08.10.2019 Author: Dmitry Bokarev

Russia’s Standing in LNG Market


Hydrocarbon fuels are and will continue to be a primary energy source for some years to come. However, concern for the environment and the need for a more effective use of resources have pushed developed countries to switch from fossil fuels such as coal and oil to natural gas. The latter is considered to be a more environmentally-friendly and economical fuel source since it burns efficiently without emitting as many pollutants.

Natural gas in its gaseous state can be supplied by pipelines. If it cannot reach its destination via such pipelines, special carriers are used to transport its liquefied form.

Liquefied natural gas (LNG), as its name suggests, is a natural gas that has been cooled down by artificial means to its liquid form. In this non-toxic state, it can neither burn nor explode. In addition, when LNG is produced from natural gas its volume decreases by approximately 600 times. Hence, natural gas can be easily stored and transported in its liquefied form.

It is also worth noting that although supplying natural gas via pipelines is cheaper, such means of transporting it has several disadvantages. Delivering gas using pipelines is lucrative when its destination is fairly close to the source of this fuel. China’s West–East Gas Pipeline is the longest in the world (it is more than 8,700 km in length). Construction costs of such projects are enormous and may cancel out any financial benefits of transporting gas in its liquefied form. Moreover, the import / export of natural gas via pipelines limits buyers’ as well as sellers’ options, because they are forced to collaborate with each other even when it ceases to be profitable (otherwise all the money spent on the pipeline would be viewed as wasted). And if a pipeline links two or more countries, the importer-nation may become “a hostage to politics” of the exporter or transit nations who may threaten to stop the supply of gas in order to pressure its leadership.

Supplying gas in its liquefied form using tankers and other means of transport allows it to reach almost any destination irrespective of distance wherever is most convenient for a client. Not using pipelines also lets importers and sellers diversify their trade as much as possible.

Notably, one of the main producers of LNG in the world is Russia. In 2018, it was in sixth place among exporters of liquefied natural gas (the top three spots were taken by Qatar, Australia and Malaysia, respectively). This outcome is quite satisfactory considering the fact that the first LNG plant in the Russian Federation began operation in 2009 (the Sakhalin-II project).

Russia’s natural gas deposits are vast (and account for one third of known global reserves). However, many gas fields are in hard-to-reach places where weather conditions are harsh and necessary infrastructure is lacking (Siberia, the Far East and the Arctic regions). And some deposits are still undiscovered. During the last decade, the Russian Federation began exploring its hydrocarbon riches.

In 2007, the Ministry of Industry and Energy of the Russian Federation approved the Eastern Gas Programme, aimed at creating “an integrated gas production, transportation and supply system in Eastern Siberia and the Far East, taking into account potential gas exports to China and other Asia-Pacific countries.” Russia’s government handed over its management to Gazprom.

There are two core projects in the programme: Sakhalin II and Sakhalin III aimed at exploiting oil and gas deposits on the shelf of Sakhalin Island (in the Russian Federation), and also fields in Yakutia, Irkutsk Oblast, Krasnoyarsk Krai and the Kamchatka Peninsula.

As mentioned earlier, Russia’s first LNG plant Sakhalin II started its operations in 2009.

In 2017, YAMAL LNG (its majority stake is owned by Russian company NOVATEK) became operational.

In 2018, Russian Federation’s LNG exports increased by 70%, exceeding 18.3 million tons, and liquefied gas produced by YAMAL LNG accounted for 8.4 million tons of this volume.

In April 2019, Cryogas-Vysotsk LNG plant in the Leningrad Region began operation.

In the nearest future, Russia is planning on launching several other LNG manufacturing facilities. Russian Federation’s leaders are not worried about demand, as only from 2006 to 2016 it doubled and will continue to grow for some time to come. This trend was described at the annual LNG Producer Consumer Conference, which took place in Tokyo in September 2019. It was also reported that investments in the LNG sphere broke a record in 2019 to reach $50 billion.

There is a view that Russia’s exports of LNG may encounter difficulties stemming from rising tensions between the West and the Russian Federation, the imposition by the former of anti-Russia sanctions, and simply rivalry (after all the United States is also a big LNG supplier).

However, all of this is unlikely to cause serious problems for Russia since the main importers of LNG are Asia’s industrial giants. Japan, China and South Korea purchase 60%of LNG available for import. India is also one of the major liquefied gas consumers.

Japan, the Republic of Korea and India are partners of the United States. However, India is also as much of a partner to the Russian Federation. South Korea is also trying to forge cooperation with Russia by any means available, including the New Northern Policy (and LNG is an important part of the initiative). In September 2019, during the Eastern Economic Forum in Vladivostok, President of the Russian Federation Vladimir Putin stated that South Korea wished to considerably increase its purchases of Russia’s LNG and was even planning on building 15 more tankers for this purpose. Finally, Japan, the main US ally in the Asia-Pacific region and the largest consumer of LNG in the world, has become the main importer of Russian LNG immediately after the start of its production in 2009, and is still part of the number of its main consumers. Of the above 18.3 million tons of LNG exported Russia in 2018, more than 6.6 million tons fell to Japan.

As for the PRC, it is a strategic partner of the Russian Federation, and is currently engaged in a tough confrontation with the United States. And according to reports at the conference in Tokyo, it is Chinese consumption that will account for most of the growth in demand for LNG in the nearest future. It is expected that soon the PRC will import more LNG than Japan does.

Moreover, despite conflicts and sanctions, Europe still purchases Russia’s liquefied gas. In 2018, nations of the European Union imported 4.4 million tons of LNG from Russia, and 2.7 million tons from the United States. In 2018, Great Britain, the closest U.S. ally, bought 17% of its liquefied gas imports from the Russian Federation.

According to the information presented at the conference in Tokyo, it is expected that LNG imports by Europe will increase in the nearest future, possibly on account of larger deliveries from Russia. This may be facilitated by the convenient location of the Cryogas-Vysotsk LNG plant (in the Leningrad Region), and further development of Russia’s Northern Sea Route, which can be used to quickly deliver products from YAMAL LNG to Asia as well as Europe.

At present, the outlook for the LNG market looks favorable for Russia. Hydrocarbon fuels are a necessity, and no country in the world would claim that it had no need for them because of political tensions among other nations. The Russian Federation has vast hydrocarbon deposits, well-developed technologies for processing and delivering them, and many partners keen on collaboration. Hence, the future of its oil and gas sphere, including its LNG sector, looks bright.

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


Please select digest to download: