CC BY
0ЭКОНОМИКА И УПРАВЛЕНИЕ
УДК 658.2
A. E. Zubarev, A. V. Tishkov, Guo Shuhong, Jia Yushu
DEVELOPMENT OF LIQUEFIED NATURAL GAS EXTRACTION IN THE RUSSIAN ARCTIC WITH CHINESE INVESTMENTS
Zubarev A. E. - Doctor of Economics, professor, director of Institute of Economics and Management, Pacific National University, e-mail: 000008@pnu.edu.ru; Tishkov A. V. - PhD student, Pacific National University, e-mail: tishkov@sco-khv.org; Guo Shuhong - professor, Dalian University of Technology, e-mail: lenaguo@dlut.edu.cn; Jia Yushu - senior lecturer, Northeast Agricultural University, e-mail: 182503501@qq.com
In the article the authors discuss the issues of extraction and production of liquefied natural gas (LNG) in the Russian Arctic. LNG production is a form of gas export diversification and, according to the authors, a definite alternative to pipeline gas export. The authors compare these forms of gas export and analyze the conditions and factors for the development of LNG extraction and production, as well as provide an assessment of the role and activities of key players in the LNG market, large projects for the production and export of LNG. The reasoned conclusions are drawn on the gas export strategy.
Keywords: extraction and production of liquefied natural gas, diversification of gas exports, key players in the LNG market, assessment of projects in the field of production and export of LNG, strategy for production and export of LNG.
Acknowledgments: this work is done within the framework of the PNU's development program "Prioritet-2030" and supported by the Fundamental Research Funds for the Central Universities (DUT20RW215), the Project to Study the Countries and Regions of the Ministry of Education of the PRC (2020-G18).
Introduction
Historically, Russian gas exports have been linked to Gazprom, which continues to supply gas to Europe via pipelines. Thanks to Soviet-era infrastructure built, the volume of Russian gas supplied to the EU has systematically increased after the 90s of the last century, reaching record values of 200 billion cubic meters in 2018. However, in the five decades since the start of exports, the global gas market has changed. It happened in particular due to the emergence of liquefied natural gas (LNG), which can be easily transported between regions, reducing the dominant role
© Zubarev A. E., Tishkov A. V., Guo Shuhong, Jia Yushu, 2023
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of the pipeline method. Additionally, the threat to the security of pipeline supplies is manifested in the unstable political conjuncture of the transit countries. Thus, the fate of the Nord Stream 2 project is still not completely clear as disputes over transit through the territory of Ukraine have not stopped yet. In general, pipeline transport carries enormous risks both at the stage of project implementation, as well as at the stage of facility operation itself.
Therefore, the diversification of gas exports is becoming an obvious solution for Russia. In addition to using the same pipeline method for deliveries to the Asia-Pacific Region (the Power of Siberia pipeline), an additional solution to this problem is the development of its own LNG technologies and the creation of a major player in the liquefied gas market. The so-called LNG export liberalization law came into force in Russiaon December 1, 2013. The law reduces Gazprom's gas export monopoly. This article examines how PJSC Novatek is becoming the most important and largest player in the Russian LNG sector. In addition, an assessment of the reality and practical feasibility of implementing LNG projects are given.
Making of a Major Russian Player in the LNG Market
The introduction of the new LNG export law has intensified competition between three key players in the Russian gas industry: Gazprom, Rosneft, and Novatek. Each of them has developed a strategy that was consistent with their own asset base and previous experience. As a result of this work, three competing approaches to LNG development in Russia emerged during the 2010s:
Gazprom has always been a company involved in the pipeline business. Therefore, it is not surprising that when it was tasked with developing the LNG business, Gazprom proposed a combination of pipeline and liquefied gas (Baltic LNG and Vladivostok LNG), with the latter playing a supporting role in this concept. The approach offered potential flexibility and bargaining power. However, it was extremely costly, especially with regard to eastern gas projects, as it required development of new fields, construction of pipelines, and coordination with closest consumer neighbors (Japan, China, and South Korea). The high cost of Gazprom's projects in the early 2010s was offset by high gas prices, but the possibility of their potential fall, as well as the strong Russian ruble. This led to an increase in dollar costs for Gazprom's capital construction programs, greatly increased the risks.
Rosneft wanted to develop LNG through its partnership with ExxonMobil and leverage the potential strengths of this alliance on Sakhalin. The Far East LNG project helped monetize the gas reserves of the Sakhalin-joint venture (JV), as gas was not previously in demand. However, imposed against Rosneft, due to the events in Ukraine in 2014, the US sanctions put the Far East LNG on the back burner of the company's corporate priorities. Nevertheless, the September 2019 announcement of
the renewal of the project suggests that nowRosneft believes that the partnership could be renewed.
