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Russia’s Answer To The U.S. Shale Threat Is Finally Here

First output is now being produced by Russia’s number two gas producer (after state-owned Gazprom) – Novatek - from its much-awaited fourth train at the Yamal LNG project, according to a number of Moscow-based oil and gas analysts spoken to exclusively by OilPrice.com last week. It is ‘highly likely’, they add, that the first full cargo from the 900,000 metric ton per annum (mtpa) LNG plant will be loaded on to a tanker within the next six months at most, and possibly even by the end of the second quarter of this year. The fourth train coming fully online will herald the full return of Yamal LNG into Russia’s Arctic gas initiative that President Vladimir Putin personally regards as a cornerstone projection of Russian energy power across the globe in the same way that the U.S. regards its shale energy sector.

The delay to the fourth train came within the context of Novatek having previously brought the first three plants of its US$27 billion flagship Arctic LNG project in the Yamal Peninsula online on time or even ahead of schedule. Specifically, the first train opened in December 2017, the second in July 2018 and the third in December 2018, allowing Novatek to produce capacity of 16.5 million mtpa by the beginning of 2019 from the Yamal LNG facility. Just a few months after that, Novatek had also completed a fleet of 15 icebreaking carrier ships that could move its LNG product from Yamal to the global LNG markets. All of this had been achieved despite the full weight of U.S. sanctions having being imposed on Russia in 2014 as a result of its annexation of Crimea, and underscored Novatek’s international reputation as a world-class operator that never missed a deadline. This made the delay over the fourth train – even before the COVID-19 pandemic came into play – all the more mystifying.

In reality, the delay was prolonged by the fallout from COVID-19 but the previous part of the postponement was likely in significant part to have been the result of the original gas processing pipelines not being able to optimally handle the exceptional cold temperatures involved at times, according to the Moscow-based analysts. Consequently, tests had to be carried out across the entire pipeline configuration and related equipment, which took time. The delay was apparently not connected to the basic design of the ‘Arctic Cascade’ technology and equipment that lies at the heart of Novatek’s LNG program, elements of which are also utilised by other Russian companies now working in the Arctic LNG sector as well.

Related Video: Goldman Calls $70 Oil in Q2, But Jet Fuel Is The Joker

More immediately, the problems that caused the delay to the fourth train of Yamal LNG having now been remedied, there are unlikely to be any further significant knock-on effects to the launch date of the Obsk LNG plant in 2023. This will be Novatek’s third large-scale LNG export project, with its 5 million mtpa also based on the use of the Arctic Cascade technology. This is in line with Novatek’s plans to build out its LNG export capacity up to 70 million mtpa by 2030, including the 19.8 million mtpa Arctic LNG 2, which is due to start in 2023. In turn, this dovetails into Russia’s plans for LNG production of 80-140 million mtpa by 2035, which would be greater than that of LNG powerhouses Qatar and Australia. All of this can be done, according to Novatek’s chief financial officer, Mark Gyetvay, at competitor-busting LNG delivery rates into northeast Asian markets of a little over US$3 per million British thermal units.

Arctic Cascade itself is based on a two-stage liquefaction process that capitalises on the colder ambient temperature in the Arctic climate to maximise energy efficiency during the liquefaction process and is the first patented liquefaction technology using equipment produced only by Russian manufacturers. The overall goal of Novatek, as the company itself has stated more than once, is to localise the fabrication and construction of LNG trains and modules to decrease the overall cost of liquefaction and develop a technological base within Russia. This means that these Arctic LNG operations are not subject to the whims of other countries and future sanctions. Consequently Novatek localised the fabrication and construction of LNG trains and modules to decrease the overall cost of liquefaction and develop a technological base within Russia, in addition to fully rolling out the Arctic Cascade process.

This self-sufficient element was also mandated by Putin for the financing of Yamal LNG and other related Novatek projects, particularly after the U.S. imposed its 2014 Crimea-related sanctions. The Russian Direct Investment Fund, for example, established a joint investment fund with the state-run Japan Bank for International Cooperation with each contributing half of a total of about JPY100 billion (US$890 million) to it. The Russian government itself, having bankrolled Yamal LNG from the beginning with money from the state budget, supported it again when sanctions were introduced by selling bonds in Yamal LNG (the program began on 24 November 2015, with a RUB75 billion 15-year issue), and then provided it with another RUB150 billion (US$2.2 billion) of backstop funding from the National Wealth Fund. Related: Oil Prices Rally On U.S. Outages And A Weak Dollar

This multi-layered state commitment to Arctic LNG attests to the multi-level importance that the Kremlin attaches to Arctic exploration more widely for three key reasons. First, there is the physical expansion of Russian entities into the Arctic region, clearly marking the country’s claim to all the resources that the entire area has to offer. Second, for a long time Putin has thought that Russia’s status as an energy superpower – and especially a gas one - has not been reflected in its standing in the LNG sector. And third, LNG is a key part of Russia’s ongoing plans to secure as much of the still fast growing Asia segment of the gas market  as possible to augment its pipelined gas plans. In this latter context, China remains Russia’s focus, building on its 2014 US$400 billion+ 30 year deal to export over 1 trillion  cubic metres of gas through the ‘Power of Siberia’ and related pipeline projects. Not only is Asia’s robust economic growth over the next 10 years set to continue in general, as is its uptake of gas, China in particular is expected to increase the gas share of its energy mix from 6 per cent to 15 per cent by 2030. The importance that Russia is placing on the Asian markets and the magnitude of gas and oil volumes that are expected to move in the Eastern direction is underlined by the fact that it is moving forward with the build-out of its trans-shipment LNG facility on the Russian Far East coast in Kamchatka and its Northern Sea Route to move Arctic oil to China as well.

