[Analytics] Asia connects to Russian energy

“Russia has the opportunity to create Canada out of Siberia.” The process of turning northern and eastern Russia into an energy exporter started in the 1990s, many years before the Financial Times in 2012 attributed the words quoted above to Artem Volynets, former CEO of EN+, the Russian aluminum and power producer, and before Russia officially focused its international economic policy on Asia. Scott Foster specially for the Asia Times.

In 2019 a great deal of progress was made in proving Volynets’s claim. Russian gas and oil today are of great and increasing importance to China, Japan, Korea and India.

In the second half of December, it was reported that Rosneft, Sakhalin Oil and Gas Development Co. (SODECO), ExxonMobil and a Japanese consortium made up of Japan Petroleum Exploration (JAPEX), Itochu, Marubeni and the Ministry of Economy, Trade and Industry (METI) are planning to expand the Sakhalin-1 project to include the production of LNG in addition to crude oil.

SODECO is an American, Japanese, Indian, Russian joint venture owned by ExxonMobil subsidiary Exxon Neftegas (30%), JAPEX (30%), Indian state oil company ONGC Videsh (20%) and two Rosneft affiliates, Sakhalinmorneftgas-Shelf (11.5%) and RN-Astra (8.5%). The Qatar Investment Fund owns 18.93% of Rosneft through its subsidiary QH Oil Investments and BP owns 19.75%.

A final decision is expected to be made in 2021, which would allow production of an estimated 6.2 million tons of LNG per year starting in 2027. That is equivalent to almost 10% of Japan’s annual LNG consumption. Sakhalin 1 supplies oil to customers in Japan, Korea and Russia.

The Sakhalin-2 oil & gas project is owned by subsidiaries of Gazprom (50% plus one share), Royal Dutch Shell (27.5% minus one share), Mitsui & Co. (12.5%) and Mitsubishi Corp. (10%). Sakhalin 2 supplies Shell Trading, Korea Gas, Tokyo Gas and several Japanese electric power and gas companies.

Sakhalin-3 consists of oil and gas projects owned by Gazprom, Rosneft and Sinopec, with the Russians exercising majority control. It is the main resource base for the Sakhalin-Khabarovsk-Vladivostok gas transmission system, which one day could be extended to North and South Korea. Russia and South Korea have been talking about this since 2008, but North Korea’s nuclear weapons program has gotten in the way.

At the beginning of December, Russia and China inaugurated the Power of Siberia pipeline, which runs more than 3,000km from gas fields west and north of Lake Baikal to the border at Blagoveshchensk and on to Harbin, Jilin and Liaoning via connecting Chinese pipelines. The project, which could eventually be extended to Shanghai, should supply China for the next 30 years under a $400 billion contract between Gazprom and China National Petroleum Corporation (CNPC) signed in 2014.

In November, Indian Oil Corporation Ltd. (IOCL) revealed that it was in discussions with Rosneft about increasing its heretofore insignificant imports of Russian oil and investing in Russian oil refining projects. Earlier in the year, Indian oil companies and the Indian Ministry of Petroleum and Natural Gas announced plans to participate in Rosneft’s Vostok oil project and expressed interest in Novatek’s Arctic LNG 2 and Arctic LNG 3 projects.

In September, at the 20th India-Russia Annual Summit and Russia’s Eastern Economic Forum, both held in Vladivostok, Prime Minister Modi and President Putin agreed to establish a “Far East Energy Corridor” to increase shipments of Russian oil, gas and coking coal to India. Russia is seeking to diversify its customer base while India is seeking to diversify its suppliers. India already has a gas import contract with Gazprom that runs through 2040.

Also in September, Japanese shipping company Mitsui O.S.K., the Japan Bank for International Cooperation and Novatek (Russia’s second-largest natural gas producer) signed a “Cooperation Agreement for LNG Transshipment Projects in Kamchatka and Murmansk” to facilitate the delivery of gas cargoes from Novatek’s Yamal LNG Project and Arctic LNG 2 Project to East Asia and Europe along Russia’s Northern Sea Route.

The transshipment projects will include the construction of floating storage units (FSUs) to transfer LNG cargoes from ice-breaking LNG carriers to conventional LNG carriers in Kamchatka and Murmansk. The gas will then be shipped onward to offloading terminals in Japan, China, Singapore and Western Europe. The ice-breaking vessels are designed in Finland and built by Daewoo Shipbuilding & Marine Engineering in South Korea.

Launched in 2010, the Yamal LNG project is owned by Novatek (50.1%), Total (20%), China National Petroleum Corporation (CNPC) (20%) and the Chinese government’s Silk Road Fund (9.9%). The EPC (Engineering, Procurement and Construction) contract was awarded to Technip, JGC and Chiyoda. Shipments began in 2018.

The Yamal LNG plant is located on the east coast of the Yamal Peninsula on the Gulf of Ob. The Arctic LNG 2 plant will be located across the gulf on the west coast of the Gydan Peninsula. The ownership structure of Arctic LNG 2 is Novatek (60%), Total (10%), CNPC (10%), China National Offshore Oil Corporation (CNOOC) (10%) and Japan Arctic LNG, a joint venture between the Japan Oil, Gas and Metals National Corp. (JOGMEC) and Mitsui & Co. (10%). The EPC contractors are TechnipFMC, Saipem and NIPIgaspererabotka. Novatek expects the plant to be completed between 2023 and 2025.

The point of all this detail is to show the enormous scope of work, the wide range of owners, builders, operators and customers, and the decades-long time frames.

Northern and eastern Russia have much in common with Canada: great distances, severe weather, abundant resources, interested foreign investors, and large, energy-hungry customers to the south. One major difference is that while Canadian energy is largely a captive of the US, Russia has linked itself to the entire Eurasian economy.

Scott Foster is a partner and analyst with JA Research, Tokyo.