Russia looks to build ‘LNG Island’ to supply booming Asian market

Russia’s largest LNG (liquefied natural gas) producer is looking to boost supply to the fast growing Asian markets by upgrading its facilities in the Far East.

While Russia’s gas giant Gazprom is working to complete the Power of Siberia gas pipeline expected to begin delivering gas to China in December 2019, another Russian company — the country’s biggest liquefied natural gas (LNG) producer Novatek — is looking to boost LNG supply to the growing Asian market. 

While it continues to keep more than a third of the European gas market with pipeline gas supply, Russia is also increasingly looking east and aiming to take a larger portion of the booming Asian LNG demand, led by China.  

Novatek has one producing LNG plant, Yamal, and aims to reach a final investment decision (FID) on another one, Arctic LNG 2, this year.

The Russian firm has recently signed a preliminary agreement with Japan’s Saibu Gas, under which the companies will consider potential cooperation in entering the end-consumer LNG market in Asia. Novatek will optimize its LNG supplies to the Asia-Pacific region by using Saibu Gas’s Hibiki LNG terminal in Japan.

“The Asia-Pacific region is a priority destination for NOVATEK’s LNG projects. Our ability to use the Hibiki terminal will help diversify our customer base and increase the flexibility of deliveries to the premium LNG markets,” Novatek’s First Deputy Chairman of the Management Board Lev Feodosyev said last month.  

Novatek also plans to build, with the support of Russia’s government, a marine LNG transshipment complex in the Kamchatka Peninsula in Russia’s Far East, close to the Asian markets.

“The construction of the Kamchatka transshipment complex will increase the efficiency of LNG deliveries from the Arctic zone by optimizing transport logistics,” Novatek’s Chairman of the Management Board, Leonid Mikhelson, said last September.

“We plan to create a Russian LNG hub for shipments to consumers in the Asia-Pacific region. This investment will contribute to the development of the Northern Sea Route allowing for the optimal use of the existing Arctic tanker fleet,” Mikhelson noted.

Japan’s Saibu Gas, for its part, said this week that it would consider building two additional LNG tanks and upgrade its re-exporting capability.

Thanks to LNG storage hubs closer to Asian markets, Novatek could cut shipping costs and better meet spot demand in Asia, China in particular, according to analysts who spoke to Bloomberg.

“Given its LNG sources are very far from Asia, storage and re-loading will enable it to capture shorter-term arbitrage opportunities,” Wood Mackenzie analyst Nicholas Browne told Bloomberg.

Russia’s LNG supply focus on Asian markets is not surprising at all, considering that natural gas demand in Asia, and China specifically, will continue to grow.

China’s natural gas imports by pipeline and as LNG hit another record in December 2018 amid the Chinese government’s push to have millions of households switch from coal to natural gas for heating. Total natural gas imports for full-year 2018 soared by nearly 32 percent annually to 90.39 million tons, solidifying China’s position as the world’s biggest importer of the fuel.

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Novatek has yet to make the FID on the $27-billion Arctic LNG 2 project, but analysts widely expect that it will reach FID this year.

France’s Total, a partner in the operating Yamal LNG project with 20 percent, expanded last year its partnership with Novatek, and the French group now has the opportunity to buy a 10-15-percent direct interest in Arctic LNG 2.

Reports have it that various other potential partners, including Saudi Aramco, are vying for a stake in Arctic LNG 2.

According to Wood Mackenzie, Novatek will aim to reach FID on Arctic LNG 2 this year, and at least one new investor will join the project in 2019. The LNG project in Russia is one of the frontrunners to reach FID this year, alongside one LNG project in Mozambique, Golden Pass, Calcasieu Pass, and Sabine Pass Train 6 in the United States in what could be a record year for LNG project approvals, WoodMac says.

While keeping a grip on the European gas market, Russia looks to boost LNG deliveries to the growing Asian market with storage hubs close to end-users to reduce freight costs and increase flexibility in deliveries.

This article was originally published on Oilprice.com