AlexandeR KlimentyeV, Andrej Haug, Amina Talipova, and Minzalya Ishmuratova, part of a Russian small and mid scale LNG research group, investigate the new role of the Russian gas industry.
Given recent market and technology developments, LNG is among the most rapidly developing global energy industry sectors. Competition is getting more stringent, and governments use a broad range of stimuli, from tax benefits to direct product marketing, to promote their producers.
In April 2020, the Russian Government approved the Energy Strategy up to 2035 to maintain the international energy market share and ensure domestic energy security. Following the Energy Strategy, it is hard to achieve these goals without a substantial LNG production increase. Target LNG output is set from 80 million tpy to 140 million tpy by 2035, which will raise the LNG share of the total gas production from 4.2% in 2018 up to 22.4%.
Table 1: Raising of LNG in the Russian gas industry according to the Russian Energy Strategy. Source: AlexandeR KlimentyeV's Economic Laboratory, based on the Russian Federation Energy Strategy up to 2035.
With all projects under construction and planned for up to 2035, Russia will produce up to 158 million tpy of LNG in its three main basins (Figure 1) to target different potential LNG markets.
Figure 1: Breakdown of Russian LNG projects by basins (as of January 2021). Source: AlexandeR KlimentyeV's Economic Laboratory.
LNG is an essential element of the Russian energy exports. It is valid for small (up to 80 000 tpy) and mid-sized (up to 2 million tpy), large scale Arctic, Baltic, and Far East projects.
Looking at the Russian LNG projects’ detailed structures of beneficiaries, no one can doubt that NOVATEK is the critical driver of new projects. However, NOVATEK’s share in installed Russian LNG production capacity peaked in 2018, at 60%. NOVATEK’s share is not expected to grow in subsequent years, staying in a range from 50% to 60%.
With projects implemented under Product Sharing Agreements (PSA), over 75% of the planned LNG production in Russia until 2035 is supposed to be exported under exceptions to the Federal Gas Export Law amendments, excluding Gazprom production share. Therefore, it may be concluded that the Gas Export Law has lost its significance and role in maximising natural gas rent. It is especially true when it comes to the successful build-up of LNG production capacities and its exports.
Figure 2: Breakdown of Russian LNG projects by companies (as of January 2021). Source: AlexandeR KlimentyeV's Economic Laboratory.
Natural gas from Russia is exported exclusively by PJSC Gazprom's through the pipeline system, under PSA with Shell from the Sakhalin LNG plant, by NOVATEK from LNG projects in the Arctic under the Federal Law on Gas Exports exemption, and with recent changes in legislation, from other NOVATEK LNG projects.
The reason for new exemptions arose in 2020. Previously, only Yamal LNG had export rights, while other NOVATEK PJSC LNG projects lacked a legal basis to export gas. This changed in April 2020 by decree of Russian President Vladimir Putin dated 5 November 2019, No. Pr-2276, when draft amendments to the Federal Gas Export Law have been prepared. The adopted changes to the gas export law might have been called the ‘Mikhelson touch.’ As it used to be ‘the Midas touch’ in the ancient Greek mythology that turned everything into gold, in the same manner, ‘Mikhelson touch’ was to turn undeveloped gas fields into the real source of LNG exports in a short time. Therefore, it is not by chance that LNG’s liberalisation is one of the elements of the Russian energy strategy up to 2035, which enables to fully unlock LNG production potential in Russia.
LNG production facility classification
The LNG industry can be divided into small, mid, and large scale projects, each with different value chains. New LNG production facilities, construction of new LNG terminals, and infrastructure development to deliver LNG by water, rail, and trucks enable LNG availability to consumers for transport, autonomous gasification, and autonomous heat and energy generation. Today, small scale LNG services (transhipment to containers, trucks, railway tanks, bunkering) are included in the service infrastructure at each new large scale LNG terminal. Thus, the LNG market’s small scale segment approaches perfect market conditions with numerous buyers and numerous sellers, i.e. LNG on LNG competition.
The Russian LNG production potential cannot be realised in full by building only large scale projects, and will have to rely on structural changes in the industry, including regulation:
- Growth in the number and output of small scale (up to 80 000 tpy) and mid scale (up to 2 million tpy) production facilities in Russia.
- Establishment and improvement of the legal regulation of access to both infrastructure (gas pipelines, LNG terminals) and production facilities to enable tolling for LNG production.
