In what can only be seen as another “symbol of sanctions defiance”, on March 27 China announced it would be providing French oil giant Total with $15 billion to invest into the Yamal LNG project in northern Siberia. Despite some of the harshest Western sanctions placed upon Yamal’s majority stakeholder, private Russian gas company Novatek, the project has hardly been derailed. What’s more, Yamal offers a glimpse into a world where Russia is no longer dependent on the West for financing.
The $27 billion investment project in the Yamal Peninsula, owned by Novatek (60%), Total (20%) and China’s CNPC (20%), aims to tap into northwest Siberia’s vast natural gas reserves, which contain 84% of Russia’s total natural gas, and double Russia’s share in the fast growing liquefied natural gas market. The Arctic region is said to contain 22% of the world’s undiscovered oil and gas, with the majority of untapped natural gas predicted to be located within Russia’s territory. Currently, Russia’s LNG capacity stands at 10mtpa, but the Yamal LNG project will increase this number by more than twofold.
Set to start exports in 2017, the Yamal LNG project will export 16.5 million tons of LNG a year; or in other words, 6 months’ worth of French gas consumption. Indeed, prior to his death, Total’s former CEO Christophe de Margerie had taken a “business as usual” approach with Russia in spite of sanctions, insisting that “we have to do this project”. Related: Why Putin Doesn’t Need To Pander To The West
However, the announcement of Total’s turn to China for further funding for the Yamal plan shows that the “business as usual” approach has hit quite a snag. Indeed, after years of Western-Russian interdependence on energy projects, the sanctions regime seems to have nudged Moscow decisively towards Asia in search of support, financing, and technological knowhow. Coming on the heels of more than 20 years of haggling, China and Russia have signed a 20-year $700 billion agreement for gas deliveries to China worth some 17% of Beijing’s annual consumption. But that was just the first step.
During a trip to India in December 2014, President Putin and Indian Prime Minister Narendra Modi signed a series of bilateral agreements, dubbed Druzhba-Dosti, aimed at furthering cooperation in the defense and energy industries of the two countries. What’s more, the agreements will see India and Russia “explore joint development of technologies for processing rare earth materials in the Russian Arctic”. Announcing the deal, Putin proudly quipped that,"Rosneft and Gazprom, our biggest companies, together with their Indian colleagues, are preparing projects for the development of Russian-Arctic [and] the expansion of liquefied gas.”
The move comes as no real surprise for industry watchers given Russia’s aims to safeguard its Arctic projects, but its importance should not be underestimated. Moscow is completing its own pivot to Asia in search of support, financing and technological knowhow. Such a shift to its Asian partners signals a worrying trend for the future of investment opportunities of Western companies, which have their hands tied by the sanctions regime. Related: Ukraine Won’t Be Bullied By Russia Over Gas Deal
Indeed, in September 2014, Russia’s Rosneft and ExxonMobil discovered vast natural gas and oil reserves in the Kara Sea, but due to US sanctions imposed just days later, Exxon was forced to abandon the $700 million project and subsequently withdrew from the Arctic. As a result, Russia was forced to move towards alternative partnerships with Asian countries to obtain the technical expertise needed to develop its lucrative Arctic wells. Out of the 61 large oil and gas fields that have been discovered within the Arctic Circle territories, which include Russia, Alaska, Canada and Norway, 42 are located in territory belonging to Russia. While the sanctions have seriously dented the Russian economy and have sent its ruble into a tailspin, they have also displaced the market share of Western companies and their ability team up with Russian companies and tap into these vast reserves.
Despite being cut off from Western financing and technology, analysts have expressed optimism over Yamal’s current status, as the number of people working on the project is set to increase from 6,000 to 15,000 by the end of the year. “Having been there, I realized the project will become a reality”, chirped UBS oil analyst Maxim Moshkov. Should the situation continue as it is today, it will send a worrying message to the West that Russia’s energy industry will recover in the medium term from the effect of Western sanctions. Related: Gazprom Feeling The Heat From Sanctions And Low Energy Prices
Both Yamal LNG’s move to China and Russia’s newfound partnership with India are key steps in Moscow’s plan of undermining Western sanctions. What has become clear is that emerging powers and partners of Russia are more than willing to fill in the gap that has been left wide open by fleeing Western investors. For its part, the US, which recently gave indication that it saw no end to sanctions until Crimea was returned to Ukraine, might run the risk of allowing political aims to weaken its own economic output, specifically the future growth of its bulging energy industry sector.
While US economic sanctions have unwantedly brought Russia and its Asian partners closer together than ever before, De Margerie was always quick to point out the obvious: “Can we live without Russian gas in Europe? The answer is no. Are there any reasons to live without it? I think […] it is a no”. While EU member states and the US government are striving to sway Putin from his present course in Ukraine, they should also think about the unintended long-term consequences that foregoing collaboration with Russian companies in the arctic would have for their own economies.
As stated a by senior analyst at the Forex Club, Alyona Afanasyevna, “times of crisis always present the possibility to strengthen one’s position in a certain market” and while other international companies flee the scene, Total’s commitment to Russia and to Novatek’s Yamal LNG plan, “guarantees it future dividends in the form of closer cooperation”. Western governments and other energy companies should take note.
By Scott Belinski for Oilprice.com
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