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Tim Daiss

Tim Daiss

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China Invests In Game-Changing Arctic LNG Project

Russia’s second largest natural gas producer, independent player Novatek, has signed up key participation from two state-owned Chinese oil majors in its massive Arctic LNG 2 project. The deals were inked last week at the Second Belt and Road Forum for International Co-operation held in China. This cements Novatek’s position as Russia’s leading liquefied natural gas (LNG) developer, moving it a step ahead of the country’s two state-backed companies, Rosneft and Gazprom. China National Offshore Oil Corp. (CNOOC) and China National Oil and Gas Development Co. (CNODC), a unit of China National Petroleum Corp. (CNPC), signed up to acquire 10 percent each in the project. CNOOC is also China’s largest offshore oil and gas producer and developer.

Novatek’s chairman, Leonid Mikhelson, welcomed CNOOC’s involvement, saying China was “one of the key consuming markets for our LNG sales.” He added that Arctic LNG 2 would be a “game-changer” in the global gas market and noted the company’s experience from its Yamal LNG project as a demonstration of its ability to carry out operations in the Arctic.

The entry of the CNPC unit, meanwhile, was described by Mikhelson as an “important milestone” for Arctic LNG 2, while he noted the Chinese company’s participation in Yamal LNG. “The accumulated experience of working together is a solid basis for the successful implementation of our new LNG project,” he said. No details have been given yet for the price the Chinese companies paid. French oil major Total also invested in Arctic LNG 2 in March. Novatek, in its first-quarter results, said the sale of a 10 percent stake in the project had resulted in a net gain of $4.8 billion. Related: Oil Market Is Set To Become Very Tight Later This Year

Experience

China was instrumental in making the Yamal LNG work. In addition to the participation of CNPC, which acquired a 20 percent stake in 2013, the Silk Road Fund (SRF) purchased a 9.9 percent stake for $1.21 billion in March 2016. SRF also provided a 15-year loan worth some $813 million. Additionally, CNPC signed up to a 20-year off-take agreement, covering 3 million tons per annum (mtpa) of Yamal LNG’s production, indexed to the Japanese Crude Cocktail (JCC) price, the leading LNG pricing benchmark in Asia. The Export-Import Bank of China (China Eximbank) and the China Development Bank (CDB) also provided loans, of $10.4 billion and $151 million in 2016. This came on top of a $4 billion loan from Russian funding.

Massive gas project

The Arctic LNG 2 project will cover three production trains, each with 6.6 mtpa worth of capacity.  An all-important final investment decision (FID) on the project is anticipated later this year, with the first LNG delivery slated for the end of 2023, around the time when most analysts forecast that global LNG markets will pivot from its current overhang to a possible shortage of the super-cooled fuel.

Insatiable gas demand

hinese LNG demand could reach 80-100 mtpa by 2025, according to various industry forecasts, up from 53.7 million tonnes in 2018. Rising demand for the fuel is part of Beijing’s drive to clean up the air quality of the country’s largest cities, which have been plagued by high air pollution levels for years. This drive has seen an explosion of demand in recent years that has been increasingly met by imports, including U.S.-sourced geopolitically charged gas imports that have also been embroiled in the ongoing trade war between Washington and Beijing. Overall demand for gas is expected to climb to 620 bcm by 2035, according to CNPC, up from at 280.3 bcm in 2018. The oil major has also predicted that domestic production will amount to 300 bcm by 2035, up from 161 bcm last year. This will mean an expansion in imports from 124.7 bcm in 2018 to 320 bcm in 2035.

By Tim Daiss for Oilprice.com

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  • Mamdouh Salameh on May 04 2019 said:
    Russia regards the Arctic as a strategic area where it is willing to invest significantly to secure the largest and most important share of oil and gas reserves for itself. Notable successes are Novatek’s Yamal LNG and Gazprom Neft’s Novy Port project. To complete such projects, unique and extensive Arctic infrastructure was needed along with a new breed of vessel: the LNG ice-breaker tanker which can sail in ice of up to 2.1 metres thick.

    Another massive Russian gas project is shaping up with Chinese investments. It is Novatek’s Arctic LNG2 project. China’s National Offshore Oil Corp (CNOOC) and National Oil and Gas Development Co. (CNODC) signed up last week to acquire 10% each in the project.

    When completed by 2023, the Arctic LNG 2 will have three production trains, each with 6.6 mtpa worth of capacity. An all-important final investment decision (FID) on the project is anticipated later this year, with the first LNG delivery slated for the end of 2023.

    Economically, under China’s Belt and Road (BRI) Initiative, Russia has become one of the biggest recipients of Chinese investment receiving so far $46 bn in Chinese funding for BRI projects, the latest of which was the Yamal LNG project and the Arctic LNG 2 in Russia’s Yamal Peninsula.

    These plans aim to exploit the vast oil and gas recoverable reserves in the Arctic estimated at 90 billion barrels (bb) of oil and 47 trillion cubic meters (tcm) of natural gas of which Russia has the largest share estimated at 48 bb of oil and 43 tcm of gas as well as developing the so-called Northern Sea Route—a shipping lane through Russian Arctic waters stretching from Europe to the Far East.

    Russia is now China’s largest supplier of oil providing more than 1.55 million barrels a day (mbd) and is also emerging as China’s largest supplier of gas. With the Power of Siberia 1 gas pipeline becoming operational by the 1st of December this year, Russia will start an annual delivery of 38 billion cubic metres a year (bcm/y) to 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.

    However, the fast-growing demand for natural gas in China for which domestic production is not sufficient and China’s decision for environmental reasons to implement the coal-to-gas policy have created the need for more gas pipeline capacity to bring more Russian gas supplies to China, hence the Power of Siberia 2.

    Due to the expectation that demand will keep on growing, Beijing has been looking for an alternative to LNG imports. Last year, during the economic forum in Vladivostok, President Putin and the Chinese President Xi agreed to reopen negotiations on a new pipeline option from Russia to China, the Power of Siberia-2 pipeline. Diversification in China’s most remote western regions would improve energy security by decreasing dependence on Central Asia.

    The strategic partnership between Russia and China will be shaping the world in coming years in the field of energy and also economically and geopolitically supported by China’s Belt and Road Initiative and Russia’s energy prowess.

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

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