In contrast, Novatek's unconditional clean LNG plan is based on a confirmed and half-completed onshore project (Yamal LNG) in partnership with French Oil Company Total and China National Petroleum Corporation (CNPC). This initiative offered the lowest operating costs and was least affected by geopolitical issues. The main drawback of the project was the inconsistency between the location on the Yamal Peninsula in the Russian Arctic and key markets. To compensate for the geographical shortage, Novatek has developed a plan to send LNG carriers to Asia along the Arctic route-the Northern Sea Route (NSR). This required the creation of port infrastructure on the Yamal Peninsula, the construction of a fleet of Arctic-class LNG carriers and the expansion of the capacity of Russian nuclear-powered icebreakers.
Novatek Formation as a Leader in the Production and Export of LNG in Russia
Analyzing the Yamal LNG project implemented by Novatek, one can assess it as one of the most successful liquefied natural gas projects in the world over the past decade. Firstly, Novatek has successfully assembled an international consortium (Figure 1) consisting of one international company with experience in gas liquefaction, one major LNG buyer (CNPC), and one major source of funding (Silk Road Fund) whose investments have opened the door for Chinese lenders to cooperate with the project.
Table 1
Shareholders Structure of Novatek's Gas Projects
Company Country Project participation (%)
Yamal LNG project
PJSC Novatek Russia 50,1%
French Oil Company Total France 20%
China National Petroleum Corporation (CNPC) China 20%
Silk Road Fund China 9,9%
Arctic LNG 2 project
PJSC Novatek Russia 60%
French Oil Company Total France 10%
China National Petroleum Corporation (CNPC) China 10%
China National Offshore Oil Corporation (CNOOC) China 10%
Mitsui and Jogmec Consortium Japan 10%
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Secondly, sales agreements for clients in the Asia-Pacific region, South Asia, and Europe were signed relatively quickly, which allowed the project to become successful onthe market by 2013. Thirdly, the project was completed on time, on budget, and ahead of schedule in 2017. As a result, all three originally planned processing lines have been operating at full capacity since 2018. Fourthly, the company has been developing a new Russian LNG technology, the Arctic cascade, which has been implemented in the fourth Yamal LNG line since the end of 2020
[3].
In addition, the concept of using giant gravity structures (GBS) as floating foundations for the Arctic LNG 2 plants (and other future projects in the shallow waters of Yamal and Gydan bays) has become another innovation of Novatek. This concept has ensured the utilization of industrial capacities in Murmansk region, where construction work has been carrying out. Finally, Novatek has achieved all of this, subject to US financial sanctions, and the threat of low global gas prices from a glut of new LNG supplies.
The successful on-time launch of the Yamal LNG project and Novatek's aggressive growth plans for Arctic LNG 2, Arctic LNG 1, and Obskiy LNG resulted in the company's leadership in the liquefied gas market in Russia with strong support from the Kremlin.
Prospective Projects and Assessment of Their Implementation
Although Novatek has become a key player in the Russian LNG market, it is not the only company looking to develop new projects. In the Far East, Gazprom and Rosneft are also striving to implement their initiatives. Both companies have been looking for ways to leverage their existing partnerships with foreign companies on Sakhalin. Another potential area for new gas liquefaction projects is the Baltic coast, where Gazprom has been considering a large potential LNG project for many years. However, the start date of the Baltic LNG project was once again postponed by a year in November 2020 [1]. All in all, in 2019, the volume of Gazprom's LNG sales amounted to 3.78 million tons (5.04 billion cubic meters) with the help of Sakhalin-2, which it controls.
In turn, in September 2019, Rosneft (20%) along with the participants of the Sakhalin-1 project, American Exxon Mobil Corporation (30%), Japan'sSodeco (30%), and India's ONGC (30%) announced the intention to build an LNG plant in De-Kastri (Khabarovsk Territory). At the same time, Rosneft and ExxonMobil have long discussed this project in the Far East. Initially, it was about a plant with 5 million tons of LNG per year worth $ 8 billion. Then the capacity of the project was increased to 6.2 million tons, and the price which at first increased to $ 15.3 billion, then dropped to $ 9.8 billion. The implementation of the project has begun, but the timing and exact cost have not been disclosed. It should be also indicated that the
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project is being implemented within the framework of a joint venture with Exxon Mobil Corporation as the main operator.
