Russia’s Arctic Frontiers
Already the largest national contributor of gas to European markets, Russia stands to increase its global gas export footprint through the development of a huge LNG project in its Arctic region capable of serving both Asia and Europe.
“Despite being in the Arctic zone, there is plentiful conventional gas onshore.”
Mark Gyetvay, Novatek
The Russian Arctic is one of the most foreboding regions in the world; an area that is ice-bound for three quarters of the year and where there is no sunlight for three months at a time. In the winter months, temperatures can drop below -40°C. The region has traditionally been incredibly isolated, with nomadic local tribes cut off from the rest of the world due to the harsh conditions a lack of infrastructure. Despite these formidable obstacles, domestic and international companies are jostling for position in the region as it is one of the richest in natural gas in the world. Gazprom estimates that there are 38 trillion cubic meters (tcm) of gas reserves in the Yamal Peninsula alone, while former Russian Prime Minister Viktor Chernomyrdin speculated 55 tcm in 2009.
To capitalize on these reserves, the USD 27 billion Yamal LNG project was launched in 2013, with the goal of producing 16.5 million metric tons of LNG per year on becoming operational in late 2017. Yamal LNG is being led by independent Russian gas producer Novatek (50.1%) along with TOTAL (20%), China National Petroleum Company (CNPC) (20%) and China’s Silk Road Fund (9.9%). The Chinese investors came on board in 2014 when Novatek came under Western sanctions for Moscow’s role in the Ukraine crisis. At the recent European Gas Conference in Vienna, Novatek Deputy Chairman and CFO Mark Gyetvay was bullish on the project’s prospects; stating that “[Novatek is] at the forefront of the emergence of LNG from the Arctic zone” and highlighting the region’s abundance of accessible natural resources: “despite being in the Arctic zone, there is plentiful conventional gas onshore.”
In terms of the practicalities of extraction, aside from the fact that for a quarter of the year, engineers will work by torchlight due to the total lack of sunlight, Yamal has required significant investment in both basic infrastructure and highly specialized technology. The previously inaccessible region now has its first airport, with plans to be able to handle 300,000 passengers per year when the LNG plant becomes operational, as well as a dedicated port and train lines. On a more technical level, the extreme conditions necessitate that the plant be supported by thousands of piles driven into the permafrost; the first time that this technique has been used on such a mammoth scale. To transport the gas to international markets, 15 specially designed tankers capable of breaking the Arctic ice and reaching Europe to the west and Asia to the east have been commissioned; each with a capacity of 170,000 cubic meters.
“Extraction costs [in Russia] are some of the very lowest in the world. Russia therefore has an embedded advantage”
Mark Gyetvay, Novatek
Yamal is a game changer in that it opens up new markets for Russian gas exports. Much has been made of European reliance on pipelines of Russian gas but, as S&P Global Platts’ Francis Browne pointed out in Vienna, this reliance is a double-edged sword: “We [Europeans] agonize about gas security but it is actually vital to the Russian treasury that they trade with Europe and that is why they have done so on a consistent basis in the past.” With US LNG beginning to be exported to Europe in greater quantities, Yamal offers Russia a chance to broaden its export portfolio to Asian markets and increase its production of LNG which currently makes up less than five percent of global output. Novatek’s Gyetvay notes that “Extraction costs [in Russia] are some of the very lowest in the world. Russia therefore has an embedded advantage” over its global gas rivals. The Yamal project may just be its opportunity to capitalize on that advantage.
Writer: Patrick Burton