- Development of LNG transportation and distribution services, including ISO containers, mobile tanks, bunkering vessels, and small scale gas carriers.
- Formalisation and regulation of LNG exports. The continued monopoly and few exemptions hamper the small and mid scale projects that usually target market niches and adjacent countries.
The energy transition and global changes in energy carriers trigger changes in consumer preferences. As a result, the energy basket becomes more complex and resembles a mosaic – not only on the country level but also on smaller levels.
LNG is an energy carrier that meets both current and future requirements.
Different production segments and market models evolve in the LNG market. A version of the LNG project classification is shown in Table 2.
Table 2: Comparison of the small, medium, and large scale projects in Russia. Sources: Opportunities and Prospects of Small Scale LNG Development in Russia, edited by ?. Klimentyev, T.A. Mitrova, A.A. Sobko, etc. Moscow School of Management SKOLKOVO, Moscow, July 2018.
Unlike the majority of industrial technologies, LNG of equal quality can be produced at LNG plants of any size. Thus, LNG sales have no limitations and barriers in different geographical markets and market segments.
There are several global-level large scale LNG production facilities in Russia, but small and medium tonnage LNG production facilities are also actively developing. Amid the global increase in demand and supply, production chains are evolving on the market to make LNG available to as many consumers as possible.
Several LNG development regions with projects of different scale can be singled out in the Russian Federation:
- Baltic Region.
- Arctic Region.
- Individual segments from the Black Sea to the Pacific Ocean.
Upon completing the gas pipeline projects Nord Stream and Nord Stream 2, and by actively developing the Ust Luga port, Russia's Baltic shore will be appealing for implementing major gas processing projects.
Geographic proximity to European markets has triggered the development of an array of LNG projects in North-West Russia.
Table 3: LNG project development models in the Baltic Region. Source: Russian Small and Medium Tonnage LNG. Vol. 1, Regional Series: the Baltics; Moscow School of Management Skolkovo Energy Centre, edited by A.Klimentyev, T.A. Mitrova, S.A. Kapitonova - 2019.
For several years already, LNG from Russian small scale plants has been supplied to Poland, Finland, and marine vessel bunkering. Since April 2019, the medium scale project in Vysotsk started production and delivered cargoes to Baltic countries, the Netherlands, and even Spain.
Gazprom’s LNG project in Ust Luga is in progress. The Baltic LNG + Baltic Gas Chemical Plant is the first example of a combined LNG production and natural gas separation. As gas chemical facilities are developed in Ust Luga, the Baltic shore will resemble the Gulf of Mexico's coastline, with its developed gas supply system and a large volume of gas available for liquefaction and production of different chemicals.
LNG output in this region will be 16.5 million t by 2024 under the declared projects. The Baltic is well-positioned to become a global centre of LNG production.
The explosive Russian LNG production growth in the Baltic region up to 2025 will necessitate significant changes throughout the value chain and significant changes in the Russian LNG industry legal regulation.
The Yamal LNG project has transformed the Russian Arctic into a global LNG production centre. LNG production in the Arctic ensures clean energy for the global economy and helps to decrease greenhouse gas (GHG) emissions. It will be quite logical to widely use LNG to fuel vessels, industrial projects, and the Russian Arctic settlements.
Despite global-scale LNG projects implemented in the Arctic, a diverse resource base is available for small and mid scale LNG production. Such projects are to grow in number as the infrastructure develops.
Table 4: Arctic LNG project development models. Source: Russian Small and Medium Scale LNG. Vol. 2. Regional Series: the Arctic, Moscow School of Management Skolkovo Energy Centre, edited by A. Klimentyev, T.A. Mitrova, S.A. Kapitonov, 2019.
Total LNG output in the Russian Arctic and the High North regions may exceed 80 million t by 2030, which creates prerequisites not only for export scaling up but for LNG use as bunker fuel in Arctic waters and supply to local consumers in the Arctic.
With the limited infrastructure and transport availability in the Arctic, the development of the following areas will be essential:
- Establishment and improvement of the legal regulation of access to LNG reloading terminals being built in the Murmansk Region and Kamchatka, in particular, due to significant governmental investments into these terminals.
- Development of small scale LNG transportation and distribution services for the Arctic onshore and island territories, including ISO containers, trucks, bunkering vessels, and small tonnage gas carriers.
