Despite its shaky economic performance over the past two years, Russia is pushing ahead with a wealth of multi-billion dollar oil and gas projects. Featuring pan-Baltic pipelines, enhanced oil and gas trading platforms, and massive transportation deals, Russia’s energy ambitions are not to be ignored.
Sometimes controversial, but always attention-commanding, here is a cross-section of Russian oil and gas projects to monitor in 2017.
European Russian oil & gas projects
Nord Stream 2
Cost: $11 billion
Germany, which already sources 38% of its natural gas supplies from Russia, is stepping up its demand. The solution, according to Russia, is to build a brand new pipeline to boost supplies to Europe while bypassing Ukraine.
Gazprom’s $11 billion project will pump liquid natural gas from Vyborg in Russia to a terminal in Greifswald on Germany’s northern coast – an undersea journey of some 1,200 kilometers. At peak production, Nord Stream 2 will deliver an annual total of 55 billion cubic meters of gas to Europe.
Despite the controversial nature of this project, earning condemnation from US and Polish government officials, Gazprom is determined to push ahead. October 2016 saw the delivery of the project’s first pipes, including units from Germany’s Euro pipe GmBH in preparation for 2019’s first gas deliveries.
A collection of international partners, including the Shell, French company Engie and Austria’s OMV AG, have been involved in Nord Stream 2 since its inception. Reports of crucial partners withdrawing under Polish pressure have been circulated. However, Nord Stream 2’s partners met in St. Petersburg in October 2016 to reaffirm their support for the pipeline.
Whatever the view of international commentators, Gazprom and Nord Stream 2 are more determined than ever to push on with Nord Stream 2’s construction.
LNG hub in St. Petersburg
Timeframe: 2018 onwards
The Baltic Sea is already a hotbed of LNG activity. Terminals, such as Lithuania’s Klaipeda, Poland’s Swinoujscie and a site under development in Gothenburg, Sweden, make it one of the most competitive environments in oil and gas.
Coupled with an increased demand for LNG stemming from regional ferry operators, who are employing more LNG-powered vessels in their fleets, it is easy to see why Russia wants its own piece of the Baltic action.
Russia, therefore, will also develop storage and processing facilities around St. Petersburg and the Baltic ports. LNG-Gorskaya, a Russian investment firm specializing in natural gas projects, was given the go-ahead to construct a new LNG terminal at the port of St. Petersburg.
Comprised of a plant assembled on three non-self-propelled barges, gas pipeline, loading rack, jetty and three bunkering barges, LNG-Gorskaya’s proposed plan is ambitious. The company hopes to begin production, which would amount to 1.26 million tons of gas annually, in 2018.
Russia’s drive to establish itself as a major LNG player in the Baltic region will likely result in further facilities. As such, a big demand for machinery, equipment, and knowhow will be emanating from the St. Petersburg region in the near future.
Cost: N/A at the time of writing
The St. Petersburg International Mercantile Exchange was once a point of contention for international firms interested in Russian gas, thanks to opaque pricing and a lack of cooperation when it came to disclosing trading volumes.
Now, SPIMEX is opening up to the world to boost St. Petersburg’s gas hub potential – going on a charm offensive around Europe, and taking steps to make its pricing of Russian gas much more transparent for the international spot market.
September 2015 saw SPIMEX, state-owned pipeline company Transneft and Russia’s Federal Antimonopoly Service, sign an agreement to optimize exchange trading of oil and petroleum products. They will be streamlining procedures and updating SPIMEX’s electronic trading platform to make transparency a non-issue.
SPIMEX’s global integration will ensure Russia has a world-class trading platform to match its new transportation and storage infrastructure. Russian resources at Russian prices has long been a goal of the Putin administration. With SPIMEX, it looks closer than ever.
Central Russian oil & gas projects
Yamal LNG Plant
Cost: $27 Billion
Yamal is another vital part of Russia’s LNG strategy. With waves of international investment, including a $12 billion loan courtesy of a consortium of Chinese banks, the facility’s funding has been fully secured. Construction is now set to start in earnest.
A range of foreign companies is supplying Yamal, and main stakeholder Novatek, with vital construction components. Take Norway’s Teekay LNG Partners. The company stated in September 2016 it was supplying the Yamal development with one of its unchartered 174,000 cubic meter MEGI LNG carrier newbuilds on a 15-year fixed rate charter deal.
French company Technip pre-empted Teekay’s activity by outfitting the $27 billion plant with necessary technological modules. Technip had delivered all its Yamal-bound modules by the end of 2015.
Novatek, despite being hit by US sanctions just after announcing the Yamal facility’s development, is feeling confident. Its first gas lines were reported as 76% ready in September 2016. Overall construction is said to be 60% complete at the time of writing. Once operational, with first gas cargos expected in 2017, the Yamal LNG plant will produce up to 5.5 million tons of LNG annually.
Caspian exploration and transportation
Cost: N/A at the time of writing
Most Caspian production is in non-Russian acreages, so transportation is the key concern for Russia’s energy operators in the region. While some companies such as Lukoil, which announced in September 2016 it was to start producing oil at its Vladimir Fillanovsky Field development, are actively exploring the Sea, others are focusing on linking transportation deals.
Azerbaijan’s SOCAR and Russia’s Transneft, for example, signed a new oil transportation deal in February 2016. Utilizing the Baku-Novorossiysk pipeline, and collecting oil from the Azeri Sangachal terminal, SOCAR will transport 1.3 million tons of oil monthly from the Caspian Sea.
