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Russia’s plans for Arctic gas may be an alternate source for China’s energy needs

The United States, the largest potential new supply of natural gas on earth, may have to contend with a formidable competitor in the Arctic Circle, after Russia’s second-biggest producer Novatek’s agreement last week to sell 20 per cent of its Yamal Peninsula project to Chinese state oil companies.

The deals with CNOOC and China National Petroleum Corp – the parent of listed PetroChina – were announced at last week’s Belt and Road Initiative forum in Beijing. They are pending due diligence and no investment amount has been disclosed.

However, their announcement came at a time when the US-China trade dispute has already delayed potential investments by Chinese energy majors in some US projects.

“There is another tier of US projects which need some Chinese investment and or gas purchase commitment to keep going,” Nicholas Browne, Singapore-based Asia gas and liquefied natural gas director at natural resources consultancy Wood Mackenzie. “Until the trade dispute is cleared up, it will be challenging to make a business case for some of these projects.”

The binding investment commitment in Novatek’s Arctic LNG 2 project by CNOOC and CNPC gave a “vote of confidence” in Russian LNG, particularly in Novatek’s ability to deliver projects, he noted.

“It is a reminder that while US LNG, as the fastest potential source of future global supply growth, may have dominated the headlines, there are a lot of alternative credible projects out there,” he said, citing Mozambique, Qatar and Canada for locations of rival projects.

The Yamal Peninsula, a frigid area eight hours flying time north of Moscow, became commercially viable thanks to Russia’s deployment of nuclear-powered icebreaker vessels, and global warming that made the northern shipping routes more navigable.
LNG is chilled gas in liquid form and is transported by specialist tankers, and is re-gasified at a receiving terminal before it is sent by pipeline to users.

Russia is the world’s second largest natural gas producer after the US. Both are relative later comers as LNG producers, although Russia has long been the largest gas exporter by pipeline.

China is the world’s third largest gas market, but with an average annual growth of 14 per cent in the past 12 years, it is the fastest-growing major gas market thanks to Beijing’s efforts to replace coal-burning boilers with gas-fired ones.

“China is the No 1 target market for all LNG projects under development globally, there is very strong overlapping interest between the US and China,” said Sanford Bernstein senior analyst Neil Beveridge. “China wants to double its gas consumption by 2030 while the US has plenty of surplus supply given the shale gas revolution.”

“With the US trying to strike an agreement to reduce its trade deficit with China … we would expect any trade deal to involve LNG as part of the solution.”

“The Arctic LNG 2 project, which fits in with the Belt and Road Initiative, will reduce the available space for US LNG, unless China decides to increase [the market] further.”

Targeted to start commercial production in 2023, the US$25 billion project will have the capacity to produce 19.8 million tonnes of LNG a year.

Russian President Vladimir Putin last year set a target to boost the Northern Sea Route’s traffic to 80 million tonnes of annual LNG output by 2024 from 10 million tonnes in 2017.

Novatek chief executive Leonid Michelson pledged in February it could boost annual LNG output to 57 million tonnes by 2030, which could be revised up to 70 million tonnes in one to two years, up from 16.5 million tonnes currently, according to a document posted on the Kremlin’s website.

Browne estimated Arctic LNG 2’s delivered cost in Shanghai at between US$5.5 and US$7.5 per metric million British thermal unit (MMBtu), depending on whether LNG is shipped in the winter or summer.

This makes it a “middle-ranked” cost competitive project, slightly behind projects in Qatar – the world’s largest LNG exporter – but ahead of those in Mozambique and North America.

Its upstream production cost, at around US$0.7 per MMBtu – a third or less of those of rival projects – would offset slightly higher liquefaction cost of US$3.3 and substantially higher shipping cost at US$2.5.

The shipping distance between Yamal Peninsula and Shanghai via the Russian Arctic coast and Siberia is around 6,000 nautical miles, slightly longer than from Qatar to Shanghai and two thirds further than from Queensland, Australia to Shanghai.
Source: South China Morning Post

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