- Formalisation and regulation of LNG export.
With the global IMO mediated processes intended to mitigate environmental risks when using bunker fuel in the Arctic, Russia may put forward a global initiative of banning the use of any oil products across the Arctic for the industry and transportation sector, 2035/2040 being the horizon for its implementation. To this end, Russia may act as a global gas fuel supplier for marine vessels, the industry, and road transport in the future.
Active growth in the Russian LNG production in the Arctic will require significant LNG transportation and storage infrastructure changes, new LNG processing, distribution solutions, and major changes in Russian LNG industry legal regulations.
Gas availability in individual Russian regions and the roll-out of autonomous gas supply systems in Eastern Russia enable using its diverse resource base.
With the limited infrastructure and sales market for regional projects, the following areas for development are most likely:
- Focus on small scale plants.
- Development of small scale LNG transportation and distribution services provided by trucks and rail transport, including setting up of regional fleets of ISO containers, lorry tanks, cryo-filling stations, and for offshore projects, bunkering vessels, and small tonnage gas carriers.
- Formalisation and regulation of LNG export supplies to cross-border regions.
The booming investment activity in the Russian regional LNG production projects necessitates significant LNG transportation and storage infrastructure changes, new LNG process and distribution solutions, and significant Russian LNG industry legal regulation changes.
When creating small and medium tonnage production facilities in Russia, one can highlight three strategy models:
- Model 1: Small scale LNG networks.
- Model 2: Use of regional distinctions of small and mid scale LNG.
- Model 3: Implementation of projects involving industrial partners.
Table 5: Model 1: networks of Russian companies' small tonnage LNG. Source: Russian Small and Medium Tonnage LNG. Vol. 3. Regional Series: Kuzbass, Yakutia, the Far East, Sakhalin, the Black Sea, Moscow School of Management Skolkovo Energy Centre, edited by A. Klimentyev, T.A. Mitrova, S.A. Kapitonov, 2019.
Technology availability, sufficiently high quality for small-volume production and low start-up investments (in absolute terms) attract investors from outside the oil and gas sector into the industry. The use of regional distinctions is Model 2 of the Russian regional LNG industry.
Virtually all small scale plants in Asian Russia are owned by non-core investors (a group of private investors in Novokuznetsk, the AYaM construction association, a private investor, and the Sakhalin Development Corporation in Yuzhno-Sakhalinsk). Mid and small scale LNG is today the only gas monetisation option for East Siberian fields.
Mid scale projects of major players also have much in common and are implemented with the maximum use of technological advantages in each particular region.
The development of Russian and global LNG projects has drawn large corporations' attention, including state-owned ones.
Table 6: Model 3: implementation of projects involving industrial partners. Source: Russian Small and Medium Scale LNG. Vol. 3. Regional Series: Kuzbass, Yakutia, the Far East, Sakhalin, the Black Sea, Moscow School of Management Skolkovo Energy Centre, edited by A. Klimentyev, T.A. Mitrova, S.A. Kapitonov, 2019.
Russian LNG projects have been announced and are being implemented in all capacity segments, including small and mid scale projects, which may account for 13% of the total installed LNG production capacity in Russia in the future.
In the Russian small and mid scale segment, proprietary LNG production technologies are created, and Russian equipment can be applied.
Small and mid scale projects are gaining significance in the Russian gas industry development.
Early in 2019, the mid scale plant started its operations in Vysotsk. Shortly, two more mid scale plants are going to launch – Portovaya CS and Yamal LNG L-4.
Gazprom PJSC intends to leverage its designing and construction of Portovaya CS mid scale plant to implement similar size projects in the Far East and the Black Sea.
Small scale LNG technologies may help efficiently address issues of the Bosporus navigation safety, thus securing Russian LNG a place in the development of LNG bunkering in the Black and Mediterranean Seas.
2019 saw the first Russian LNG export to Mongolia by rail, at a distance of approximately 3000 km, using cryogenic tank containers.
LNG projects stimulate the gas industry development and may contribute to the establishment of Russian gas hubs, claiming the role of gas trading centres within Russia and neighbouring countries. It is especially viable for the Baltic and the Far East regions.
LNG production project quantity and size in Russian regions can be boosted by:
Governmental investments may play an essential part in LNG industry development, in particular, by establishing public corporations not only in the area of LNG production but also LNG transportation infrastructure and LNG consumption.
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