Transneft has a history of activity in the Caspian region. Since 2008, it has held a 31% share of the Caspian Pipeline Consortium (CPC) – making Transneft the group’s majority shareholder. Not just a consortium, the CPC is also a vital pipeline linking the Caspian Tengiz Field to Russia’s Black Sea coast.
Russia is intent on securing not only its own supply lines, but also those to Europe and beyond. Expect to see a flurry of transportation deals and negotiations underway in 2017 and beyond.
Russian Far East oil & gas projects
Sakhalin-2 gas hub
Cost: N/A at the time of writing
Timeframe: 2015 – 2021
Gazprom and the Royal-Dutch Shell (Shell) met in Sochi end of February to approve a memorandum of understanding (MOU) defining the roadmap to proceed to the Sakhalin II expansion project with the addition of a third liquefied natural gas (LNG) train at the existing Prigorodnoye plant at the south of the Sakhalin Island in Far East Russia.
This Sakhalin II third LNG train project was in intensive discussion between Gazprom and its partners Shell, Mitsui & Co (Mitsui) and Mitsubishi Corporation (Mitsubishi) as each member of the Sakhalin Energy joint venture had different views regarding such expansion.
Russia is planning to add a third production facility at the existing Sakhalin-2 plant, which currently produces 10 million tons of gas annually. Gazprom will be spearheading the project, in collaboration with Shell, plus Japan’s Mitsui and Mitsubishi. Mitsui’s CIS Managing Officer, Hiroshi Meguro, expects the site’s planned third LNG liquefaction train will add an additional 5.4 million tons of gas to the supply each year.
2015 saw the Sakhalin-2 site extract around 10.8 million tons of natural gas, alongside 5.15 million tons of oil, making it one of the world’s foremost LNG facilities. Shell, which owns a 27.5% stake in the project, has stated Sakhalin-2 supplies 4% of global LNG, with South Korea and Japan as its key markets.
Preparation for the design and front-end engineering documentation for Sakhalin-2’s expansion was nearing completion at the start of October 2016. Gazprom hopes the third train will come online in 2021. Once complete, this expansion could promote Russia’s first offshore LNG facility to the status of a world leader in natural gas production.
Power of Siberia-Chin
Cost: $20 billion total ($1.17 in 2016)
A voracious energy appetite, coupled with a gigantic population, imposes some tough demands on China’s energy grid. Electricity generation in the north of the country is a particularly hot topic. Now, China hopes to draw on Siberia’s vast natural resource stores to satiate its massive energy demands.
Gazprom and the China National Petroleum Company (CNPC) signed a contract in September 2016 to build a cross-border section of the Power of Siberia pipeline, which will pass under the Amur River. Gazprom’s Western Siberian fields will be the source for its Chinese suppliers.
Such is China’s need for steady energy supplies that CNPC and Gazprom inked an agreement for Gazprom to supply 38 billion cubic meters of gas over a 30-year period. Over this period, China will purchase $400 billion worth of gas from Gazprom.
Despite this energy agreement, the Power of Siberia pipeline has endured funding woes in recent years. Gazprom slashed budgets again in February 2016. The state-owned energy monopoly will subsequently be spending $1.17 billion on the pipeline this year – less than half of 2015’s budget of $2.6 billion. Gazprom Chairman Alexei Miller, however, has stated first supplies to China will commence in 2019.
Russia’s ‘petro-power’ has become an increasingly clear threat to all the states which buy Russian oil and gas. This is obviously especially true for the small, poor, highly dependent states of what Russians call the ‘near-abroad’—the former Soviet states. As we have seen, Russia has used its influence both to reward its friends and punish its enemies, seeking to regain its influence over the region. It has shown it can be successful, and even when it is not it can impose high costs on those who dare to defy it.
Yet the impact of Russia’s actions extends far beyond Russia’s immediate neighbors. For example, Western Europe now has great cause for concern. Although it is less dependent on Russia than the former Soviet states, Moscow’s willingness to ruthlessly use its ‘petro-power’ has led to much worry among EU states—and, as we have seen, to increasing efforts to persuade Russia to sign an Energy Charter restraining its influence. Other countries, such as the U.S., also have reason to be concerned about Russia’s oil wealth. While the U.S. does not depend directly on Russian oil and gas, it has many allies that do. Russia also exerts some influence on global prices, especially in today’s unsettled, nervous ‘seller’s market.’ It has recently tried to enhance this leverage by creating an organization of natural gas exporters, modeled on OPEC. Any decision by Moscow to limit production would immediately cause world prices to jump.
Finally, the U.S. and others around the world are also concerned about another facet of Russia’s ‘petro-power’: the huge war chest of oil and gas revenue that Moscow has accumulated. By early 2008 Russia held over $157 billion in its ‘Stabilization Fund,’ one of a number of ‘sovereign wealth funds’ which have emerged in recent years worldwide (Kramer, 2008). Disturbingly, these sovereign wealth funds are often held by countries which are undemocratic and have limited commitment to free markets. Also, more and more, countries with regional or worldwide geopolitical ambitions control large wealth funds.
In short, the surging price of oil and gas has driven a fundamental reallocation of global wealth. This can be seen in the fact that oil exporting states had a collective balance of payments surplus of $88 billion in 2002 and $571 billion in 2006, an increase of almost five times in only four years. Despite the current decline in oil prices, projections for the longer-term future are even more sobering. A recent report projected that sovereign wealth funds could expand from $2.5 trillion in 2007 to $27.7 trillion in 2022. Thus, as the world warily watches the rise of politically ambitious ‘petro-states’ like Russia, there is a reason for concern. And all countries, not just Estonia or Belarus, should be aware of the cynic’s version of the golden rule: “He who has the gold makes the rules.”