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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Russia’s Answer To The U.S. Shale Boom Takes A Huge Step Forward

  • Russia's flagship Arctic LNG 2 will begin operations before the end of this year.
  • Russia's Arctic sector comprises over 35,700 billion cubic metres (bcm) of natural gas and over 2,300 million metric tons of oil and condensate.
  • The key market into which much of this Arctic gas and oil output will flow will be China.
Arctic oil and gas

Despite multi-layered international sanctions on Russia following its 24 February 2022 invasion of Ukraine, President Vladimir Putin’s ‘special energy project’ – developing the country’s massive gas and oil resources in the Arctic – took a major step forward last week as it was confirmed that the flagship Arctic LNG 2 will begin operations before the end of this year. Over and above the significance of Russia being able to complete such a financially and technologically challenging project despite swingeing sanctions in place against it, Arctic LNG 2 is of vital importance to Russia for several wider reasons. Given the scale and scope of Russia’s broader plans for the Arctic, it is also vitally important to the U.S. and its allies how Russia proceeds there.

One reason why the Arctic is so important to Putin is the sheer size of its gas and oil reserves, much of them in Russian territory. According to various Russian authorities, the country’s Arctic sector comprises over 35,700 billion cubic metres (bcm) of natural gas and over 2,300 million metric tons of oil and condensate, the majority of which are in the Yamal and Gydan peninsulas, lying on the south side of the Kara Sea. These may well be underestimates, according to a senior source in the European Union energy security complex exclusively spoken to by OilPrice.com recently. Within this, Putin has long believed that Russia’s presence in the global liquefied natural gas (LNG) market does not reflect its enormous presence in the broader world gas and oil markets, and that the perfect foundation stone for this to be addressed is the Arctic LNG projects, as analysed in full in my new book on the new global oil market order. According to comments from Putin, the next 10 years or so will witness a dramatic expansion in the extraction of these Arctic resources, and a corollary build-out of the Northern Sea Route (NSR) as the primary transport route to monetise these resources in the global oil and gas markets.

Related: Global Warming To Exceed 2 Degrees Celsius Limit By 2050: Exxon

The key market into which much of this Arctic gas and oil output will flow will be China - the second reason why the region is so important to Putin. Over the past 30 years, there has been a complete switch in the power relationship between the two former great Communist powers, with China now being the more dominant partner. Crucially, though, for Russia, it still holds some power with China in the matter of its gas and oil flows to the country. These flows mean that Moscow can continue to count on the military and political force-multiplier effect of Beijing as a major presence in the Asia Pacific theatre of potential conflict, if not directly in the European one. Given Russia’s poor performance in the Ukraine war to date, this force multiplier effect of its relationship with China has never been more important to it. In precisely this vein, around the same time as the invasion of Ukraine, Russian state gas giant Gazprom signed a deal to supply 10 bcm per year (bcm/y) of gas to the China National Petroleum Corporation (CNPC). This built on another 30-year deal between the two companies signed in 2014 for 38 bcm/y and this in turn was a part of, but significantly bolstered, the ‘Power of Siberia’ pipeline project – managed on the Russian side by Gazprom and on the China side by CNPC – that was launched in December 2019. 

The third reason why the Arctic LNG projects are so important to Putin is that LNG is the world’s emergency gas form, as was dramatically highlighted again most recently in the aftermath of Russia’s invasion of Ukraine, as also analysed in full in my new book on the new global oil market order. Unlike gas supplies delivered through pipelines, LNG does not require years of laying pipelines and building out corollary supportive infrastructure. It also does not require extensive, time-consuming negotiations over complex contracts. Instead, it can be picked up quickly in the spot market and shipped expeditiously to wherever it is required. With the world increasingly needing LNG supplies, given the spike in demand for them in Europe after flows from Russia’s gas pipelines stalled, Putin knows that increasing Russia’s own LNG supply capabilities has never been more geopolitically important to it. The importance that Russia is placing on being able to move LNG quickly to its key target markets of China, and in Asia more broadly, is underlined by the fact that it has pushed hard with the build-out of its trans-shipment LNG facility on the Russian Far East coast in Kamchatka and its Northern Sea Route as well.