In addition, it is worth noting A-Property Company. In May 2020, it announced plans to build an LNG plant with a capacity of up to 13 million tons per year on the coast of the Sea of Okhotsk [6]. The project is planned to be implemented on the basis of the resource base of the main gas producer in Yakutia - the Yakutsk Fuel and Energy Company (Y ATEK), which is part of A-Property. The initiative is estimated at $ 10 billion and it is planned that the development of the project's technical concept will be completed by the end of 2020 with the launch of the first stage in 2025. However, the company has yet to obtain permission to export LNG, which seems very vague in the near future. Thus, by order of the government in 2014, Gazprom, Gazprom Export, Rosneft, and Novatek's subsidiaries: Yamal LNG, Arctic LNG 1, Arctic LNG 2, and Arctic LNG 3 have the right to export LNG.
PJSC Novatek stands out against the background of plans and projects of other Russian companies. It focuses its attention on the development of fields on the Yamal and Gidan peninsulas in the Arctic (Figure 1).
Figure 1. Map of the Key LNG Projects in Russia
Further, the plans of PJSC Novatek on the Yamal and Gydan peninsulas are considered in more detail. The region's mineral resource base available for monetizing natural gas in the form of LNG is huge and grows as it is explored. As a result, the company's immediate plan is to "double" the success of the Yamal LNG project by launching Arctic LNG 2 in the neighboring area.
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The Yamal LNG feedstock is based on reserves located in the South-Tambeyskoye field. It contains more than 424 billion cubic meters of natural gas, in accordance with the standards stipulated by the Securities and Exchange Commission (SEC) (Table 2).
Table 2
Reserves of Novatek's LNG fields (as of December 31, 2018)
Licens Natural gas reserves, billion cubic meters Liquid hydrocarbon
Owner- evalidit re- LNG
LNG field / license area ship yperiod (year) serves, million tons project
50.1%
South-Tambeyskoye (+59.97 % reserved) 2045 690 14 Yamal LNG
Utrenneye 100% 2120 461 15 Arctic LNG
VerkhnetiuteiskoyeandWestSe yakhinskoye 100% 2044 157 2 Obskiy LNG
When considering the Yamal LNG project, as well as taking into account the SEC reserves estimate and the planned project capacity of 17.4 million tons per year of the "reserves coverage" is more than 40 years. However, according to the Russian classification of reserves assessment, the South-Tambeyskoye field contains 1,036 billion cubic meters, which assumes uninterrupted operation of the LNG plant for more than sixty years.
The Arctic LNG 2 project will have a total capacity of 19.8 million tons per year and will consist of three lines, each with a capacity of 6.6 million tons per year, to be installed on three platforms. Initial estimates indicate that the project will cost USD 23 billion. At the same time, Arctic LNG 2 is based on the hydrocarbon resources of the Utrennoye field of 461 billion cubic meters (according to the SEC) and 665.2 billion cubic meters (category A + B + C1) and 560.6 billion cubic meters (categories B2 + C2) (according to the Russian system of calculation). In addition, Novatek regularly reports on the discovery of additional gas reserves, which can bring more than 2 trillion cubic meters of gas. Thus, the reserves of Yamal LNG and
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Arctic LNG 2 projects are sufficient for a significant expansion of projects beyond the initial volume.
Novatek also continues its license acquisition policy. On August 30, 2019, the company announced that Arctic LNG 1 (its wholly owned subsidiary) won an auction for a license for geological exploration, exploration and production in a subsoil block including the Soletsko-Khanaveyskoye field located on the peninsula Gydan. According to the estimates of the Russian licensing system, the hydrocarbon reserves of this field amount to 2,183 billion cubic meters of gas and 212 million tons of liquids (16 billion barrels of oil equivalent). The license is valid for twenty-seven years, and as a result of the auction, a one-time payment for subsoil use was made in the total amount of 2.586 million rubles (approximately USD 40 million) [4].
The new license area borders on the Trekhbugorny and Gydansky (Figure 2) license areas of Novatek on the Gidan Peninsula and may create a resource base for a new LNG project similar in size to Arctic LNG 2. Leonid Mikhelson, Novatek CEO, said that the proposed Arctic LNG 1 project will have a capacity of 19.8 million tons per year and will use the infrastructure of the Utrennee export terminal, which is being built for the needs of Arctic LNG 2.
Figure 2. Map of licenses issued by PJSC Novatek on the Yamal and Gidan peninsulas
Thus, Novatek has used and continues to use the synergy between its projects in Yamal and Gydan. The Arctic Cascade technology used on the fourth Yamal LNG line can also be applied to three larger processing lines in new projects. It is planned that in 2022-2023 three lines of Obskoye LNG will be put into operation.
