❄️Frozen out of a warming Arctic🔥
DEEP DIVE: Is Russia losing its grip on Arctic energy resources?
It is hard to overstate the importance of the Arctic to Russia. Moscow lays claim to the lion’s share of the region’s immense energy and natural resources, and exploiting them is an overarching economic priority for Russia. Thawing permafrost and receding sea ice would seem to make this easier, but new risks abound. Now war in Ukraine is choking off the money and technology Russia needs to extract its Arctic bounty — with far-reaching implications for governance of this coveted territory, and the global balance of power.
This is the first part in a mini-series on Russia’s Arctic energy ambitions in a time of war and rapidly rising temperatures. This instalment, focussing on Siberian LNG exports, is free to read.
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The Arctic and Antarctica are the world’s two last great fossil fuel frontiers. Governance — or lack thereof — differentiates them. The Arctic is not protected from drilling by international treaties and already supplies a significant chunk of the world’s energy and raw materials: about one tenth of global oil and a quarter of natural gas consumption.
The Arctic is a trove of natural resources, holding an estimated 13% and 30% of the world's undiscovered oil and gas, respectively, as well as abundant mineral and rare earth deposits. Russia claims vast swathes of this. The federation’s sprawling territory covers ten time zones over a contiguous landmass that spans almost half of the Arctic Circle and accounts for 58% of Arctic coastline.
Under the UN Convention on the Law of the Sea (UNCLOS), the Russian exclusive economic zone (EEZ) extends up to 200 nautical miles off its continental shelf. In 2015, Moscow laid claim to an even greater area that includes the North Pole:
The existing EEZ captures the Arctic’s biggest gas resource. The West Siberian basin holds almost 133 billion barrels of oil equivalent — 32% of total Arctic resources, according to the EIA. An estimated 43 of the 61 largest oil and gas fields discovered within the Arctic Circle as of 2009 are in Russia. Of these, 35 are in the gas-rich West Siberian basin.
It is no coincidence that Russia’s wealthiest Arctic regions are those that produce oil and gas. Much of Russia’s northerly regions have the lowest GDP in the Arctic, save for the oil and gas-rich Khanty-Mansi, Yamal-Nenets and Nenets Autonomous Okrugs (deep green Russian areas in map above). The Yamal region flourished over decades as Russian and foreign capital flowed in to projects to extract and export West Siberian gas to Europe first by pipeline, then later as LNG.
LNG boom going bust
The wealth derived from these resources keeps the Putin administration in power, keeps his cronies well-oiled and funds Russia’s military expansionism. The Ukraine invasion is not a resource grab. It is a revisionist ideological abomination funded by fossil resources.
Resources need customers, and Russia is losing its biggest one. Europe’s machinations over ending Russian energy imports are confused, veering on desperate, but all point in the same direction. The need to replace European buyers explains Putin’s push to ramp up liquefied natural gas exports to global markets, backed by an aggressive campaign of infrastructure development and resource extraction on and around the Yamal peninsula.
The first of a string of major Russian LNG projects, Yamal LNG, came online in 2017 with a capacity of 16.5 million tonnes per annum (mtpa). It frequently exceeds nameplate capacity, sending ever-greater seaborne volumes from Sabetta towards Europe and beyond.
Yamal’s success underpinned Russia’s outsized ambitions to become a major player on the LNG stage, with plans boost capacity to 120-140 mtpa and capture a 20% share of global trade by 2035. But as the world turns against Russia’s egregious military aggression in Ukraine, Moscow’s grand Arctic LNG strategy is starting to unravel.
Frozen by sanctions
Russia needs Western technology. Moscow was reminded of this after its 2014 annexation of Crimea, when US sanctions are believed to have prompted a switch from American to European gas liquefaction technology. Now, that tech is out of Russia’s reach too.
Yamal LNG licenced American technology from Air Products. Project developer Novatek, Russia’s biggest independent gas producer, switched to chemicals giant Linde’s proprietary German liquefaction technology for its second site, Arctic LNG 2 — a 19.8 mtpa facility being built opposite Yamal LNG on the Gydan Peninsula, across a stretch of water known as the Gulf of Ob.
After the Ukraine invasion, Linde ceased doing business in Russia. Equipment for the first of three 6.6 mtpa liquefaction trains (production lines) had already been delivered, but the other two face unknowable delays.
Attempts to replace Western liquefaction technology are not going well. Novatek deployed a small pilot version of the Russian-made Arctic Cascade liquefaction technology at Yamal but the equipment has proven unreliable.
