Russia jumps into LNG with Chinese money
Following Russia’s annexation of Crimea, the West carefully calibrated its ramp-up of sanctions to balance the need to turn the screws on Moscow without endangering European energy supplies. This targeting of Russia’s medium- and long-term energy projects pushed Russia to look elsewhere for financing for the development of its fledgling Yamal peninsula hydrocarbon projects.
Last week, Russia began loading the first cargoes of liquified natural gas (LNG) from an export terminal located on the peninsula.
This landmark shipment wouldn’t have been possible without significant foreign investment, and because of those aforementioned Western sanctions, that money came from China. Though France’s Total owns 20 percent of the project, China’s CNPC owns another 20 percent, and China’s Silk Road Fund owns another 9.9 percent. Moreover, it was Chinese banks that stepped in to the void left by Western lenders post-Crimea sanctions. In that context, this isn’t just a step towards Russia’s oil and gas future in the Yamal region, it’s a strengthening of ties between one of the world’s largest energy producers and the largest energy consumer.
China’s involvement with Russian LNG extends beyond the role of financier, too. The liquified gas now being loaded onto ships along Russia’s northern coast will be able to travel east towards China for five months out of the year, when the route isn’t blocked by ice. As the global climate continues to warm, it’s reasonable to expect that the Arctic’s ice-free “season” will grow, giving more opportunities for Russia to supply east Asia. For Beijing, this is an opportunity to diversify its energy imports while reducing its reliance on coal, the burning of which has clouded its urban areas with toxic smog.
For Russia, this is a sign of defiance against the West. Not only was this LNG facility able to come online as scheduled and within the budget, it was able to do all of that without Western capital and know-how, in one of the most extreme environments on earth.
And this is just the beginning. Novatek, Russia’s second-biggest gas producer (behind Gazprom, who else?) and the company behind this Yamal facility, just announced plans to construct a second export terminal nearby, bringing its investments in Arctic LNG projects close to $50 billion by 2030. Interestingly enough, Novatek is reportedly in talks with Saudi firms as they look to secure investors. If that happens, it would be another example of Russia getting closer with another energy giant. Riyadh and Moscow have been working together on the ongoing petrostate oil production cut, but that cooperation could soon extend to natural gas, as well.
This suggests that the West’s sanctions against Russian energy interests aren’t as strong as they were believed to be when they were drawn up. The West deliberately left current Russian oil and gas production alone, but it doesn’t appear to be seriously constraining Russia’s future production, either—or at least, not to the degree that might give Putin reason to think twice in the geopolitical arena.
In the long run, Chinese or Saudi money won’t be able to smooth over all of the wrinkles in Russian energy production. The U.S. Energy Information Administration (EIA) estimates that the Bazhenov shale formation—which extends onto the Yamal peninsula—contains 285 trillion cubic feet of technically recoverable natural gas, and nearly 75 billion barrels of oil. But China won’t be of much help getting those hydrocarbons out of all that shale rock, as it’s struggling to achieve commercial production at home. For that, Russia will need the kind of equipment, technical savvy, experience, and in all likelihood capital that only America can provide.
But Russia has plenty of conventional natural gas supplies, and an export hub on its Arctic coast makes it suddenly relevant in the supply-rich global LNG arena. For the United States, this means more competition in an already crowded market. For Europe, this means that Russia now has more choices for where to sell its gas, which means more leverage for Moscow. While most analysis of the Europe-Russia energy dynamic focuses on the Continent’s dependence as a consumer, there’s a similar over-reliance from the Russian suppliers’ perspective that LNG could help ease.
In the end, Arctic conditions—and not Western sanctions—will place the real limits on how much Moscow hopes to accomplish in its suddenly very real push to be a major LNG supplier.