A fourth factor at play in Russia’s Arctic gas and oil drive is its capacity to subvert the U.S. dollar-based hegemony in the energy market, particularly as it features one of the world’s biggest oil and gas producers and one of its biggest buyers. On a number of occasions, Novatek’s chief executive officer, Leonid Mikhleson, has said that future sales to China denominated in renminbi is under consideration. This is in line with his recent comment on the prospect of further sanctions from the U.S. that such sanctions accelerate the process of Russia trying to switch away from U.S. dollar-centric oil and gas trading and the damage from potential sanctions that go with it. “This has been discussed for a while with Russia’s largest trading partners such as India and China, and even Arab countries are starting to think about it... If they do create difficulties for our Russian banks the all we have to do is replace dollars,” he said. “The trade war between the U.S. and China will only accelerate the process,” he added.

Such a strategy was tested in 2014, when the state-run Gazprom Neft tried trading of cargoes of crude oil in Chinese yuan and roubles with China and Europe, to reduce Russia’s dependence on crude trading in dollars, in response to the initial Western sanctions against Russia’s energy sector. “This idea of an alternate principal trading currency for oil and gas, away from the U.S. dollar, was also discussed a while back for the BRIC [Brazil, Russia, India, and China] countries, and was work-shopped again recently by Iran, Iraq, Russia, and China, and China’s launch of the yuan-denominated Shanghai International Exchange can be seen as a move in this direction,” Mehrdad Emadi, head of risk analysis and energy derivatives markets consultancy, Betamatrix, in London, told OilPrice.com. “The more the U.S. uses the U.S. dollar sanction against major suppliers in the oil market, like Iran, Venezuela, and Russia, and major buyers, like China, then the more momentum will build to replace the oil market with a new currency benchmark,” he concluded.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on February 24 2021 said:
    From the moment the United States imposed sanctions on Russia in the aftermath of the annexation of the Crimea, President Putin has been preparing his retaliation. Being the astute strategist, he took his time to complete his game plan but it is ready now.

    His first step was to undermine the petrodollar by forging alliances across the world that he hopes will help him achieve his goal. Back in 2015, the first of a number of strikes against the petrodollar was dealt by Russia. Gazprom Neft, the third-largest oil producer in Russia, decided to move away from the dollar towards the yuan and other Asian currencies. Russia and China have stepped up their alliance to a level where the Russian ruble is an acceptable tender at many places in China.

    Putin’s second step was to help China prepare the way for the launching of the petro-yuan to undermine the petrodollar’s dominance in the global oil trade. The petrodollar system provides at least three immediate benefits to the United States. It increases global demand for US dollars. It also increases global demand for US debt securities and it gives the United States the ability to buy oil with a currency it can print at will. The petro-yuan could be a death blow for the US dollar. With major oil exporters finally having a viable way to circumvent the petrodollar system, the US economy could soon encounter severely troubled waters. First of all, the dollar’s value depends massively on its use as an oil trade medium. When that is diminished, we will likely see a strong and steady decline in the dollar’s value.

    Putin’s third step was to go at full blast in the development of the Russian Arctic’s huge oil and gas reserves using home-grown state-of-the-art technology that will ensure Russia's energy supremacy well into the future. President Putin has long ago recognized the great importance of the Arctic for the Russian economy and the Russian oil industry. That is why he has been pouring hundreds of billions of dollars into the region. It has been targeted by US sanctions since 2014 to no avail.

    Russian oil giant Rosneft’s Vostok project which started in November 2020 will become the backbone of Russia's oil industry. Rosneft expects the project to cost $170 billion over a decade that will employ 400,000 workers, create 15 new industrial towns, and build 800 km of new pipelines. Rosneft is projected to export some 2 million barrels a day (mbd) of oil from the Vostok project by 2024.

    Russia’s number two gas producer Novatek plans to build out its LNG export capacity up to 70 million mtpa by 2030. This, in turn, dovetails into Russia’s plans for LNG production of 80-140 million mtpa by 2035, which would be greater than that of the world’s two largest producers Qatar and Australia. It will undercut US LNG exports into northeast Asian markets. Furthermore, Novatek localised the fabrication and construction of LNG trains and modules to decrease the overall cost of liquefaction and develop a technological base within Russia. This self-sufficient element was mandated by Putin for the financing of Yamal LNG and other related Novatek projects, particularly after the U.S. imposed its 2014 Crimea-related sanctions.

    Finally Putin’s Russia has been undermining US sanctions against both Venezuela and Iran by helping Venezuela sell its crude oil around the world and bartering Iranian crude for Russian manufactured goods.

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

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