Arctic Cascade’s failure* at Yamal prompted Novatek to halt its deployment at a smaller nearby project, Ob LNG. Linde was being mulled as a replacement but that now looks unlikely.
Arctic LNG 2 also faces a funding shortfall. Like Yamal, the project was being equity funded by TotalEnergies and China’s CNPC, as well as a Japanese consortium. After the invasion, TotalEnergies halted capital for new projects in Russia and wrote off its 10% stake in the project with a $4.1 billion impairment. CNPC or perhaps Saudi Aramco might fill the void.
Meanwhile, sanctions are paralysing supply chains. Chinese contractors stopped fabricating the topside modules for trains 2 and 3. Shipping the giant modules from China requires specialist heavy lift vessels, access to which is strained by sanctions.
Novatek is building the gravity base structures that will sit on the seabed to support the modules at a dedicated LNG construction yard in Belokamenka outside Murmansk. The site, which employs 20,000 workers, is said to be at risk of turning into a ‘ghost town’.
* With Arctic temperatures breaking new records, it might be just as well for Novatek. Arctic Cascade is designed to improve efficiency by leveraging cooler Arctic ambient temperatures in the liquefaction process, which expends energy to condense gas into liquid form by chilling it to -162°C. It works best at low temperatures, as productivity falls above +5°C.
Russia’s reloading riddle
Operating Arctic LNG 2 at one-third of design capacity presents a conundrum for Novatek. Shipping LNG out of the Arctic requires specialised icebreaker vessels that are slower and more expensive to operate than conventional LNG carriers. There are also much fewer of them, so the ice-class vessels must reload their cargo onto standard carriers at the nearest port facility and return to Sabetta (rather than shipping their cargo all the way to the final destination).
Novatek is planning to build two reloading facilities: one in the western port of Murmansk near the Norwegian border, and another in Russia’s far east on the remote Kamchatka peninsula. The company insists both will come online next year. The western facility is most likely to proceed. The eastern hub brings its own advantages but is much harder to deliver.
Kamchatka would connect West Siberian LNG exports with premium north-east Asian gas markets via the Northern Sea Route (NSR), which saves 8,000 miles and more than two weeks compared to sailing via the Suez Canal:
Since Europe is committed to replacing Russian gas with non-Russian LNG, Novatek’s strategic rationale for an eastern reloading facility is growing. Russia urgently needs to diversify its non-European customer base beyond China, which is already a major purchaser of (heavily discounted) Russian pipeline gas. In theory, an Asian reloading facility for Russian LNG achieves that.
Short-cut to… nowhere?
It is not clear whether building the Kamchatka facility makes economic sense with Arctic LNG 2 clipped at 33% of its design capacity. Utilisation of the cryogenic transfer facility would already be limited to the summer months when NSR sailings are possible, so summer volumes would have to be maximised to make the investment worthwhile.
Summer is when Asian LNG demand typically softens and spot cargoes flow west, to be absorbed into Europe’s abundant underground storage facilities. That summer-winter trade dynamic is shifting as Europe turns to an already-tight global LNG market to replace Russian gas.
The macro demand outlook is highly uncertain. The aftershock of war is rippling through inflation-ridden economies, many of which are on the cusp of recession and in some cases social unrest. Price-sensitive Asian countries can’t afford expensive gas, and Europe is bidding up the price — undermining the economic case for LNG in the region and sowing the seeds of the next downward cycle.
“There will continue to be short-term demand for LNG. But in the medium term, gas demand will be going down.” — Arjun Flora, director of energy finance studies Europe, IEEFA
Breaking the ice
Regardless of trade flows, Kamchatka would make more sense with year-round NSR sailings. Moscow is striving to achieve this and turn the NSR into a major shipping lane. Four new nuclear icebreakers are being built for this purpose, although these are said to be delayed.
The window for navigation is widening as winter ice recedes with soaring Arctic temperatures, but it remains a perilous voyage. The NSR is liable to sudden cold snaps that can catch skippers unaware, as happened last November when 20 ships became trapped in frozen seas.
Building an LNG hub in such a remote location is no small undertaking. A cryogenic reloading facility is not necessarily beyond the capabilities of Russian companies, but procurement of certain equipment could prove tricky without international partners.
Yuriy Humber, CEO of Japan NRG, tells Energy Flux that Russia will struggle to develop Kamchatka under sanctions:
“Russia doesn't have a good track record of managing large engineering projects in the Far East by itself. The Kamchatka climate is very tough. The time difference between Sakhalin and Moscow alone makes communications tricky.”
