 million tons to be ready by that year. A lot of this new capacity, according to Wood Mac, will come from Qatar, which would leave some 70 million tons per year to be built by all other producers. That’s half of Russia’s capacity plan alone.

The payoff period for new LNG projects in Russia, according to VTimes’ Fadeeva, is more than 20 years. On top of that, renewable energy technology will continue advancing, lowering costs further, making renewables more competitive with LNG. And then there is environmental regulation, which will make “dirtier” LNG less competitive. Europe is already making the life of U.S. LNG producers harder with its emissions-cutting plans that extend to and include LNG production.

Related: Oil Prices Under Pressure As Oil And Gasoline Inventories Build

LNG is more emission-intensive than pipeline gas by definition: while natural gas is extracted from the ground and then flows through a pipeline, the natural gas destined to become LNG goes through a very complex process before it ends up as a liquid, and this process emits greenhouse gases that are causing frowns in Brussels.

At the moment, Russia has an advantage over most other producers: it is close to Europe and to Asia thanks to the opening up of the Northern Sea Route, and it can export its LNG more cheaply than most. However, this advantage will not last forever, according to the authors of Moscow’s draft energy strategy. As more governments set ambitious emissions-cutting targets, natural resources such as gas will need to be monetized soon—the sooner, the better—before demand flatlines.

This, according to the draft, is seen happening around 2035. By that year, the authors note, technology will make renewables so cheap fossil fuel demand growth will end. As a result, the payoff period for new LNG projects from that moment onwards will become even longer, with profitability risks more severe and payoff periods longer. 

The authors of the draft strategy are preparing for a grim future when it comes to fossil fuel demand. Their expectations, however, raise questions for other LNG hopefuls as well, with a slew of new projects planned in the United States, Africa, and the Middle East. The combined planned capacity of these and Russia stands at 150 million tons annually, according to Wood Mac.

Novatek alone plans to boost its liquefaction capacity to 60 million tons annually by 2030. According to the draft strategy, Russia could reach 100 million tons in capacity by that year without Gazprom. In fact, there have been suggestions that Gazprom remain exclusively a pipeline gas company leaving LNG production to others. Yet to hit the 140-million-ton goal, Russia would need Gazprom’s Tambey LNG cluster, according to the draft strategy. The question is, in the forecast market context, will there be enough demand for so much LNG?

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on November 18 2020 said:
    Russia, the world’s energy superpower wouldn’t start a huge LNG expansion without knowing that it will achieve its objectives. Moreover, President Putin has already declared Russia’s ambition to become the world’s largest LNG producer by mid-2030s.

    Moreover, Russia’s LNG has a ready and secure market in the world’s largest gas and LNG market, namely China. China is projected to overtake Japan by the end of 2022 to become the largest importer of LNG.

    Russia is already increasing its LNG exports to Europe to bolster its position as the dominant supplier of gas to the European Union (EU) with its market share projected to grow from 40% currently to 45% within the next five years aided by the Nord Stream 2 and the Turk Stream gas pipelines which will be bringing Russian piped gas under the Baltic and the Black Seas respectively.

    Furthermore, Russia has an advantage over most other producers: it is close to Europe and to Asia thanks to the opening up of the Northern Sea Route, and it can export its LNG more cheaply than most.

    Gas and LNG will be the pivot for a gradual global transition to renewables well into the future. And while renewables principally solar and wind energy will eventually replace coal in global electricity generation, they wouldn’t satisfy global electricity demand without major contributions from natural gas, LNG and nuclear energy.

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

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