21.02.2018 Author: Dmitry Bokarev

Russia May Become a Leading LNG Supplier in Asia-Pacific

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The serious environmental problems faced by China in the past decade have forced it to reform its energy industry. One of the main changes has been the large-scale transition from coal to a more eco-friendly type of hydrocarbon fuel – natural gas. China’s decision to shield its atmosphere from the products of coal combustion, replacing it with gas, which burns almost completely without leaving any harmful residues, proved to be beneficial for countries exporting natural gas, including Russia.

The environmental situation in China has long threatened the lives and health of its citizens. Factories and thermal power plants block out the sky of the country’s most industrialized areas with thick smog. It has reached the point where poor visibility on the roads due to smog causes car accidents. In these areas, significant mortality is recorded from diseases associated with failure of the respiratory system and poisoning with harmful substances.

The situation demanded radical action by the Chinese authorities. In March 2017, all the coal stations in Beijing and the surrounding areas were closed. For example, more than 33,000 facilities were withdrawn from operation in Hebei province. Such drastic measures resulted in fuel shortages. To make good the deficit, China’s energy sector needs huge amounts of natural gas.

China has its own gas fields which it is actively developing. In 2017, China produced more than 147 million cubic meters of gas, which was 8.5% more than the production in 2016. However, this quantity is not enough to meet the demands of China’s energy sector. Significant volumes have to be bought from abroad.

The cheapest way to supply natural gas from one country to another is via a gas pipeline. However, the construction of pipelines is a complex and expensive task, which can be made even more complicated if the terrain is challenging. In addition, once the pipeline has been built, it can be destroyed by a natural disaster or sabotage, or, in the event of deterioration in relations between the countries through whose territory it passes, it may simply be blocked.

For example, China is now receiving pipeline gas from Kazakhstan, Turkmenistan, Uzbekistan and Myanmar. Despite friendly relations with these countries, China cannot be absolutely sure that there will be no interruption to supplies. In all the above countries, there is a certain level of terrorist threat associated with the activities of various extremist organizations. A much more reliable option, in that respect, would be the Russian “Power of Siberia” pipeline, which will transport gas from Russia to China and other countries of the Asia-Pacific region. However, it will not be operational until 2019.

To ensure its energy security, it makes sense for a large importer like China to buy gas not only from different countries, but also in different forms. Thus, China’s interest in liquefied natural gas (LNG) has increased significantly. LNG is transported by sea in special tankers. This method of gas supply is more expensive than using a pipeline, but it has its advantages. Most importantly, there is no need for a pipeline.

In 2017, China imported more than 94 billion cubic meters of natural gas, and, for the first time, more than 50% of this volume (about 52 billion cubic meters) was in the form of LNG. In terms of the volume of LNG purchased in 2017, China became the world’s second largest importer after Japan, surpassing the Republic of Korea. China is expected to increase its LNG imports in the coming years. Other major consumers of this energy source, such as Japan, the Republic of Korea and Taiwan, also increased their imports of LNG in 2017. It is likely that in the near future the demand for LNG will continue to grow, and all its potential suppliers will be able to offer their goods on the world market, without any risk of having to reduce their prices.

In the current situation, none of the CIS nations now supplying China and the other countries mentioned above with LNG will be superfluous. Now, China buys most of its LNG from Australia, Qatar and Malaysia. The United States also intends to start producing and selling LNG, and its main target market may also be the Asia-Pacific region. However, for a number of reasons many experts believe that Russia is the most promising potential supplier of LNG to the Chinese market.

China’s transition to natural gas has coincided with the development of the Russian “Yamal LNG” project, which is concerned with the extraction, liquefaction and sale of natural gas from the South-Tambey gas condensate field (Yamalo-Nenets Autonomous Region, the RF). The main shareholder of Yamal LNG Company is the Russian gas company Novatek, but in 2014, 20% of its shares were purchased by China’s National Oil and Gas Corporation. Another 9.9% of its shares were acquired by the Chinese Silk Road foundation in 2015.

In December 2017, Yamal LNG plant began its work on gas liquefaction. The first production line of the plant to be launched has a capacity of 5.5 million tons per year (one ton of LNG approximately corresponds to 1.4 thousand cubic meters of natural gas). Two more production lines are to be commissioned in 2018-2019. In 2018, supply of Russian LNG to China will begin.

For a number of reasons, it is expected that in the near future Russia will become a leading supplier of LNG to China, as well as to the countries of South-East Asia.

Firstly, there are huge natural gas deposits on the Yamal Peninsula and in Western Siberia, which are among the largest in the world. The proven natural gas reserves in the South-Tambey field, on the basis of which the Yamal LNG project is realized, amount to 926 billion cubic meters. There are also many gas fields in the Yamalo-Nenets Autonomous Region (the YNAO). In total, about 20% of the world’s known natural gas reserves are concentrated in this constituent entity of the Russian Federation. In addition to the Yamal LNG project, Novatek is currently working on the Arctic LNG-1, Arctic LNG-2 and Arctic LNG-3 projects in the YNAO. Thus, the Russian Federation has enough resources to become a major supplier of gas to China. The proximity of the liquefied natural gas plant to the gas fields reduces the cost of delivering raw materials for processing, and, consequently, the final cost of the product.

Secondly, the import of gas from YNAO to China is beneficial in terms of logistics. The Yamal LNG project will involve not only the production and processing, but also the supply of gas to customers. As part of the project, work on the development of transport infrastructure is under way. The key elements of such infrastructure are the Arctic port of Sabetta, and Sabetta International Airport, both on the eastern shore of the Yamal Peninsula, near the South Tambey field and the LNG plant. In addition, Novatek plans to build a transshipment terminal for LNG on the Kamchatka Peninsula. This will help to create an efficient logistics chain for supplying LNG to all parts of the Asia-Pacific region. Kamchatka is close to China, Korea and South-East Asia, but even closer to Japan. So, the Land of the Rising Sun would also benefit from acquiring large volumes of LNG from Russia.

Thus, as a result of its development of the YNAO fields and of LNG production, Russia may soon become a leading supplier of this product in the Asia-Pacific region. LNG is technologically more advanced and expensive than pipeline gas. Yamal LNG and other similar projects, and the introduction of Russian LNG into the Chinese market, together represent a big step forward for the entire gas industry of the Russian Federation.

Dmitry Bokarev, political observer, exclusively for the online magazine “New Eastern Outlook.


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