Even if Kamchatka is built and year-round NSR navigation becomes a reality, this is no panacea for selling Arctic LNG into Asia. Just like in Europe, there remains the question of regasification and pipeline capacities at the receiving end.
Humber says LNG infrastructure development is still at an early stage in many emerging Asian economies that underpin the gas industry’s rosy forecasts of huge demand growth beyond China:
“Most of the [emerging] Asian LNG infrastructure is likely to be built by Japanese, Chinese and US companies. Two of those are not in a position to facilitate Russian gas exports.”
Vietnam is a good example of this. US energy companies AES Corporation and ExxonMobil are backing import terminal projects, and GE is supplying turbines to LNG-fired power plants. Vietnam’s LNG pivot is of diplomatic significance to the US, the world’s biggest LNG exporter. Even in peacetime, Washington wouldn’t open up new gas markets for the benefit of Moscow.
Don’t miss part two of this Arctic energy series.
Europe circles wagons
While Russia slowly prizes open eastward outlets for future LNG exports, westerly reloadings will remain essential to getting current production to market. Yamal LNG reloadings have continued largely unimpeded at European terminals thanks to a carve-out in an EU port ban on Russian vessels. But this situation is liable to change as EU politicians grasp for ever more punitive actions.
Murmansk reloadings would fix this problem and end Russia’s reliance on European LNG terminal slots, which are increasingly expensive and hard to secure — a situation unlikely to change soon, industry sources tell Energy Flux.
Where Russia’s LNG goes from Murmansk is an open question. Self-sanctioning has not prevented trade. The EU’s REPowerEU plan to halt Russian fossil fuel purchases by 2027 will essentially put European markets out of reach, although without an outright ban on Russian gas, Yamal cargoes could still find their way into the European gas mix.
A senior LNG executive from a European oil major tells Energy Flux:
“My guess is that Russian volumes will end up in South Asia, and perhaps in the eastern Mediterranean. I can easily imagine Greece requesting exemptions from the European Commission. Let’s also see what Turkey does.”
Russian Urals crude has crept into global markets mixed in exotic blends that disguise the barrels as originating from neutral countries. Something similar could be done with Russian LNG using ship-to-ship transfers, if countries with this infrastructure are willing. For a price, China might help; the world’s biggest LNG importer is becoming a more sophisticated trader of the fuel and has no lack of adaptable import terminals.
“Iran could also bring their large expertise to Russia when it comes to manage products under sanction,” the senior executive added, referring to Iranian crude and refined products being transferred to ships in Indonesia and Malaysia before heading to China.
Ship-to-ship (STS) transfer is trickier and more expensive for LNG than other fuels that are liquid at ambient temperatures. It can’t be done in bad weather, as Novatek discovered after trying in Norway, and it is wasteful.
Liquefied gas boils off more quickly when being pumped from one ship to another than when held in cryogenic storage. A standard carrier with a boil-off gas (BOG) rate of 0.1% can lose 40 tonnes of LNG per day, but that figure shoots up to 200 tonnes during cargo operations.
Boil-off gas (BOG) is typically flared off in a dedicated gas combustion unit (GCU). “That is energy consumed without any productive benefit, pure CO2,” Yiyong He, founder of Singapore-based LNG Easy International, tells Energy Flux. “This aspect of STS is not environmentally friendly.”
A few ships have re-liquefaction on board to turn BOG back into LNG. But those that do “are not sized to handle the BOG volume during cargo transfer, so a considerable amount will go to the GCU,” added He. Reloading LNG at a shoreline terminal is preferable because BOG can be captured and piped to shore. This is another reason why “it makes sense to build a transhipment terminal in Asia”.
So, back to square one?
The risks of success
The myriad challenges now facing Russian LNG exports exemplify the difficulties an isolated Moscow will face getting other Arctic resources to global markets. Russia set out a grandiose five-year blueprint for an Arctic infrastructure bonanza in 2018. That plan includes ambitions to ship 80 million tonnes of hydrocarbons via the NSR by 2024, half of which from Yamal and Arctic LNG 2. The rest would come from new coal and oil fields.
President Vladimir Putin is categorical that his Arctic building frenzy must continue at pace regardless of Western sanctions and company withdrawals. But what are the risks of building fossil fuel infrastructure at scale in a thawing Arctic without Western expertise? And how would a wartime construction campaign alter the delicate consensus-based geopolitics of Arctic governance?
The second instalment in this series will examine these questions in more detail. Part two is for premium members only. Need full access?