A final key reason 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, as also analysed in my new book, particularly as it features one of the world’s biggest oil and gas producers and one of its biggest buyers. Very early in the Arctic LNG projects’ history, Novatek’s chief executive officer, Leonid Mikhleson, said that future sales to China denominated in renminbi were under consideration. This was in line with his comments on the prospect of further U.S. sanctions - following Russia’s annexation of Crimea in 2014 - that they would only accelerate the process of Russia trying to switch away from U.S. dollar-centric oil and gas trading. “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 then all we have to do is replace dollars,” he said. 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. 

Putin’s determination to push ahead with the Arctic LNG projects was truly seen after Russia’s 2014 annexation of Ukraine’s Crimea region. Moscow not only initially bankrolled the US$27 billion flagship Arctic LNG project in the Yamal Peninsula from the beginning with money directly from the state budget but also later in 2014 – after the U.S. had imposed sanctions on Russia over Crimea - supported it again by selling bonds in Yamal LNG (the program began on 24 November 2015, with a RUB75 billion 15-year issue). It further provided RUB150 billion of additional backstop funding from the National Welfare Fund. After that, April 2016 saw two Chinese state banks agree to provide US$12 billion to the Yamal LNG project in euros and roubles. The project was further helped by a tumble in the rouble in late 2014 that effectively cut the cost of Russian-sourced equipment and labour at a key moment in the construction.

As it now stands, according to comments from China National Offshore Oil Corporation (CNOOC) – which holds a 10 percent stake in the three-train 19.8 million metric tonnes per year (mt/y) Arctic LNG 2 project - the first 6.6 million mt/y train will start up before the end of this year. This follows its recent installation on the foundation in the seabed at the Utrenniy terminal on the Gydan Peninsula. Additionally, according to CNOOC, all the other stakeholders – Novatek 60 percent, and 10 percent each for CNPC, France’s TotalEnergies, and a consortium of Japan's Mitsui and Jogmec – have continued to pay the funding required on schedule. The start-up of the first train of Arctic 2 LNG is in line with Novatek’s plans to build out its LNG export capacity up to 70 million mt/y by 2030, including the 19.8 million mt/y Arctic LNG 2. 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. 

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on August 29 2023 said:
    Despite unprecedented Western sanctions against it, Russia’s economy is flourishing with its energy exports particularly crude oil breaking one record after another in 2023.

    And as if this isn’t distressing enough for Western countries who imposed sanctions, bans on Russian gas and oil products and a price cap, Russia’s flagship Arctic LNG 2 will begin operations before the end of this year thus stealing a march on both the United States and Qatar’s coming new LNG capacities.

    Despite horrendous sanctions, President Putin continued to pour hundreds of billions of dollars into Russia’s Arctic sector estimated to contain under its ice 35,700 billion cubic mtres (bcm) of natural gas equivalent to 1162 trillion cubic fee (tcf) or almost three times the United States’ proven gas reserves and 16.9 billion barrels of crude oil. If these new reserves are added to Russia’s current proven gas and oil reserves, Russia reserves rise to 2483 tcf and 124.7 billion barrels (bb). These reserves will keep Russia’s oil and gas industry going strong for the next two centuries. Still, these reserves may still be underestimated according to a senior source in the European Union energy security.

    President Putin expects the next 10 years to witness a dramatic expansion in the extraction of these Arctic resources, and a corollary build-out of the Northern Sea Route (NSR) as the primary transport route to monetize these resources in the global oil and gas markets. Moreover, there is a ready market for the Arctic energy exports: China.

    Russian LNG giant Novatek plans to build out its LNG export capacity up to 70 million mt/y by 2030. This dovetails into Russia’s plans for LNG production of 80-140 mt/y by 2035, which would be greater than that of LNG powerhouses Qatar, the United States and Australia.

    And while US shale is a spent force, Russia's Arctic oil and gas production are expected to boom during the coming 10 years.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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