The Russian gas projects in the Arctic may slow down due to the disappearance of foreign investors and problems with import phaseout in the face of new sanctions.
By Artem Aldanov
The Arctic, according to experts, is a unique region in terms of the potential gas production. Its development is a priority for the Russian oil and gas industry and one of the key drivers to maintain the existing gas production volumes.
There are several main gas projects in the Arctic. Two of them are being implemented by Gazprom, and they are related to Kharasaveyskoye and Kamennomysskoye gas deposits. Two more projects are being implemented by NOVATEK. The Yamal LNG and Arctic LNG-2 projects include natural gas extraction and liquid gas production (LNG). Moreover, Arctic LNG-2 was originally created together with international partners.
Amid uncertainty
Due to recent political events, experts believe, the gas projects in the Arctic may face various difficulties. In particular, as Maxim Chernyaev, Associate Professor of the Economics Faculty at RUDN University, notes, it may look on paper that Kharasavey project will suffer significantly. Since the gas produced there was supposed to go to Europe via Nord Stream 2, which is currently frozen. And it is difficult to give an unambiguous answer about the fate of other projects in the current conditions of uncertainty and turbulence in the energy markets. Presumably, Arctic LNG-2 project should suffer the least, since the main market for Russian LNG is the Asian region.
But, Associate Professor Chernyaev adds, there are also problems with the import phaseout. “In Russia, there are no competitive technologies and equipment as Western ones to produce gas underwater (previously these technologies were supplied from Germany and the Netherlands). It can significantly complicate and delay the development of the Kamennomysskoye deposit. There is probably a difficulty associated with equipment for non-heating soil at Arctic LNG-2. During production, a large amount of heat is released, the frozen soil of the polar latitudes can begin to thaw, which is definitely a problem”.
According to Alexander Klyuchnikov, head of the analytics and forecasting department at JSC PTPA, the most vulnerable project now is Arctic LNG-2. At the moment, the project’s first line is almost completed, and the project launch is scheduled for 2023, and most of the equipment for the second line has been purchased. “At the same time, some problems arose due to sanctions. First, foreign investors withdrew from the project. Their share in the project was significant, and it is simply unrealistic to quickly find an alternative at the moment. The next problem is a failure in the supply of equipment. Foreign technology was chosen for the LNG production lines, but it will be necessary to completely change the plant layout to switch to domestic equipment. Now the company is doing everything possible to find alternatives to the EU and US equipment, for example, a floating power plant will be ordered from Turkey to supply power instead of the American gas turbines Baker Hughes. But it’s easier to agree on the already ordered equipment to complete the second line than to completely redesign the entire project,” the expert adds.
Slightly more optimistic is Sergei Melnik, the director of the Resursy practice from Strategy Partners company. According to him, the sanctions in their current composition and configuration will obviously slow down the development of both existing and ongoing projects of PAO NOVATEK, but probably will not stop them. Despite the significant dependence of similar projects on Western technologies, there are prospects for import phaseout. A good example is the functioning fourth production line at the Yamal LNG plant, while the problem of sea imports has been solved at the state level for several years.
“The financial consequences of the sanctions reflect a relatively lower level of risks. Yamal LNG and Arctic LNG-2 are examples of successful project financing, in which they used the resources of both Russian and international banks and financial institutions. The suspension or freezing of financing from international partners actually means a liabilities refinance in Russian banks, which will be successful because of finished production and existing contracts for the sale of products,” Mr. Melnik believes.
Long term
It is unlikely to achieve 100% localization of equipment for LNG plants earlier than in ten years, believes Vadim Petrov, State Secretary of the Russian Environmental Chamber and Chairman of the Public Council at Roshydromet. But this whole situation gives huge potential for Russian manufacturers of necessary equipment, which will lead to an increase in jobs and tax payments. “Against the loss of Western technologies and equipment, the forecast for gas liquefaction production has been reduced to 80–120 million tons by 2035, from the initial 120–140 million tons. But Russia is betting on the Arctic and the Arctic shelf development in the long term. It is assumed that about 13% of the world's oil reserves and 30% of gas reserves are at the bottom of the Arctic Ocean. The Arctic is the most important region that will ensure the future of Russia. By 2050, approximately 30% of all energy commodities will be produced in the Arctic. Natural gas, due to its environmental and price characteristics, will play a key role in global decarbonization in the long term. The environmental performance of the Arctic LNG-2 project will ensure its long-term competitiveness in the transition to a low-carbon economy and increasing requirements for LNG projects to reduce CO2 emissions,” says Mr. Petrov.
Meanwhile, according to independent expert Anton Sokolov, not everything is clear with the Arctic development by Russian companies, despite many statements. Currently, the geological exploration isn’t practically conducted in the seas of the Eastern Arctic. All our fields are concentrated in the Barents Sea and the Kara Sea. In the Barents Sea the problem of ice formation (with the exception of the Pechora Sea) practically does not exist. In the Kara Sea such a problem certainly exists, but the “window” of open water is much longer than that of the seas located to the east. Under the current conditions, Scandinavian exploration service companies specializing in offshore Arctic exploration are leaving our country (or simply not coming), and our country has no ice-class exploration vessels. It is not enough to find a deposit, the expert emphasizes, it needs to be developed, which can also become a problem, sometimes insurmountable: just remember the "sleeping giant" named Shtokman [the Shtokman deposit].
“There are, of course, reasons for optimism. Russia's updated maritime doctrine provides for the removal of administrative barriers and support for domestic gas exporters, producing offshore mineral resources. Undoubtedly, favorable regulations and legislation will help intensify the development of the Arctic mineral resources, but this seems unlikely without the development of domestic science and engineering. A high-quality science is the basis for the development of new exploration and producing methods and means. Also, a transparent ROI (return on investment) for mineral developers and the state that supports them will not be superfluous,” concludes Mr. Sokolov.
