Russian energy behemoth Gazprom has dominated the country’s gas sector for decades. Other companies, such as Rosneft, have tried (and failed) convincing the Kremlin to provide a leveled playing field under equal conditions. Especially, Gazprom’s control of the gas infrastructure and monopoly concerning exports through pipelines has maintained the giant’s domestic position. Novatek’s success, however, in developing the massive Yamal LNG project has created much-needed diversification for the Russian energy industry.
Although Moscow has made it clear that it intends to become a top producer of LNG, the reality is that many consumers are looking for ways to curb emissions. Especially the changing requirements of consumers concerning sustainability is becoming an existential threat for the Russian energy industry. Novatek, Russia’s LNG pioneer, is now also the first to change course and adjust to the demands of the market.
The Yamal LNG project is a major success as it was completed on time and within budget. It emboldened Novatek (and Moscow) to seize the momentum and rapidly develop other sites such as the Arctic 2 LNG project also on the shores of the Gulf of Ob. Besides increasing production capacity and revenue, the development of liquefaction technology has been another goal that is a Western-dominated area of expertise. Novatek’s second (Arctic 2 LNG) and third (Ob LNG) projects were intended to demonstrate the newly developed domestic technologies. Related: Russia Aims To Raise Production, Backs OPEC+ Cut Rollover
However, Novatek’s recent decision concerning the Ob project shows the company’s vision which is rare in the Russian energy industry. In contrast to its domestic competitors, sustainability is seen as a real threat but one that offers opportunities at the same time.
Novatek’s most important markets are in Europe and East Asia where sustainability and the energy transition are rapidly gaining traction. The EU intends to reduce greenhouse gasses by 55 percent by 2030 and become climate neutral by 2050. China, by far the world’s largest polluter, recently set itself the goal of energy neutrality by 2060. Decarbonization, therefore, is a threat to traditional fossil fuel companies. Novatek, however, doesn’t intend to remain such a company.
Recently Russia’s Kommersant reported a change in Novatek’s strategy that could have long-term implications. The current LNG supply glut is detrimental to final investment decisions for projects such as Ob. Novatek has learned from the relative failure of its domestic counterparts who are dependent on the whims of the market. Instead, the company could be diversifying towards the 'fuels of the future'.
Novatek’s Ob project would produce approximately 5 mtpa of LNG by 2025. To this purpose, a €130 million contract was signed with Siemens and Kazancompressormash in the summer of 2020. According to Kommersant, Novatek is in the process of pulling out of the aforementioned agreement. Instead, another accord could be struck with the German company Linde to produce ammonia.
Hydrogen can be transported in three ‘states’: gaseous, liquified by lowering the temperature to -253 °C, and making chemicals, such as ammonia, that are easy to transport. Novatek seems to be choosing for the latter. The Russians are not the only ones who are eyeing this potential multi-billion new market. Saudi Arabia recently announced a $5 billion hydrogen project in the new futuristic city Neom that should be producing ammonia by 2025.
Novatek is definitely at the forefront of the emerging market for green hydrogen. Even globally the company can claim to be an early adopter. Although other Russian companies are slow in adopting measures intended to mitigate the negative effects of a carbon-free future, there seems to be some movement.
According to First Deputy Prime Minister Andrey Belousov, a working group will assess the future of the Russian energy industry and provide options for political leadership. The participants represent powerful companies such as Rosatom, Gazprom, and Sovcomflot. The group's findings should be made available somewhere before the summer of 2021.
Therefore, Novatek’s changing strategy could be a precursor of the transformation of the country's energy industry. To be clear, Russia potentially has a tremendous capacity for the production of clean hydrogen due to strong scientific and industrial know-how. Sustainable fuels could also be produced using nuclear power. Furthermore, Russia’s massive gas resources can be used as a feedstock for hydrogen production through pyrolysis and SRM. In order to sustain its role as an energy superpower, Moscow should develop a long-term and broad strategy that includes more than just fossil fuels.
By Vanand Meliksetian for Oilprice.com
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