Proximity to target markets is not the only consideration driving Russian companies to consider LNG projects, writes Jennifer DeLay
Russia is already the world’s biggest producer and exporter of natural gas, and it hopes to triumph in the burgeoning LNG industry as well. This will take some work, as the country is currently home to just one large-scale gas liquefaction plant – Sakhalin LNG, which accounts for only 4% of global supplies. (By comparison, Qatar, the largest supplier, controls just under 30% of the market.) But production levels are on the way up. Novatek, Russia’s largest privately owned gas producer, is due to launch the first production train of its Yamal LNG plant before the end of this year. The facility will eventually be able to turn out 16.5 million tpy of LNG, and this is enough to raise Russia’s total gas exports by 10%, Russian Deputy Energy Minister Anton Inyutsyn said last month at the World Petroleum Congress (WPC). This development is encouraging, as it indicates that Russia is moving towards becoming a truly global gas supplier. But it also brings up questions about Moscow’s strategy for LNG exports. Pipelines vs. ports Before the launch of the Sakhalin LNG plant, the country’s state-run gas monopoly Gazprom was almost entirely dependent on pipelines for exports. This dependence limited its geographical reach, since by definition, pipelines can only pump gas to fixed or designated delivery sites. LNG, by contrast, can be loaded onto tankers and then shipped to any port in the world that has the requisite intake facilities. It is therefore a much more flexible option for Gazprom and other companies that hope to develop a truly global reach. In other words, Russian firms that can produce or supply LNG will be in a better position to tap foreign markets, as they will be able to operate over a wider geographic range. Moreover, they will not have to lobby Gazprom, which guards its monopoly jealously, for permission to use its export pipeline network. Yet market access is not the only consideration. LNG plants tend to carry higher price tags than pipelines that handle comparable volumes of gas, so they are less economical at times when gas prices – and crude oil prices, to which gas prices are often contractually linked – are relatively low, as they are now. They also require more infrastructure – marine tankers, port facilities and building sites in addition to pipelines, roads and electrical grids. Some Russian officials have attempted to codify this balance between market access and upfront expenditures. Inyutsyn, for example, said earlier this year that it all came down to logistics. “If you transport natural gas more than 3,000 km, then it is more profitable to send it as LNG,” he said in his WPC speech. “But if it is less than 3,000 km, it’s better to send it by pipelines."
Going the distance This is an interesting assertion, given that Russia’s LNG sector has not exactly been following this strategy. To date, most of Sakhalin LNG’s production has gone to Japan and South Korea, and both of these markets are considerably less than 3,000 km away from the Sakhalin-2 offshore field, which supplies gas for the plant. Yamal LNG will be different – as will Arctic LNG-2, Novatek’s next planned gas liquefaction plant, and Pechora LNG, the long-shot joint venture led by Rosneft and Alltech. All of these facilities are designed to serve Asian markets, but they will have to load their output onto ice-breaking tankers that travel long routes eastward across the Arctic Sea before passing through the Bering Sea towards the Pacific Ocean. Transportation costs are a key consideration for such projects. Indeed, Novatek said last week that it might set up a transshipment base on the Kamchatka Peninsula so that it could move LNG from ice-breaking tankers to larger vessels that are more economical for long-haul shipments. As such, they are good candidates for the application of Inyutsyn’s formula, which aims to encourage the creation of economies of scale.
Inconsistencies Yet there are other projects that disregard such logic. For example, Rosneft has indicated that it wants to build its own LNG plant to process gas from the Sakhalin-1 offshore fields rather than negotiate a deal for the use of Gazprom’s Sakhalin LNG facility. This plant would also be located less than 3,000 km away from the lucrative markets of Japan and South Korea. Meanwhile, Gazprom is also looking at shorter-haul LNG delivery options. In early June, the gas giant signed a heads of agreement (HoA) with Royal Dutch Shell on the Baltic LNG project. The document laid out terms for the formation of a joint venture for the scheme, which targets markets in Europe and elsewhere. If built, the plant will have a production capacity of 10 million tpy. It would send LNG to market from a site in northwest Russia, which is less than 3,000 km away from several countries in Europe that already receive Russian gas via pipeline. Apparently, then, Russian companies are not drawing up their business plans with Inyutsyn’s formula in mind; rather, they are investigating several options, including long-haul and short-haul export routes. This is hardly a negative development, as it shows that would-be LNG exporters are not basing their decisions on distance alone. Instead, they are trying to decide what combination of proximity to target markets and other criteria such as projected demand, transport options and potential investors’ wishes will be most profitable. It remains to be seen whether the Russian government will be as flexible when the companies in question submit requests for permission to begin construction, so project leaders should treat the Kremlin’s stance as yet another consideration in their investment decisions.