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In addition, Novatek made new gas discoveries. The first exploration well, drilled in 2018 in the SeveroObskiy license area, resulted in an additional 322 billion cubic meters of reserves (according to the Russian classification), which became the largest single gas discovery in the world this year. Novatek holds licenses for several fields that could potentially be considered for further expansion of LNG operations in the Yamal and Gydan peninsulas.
Conclusion
For many years, Gazprom has been at the forefront of Russia's LNG strategy. The strategy was initially based solely on developing reserves around Sakhalin Island in the interests of the Asian market and opening the way to the markets of the Atlantic basin countries. This situation has become possible to a large extent thanks to the successful cooperation between Gazprom and Shell Oil Company within the Sakhalin-1 project. However, a number of erroneous decisions by the leadership of the Russian gas giant and the inability to show the dynamic development of LNG production created opportunities for new players to enter the Russian liquefied gas market. The situation with the attraction of Chinese investments by CNPC and the Silk Road Fund is significantly improving.
Thus, the so-called LNG export liberalization law of 2013letNovatek successfully develop the fields of the Yamal and Gydan peninsulas. Therefore, it made the company a leader in the production of liquefied natural gas in Russia. Among other things, Rosneft is also counting on a share in this market. However, it is taking slow steps and has not received the necessary support yet. The entry into the Russian LNG market of other smaller players from among the Russian oil and gas companies is complicated by the bureaucratization of the system for obtaining export duties and a high level of competition with other enterprises. Meanwhile, Novatek continues to implement new projects such as the Arctic LNG 2 and Obskiy LNG, and Arctic LNG 1 project plans.
As a result, it now appears that Russia's overall gas export strategy is based on a two-way approach. On the one hand, Gazprom still dominates the pipeline sector, controlling the entire main gas pipeline system of the country. On the other hand, Russia's export model, dominated by pipeline transport of hydrocarbons, is no longer optimal in the global gas market, and LNG will account for the largest share of gas trade growth in the coming decades. Therefore, Russia state-controlled gas giant Gazprom lacks the flexibility and expertise to capitalize on this expanding market. In this regard, the country's leadership has chosen a smaller, more flexible and more commercially efficient player as the main exporter of LNG to the world market. No-vatek has received significant support, both financial and political, and in return keeps all its promises. If this trend continues and Novatek is able to implement the
planned projects, then Russia will export more than 100 million tons of LNG per year by 2030. It will make the country one of the exporters of liquefied natural gas of the Big Four (together with the United States, Qatar, and Australia).
Thus, LNG is essential for the development of the country, it is more than just gas export for Russia. From a geopolitical point of view, Novatek's projects help open the strategically important Northern Sea Route in the Arctic, strengthening trade and political relations with Europe and Asia (in particular, with China). Liquefied gas supplies also open up new markets for Russian hydrocarbon exports, giving Russia greater opportunities for negotiation and discussion. The ongoing expansion of the LNG business in Russia is also important domestically in terms of job creation and industrial development in the High North. All this helps the development of the Arctic in general. Finally, expanding Russia's ability to develop simpler LNG production processes (creating its own "Arctic cascade"technology) is an additional advantage, although there are still problems with import substitution in specialized areas that need to be solved.
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Заглавие: Развитие добычи сжиженного природного газа в российской Арктике с участием китайских инвесторов
Авторы:
Зубарев А. Е. - Тихоокеанский государственный университет, Хабаровск, Российская Федерация
Тишков А. В. - Тихоокеанский государственный университет, Хабаровск, Российская Федерация
Го Шухун - Даляньский технологический университет, Далянь, Китай
Цзя Юйшу - Северо-восточный сельскохозяйственный университет, Харбин,
Китай
Аннотация: В статье рассмотрены вопросы добычи и производства сжиженного природного газа (СПГ) в Российской Арктике. Производство СПГ является формой диверсификации газового экспорта и, по мнению авторов, определенной альтернативой трубопроводному экспорту газа. В статье сравниваются данные формы экспорта газа. Авторы анализируют условия и факторы развития добычи и производства СПГ. В статье дается оценка роли и деятельности ключевых игроков на рынке СПГ, крупных проектов по производству и экспорту СПГ. Делаются аргументированные выводы по стратегии газового экспорта.
Ключевые слова: добыча и производство сжиженного природного газа, диверсификация газового экспорта, ключевые игроки на рынке СПГ, оценка проектов в области производства и экспорта СПГ, стратегия производства и экспорта СПГ.
