By Michael Lelyveld
With the arrival of a special ice-class tanker from Russia’s arctic region this month, China has almost literally gone to the ends of the earth for natural gas.
On July 19, the liquefied natural gas (LNG) carrier Vladimir Rusanov docked at China’s Rudong terminal in eastern Jiangsu province with its first shipment from Russia’s Yamal LNG project using the arctic Northern Sea Route (NSR).
On July 6, the Russian gas company Novatek hailed the success of the Rusanov and its sister ship Eduard Toll in reaching open waters after transiting the frozen parts of the NSR passage without an icebreaker escort.
“The ice-covered part of the route was passed in only nine days with no icebreaking support, thus confirming the outstanding icebreaking capabilities of the Arc7 ice-class vessels,” Novatek said.
The success of the U.S. $27-billion (182-billion yuan) project depends on a fleet of 15 Arc7 tankers, designed to smash through ice up to 2.1 meters (6.9 feet) thick. Five of the ships have been built so far at a reported cost of U.S. $320 million (2.1 billion yuan) each.
Each tanker carries a cargo of super-cooled LNG with the equivalent of 172,000 cubic meters (6 million cubic feet) of gas.
State-owned China National Petroleum Corp. (CNPC) has contracted for 3 million tons (4 billion cubic meters) of the gas per annum over a 20-year period, suggesting it will need 24 cargoes each year to fill the bill.
Novatek owns 50.1 percent of the Yamal LNG project along with 20-percent shares for France’s Total and CNPC. China’s Silk Road Fund holds the remaining 9.9 percent.
The Yamal LNG project includes three “trains,” or liquefaction and purification lines, each producing 5.5 million tons of LNG per year. One is operational so far.
A successful venture?
Worldwide demand for gas, particularly in the high-priced Asian market, may make this a successful venture for Russia. The project has low “upstream” costs in the arctic region for gas exploration and development to balance the expense of new technology, equipment, and logistics.
After the first exports of Yamal LNG in December, Novatek is already talking about an Arctic LNG-2 project in 2022-23.
But it may take years to determine whether the development is a financial success.
“I have often wondered about the return on capital of projects like Yamal, notwithstanding the real achievement of the first train coming in under budget and on time,” said Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington.
“LNG projects are capital intensive but generate a lot of cash flow over a long period of time. Profitability often depends on cost efficiency and whether the project comes on stream at the right time in a cyclical LNG market,” said Chow.
The Yamal development relied heavily on Chinese financing, thanks in part to western sanctions against the project after Russia’s annexation of Crimea. Novatek has been pitching a financing role for China again to back Arctic LNG-2.
Whether the ventures are also practical and cost-effective for China remains to be seen.
Yamal LNG is only one of many solutions that China has been pursuing to satisfy its demand for cleaner-burning gas as it seeks alternatives to high-polluting coal.
Last year, China’s gas consumption rose 15.3 percent to 237.3 billion cubic meters (bcm), according National Development and Reform Commission (NDRC) figures. Imports of some 94 bcm included 47 bcm of LNG, increasing by about 50 percent.
An NDRC attempt to ban coal-fired heating in 28 northern cities last winter set off a scramble for more gas supplies, network projects, and storage facilities. LNG prices spiked, driving China into the high-cost spot market for more gas.
LNG imports in the first quarter of 2018 climbed 59.1 percent, the General Administration of Customs said.
Time savings in doubt
Even at last year’s level, China’s contracted volumes of Yamal LNG would cover only about 4 percent of gas imports. Spot purchases seem likely again this year, given the outlook for additional supplies from Australia, Qatar, Malaysia and Indonesia.
Despite the navigational breakthrough, the time saving of the NSR passage may not be as great as first thought.
Platts energy news reported that the Rusanov sailed from the arctic port of Sabetta on June 25, making the voyage to China in 24 days rather than the 18 days estimated last year by the U.S. Energy Information Agency (EIA).
The western winter route to southern China through the Mediterranean and the Suez Canal takes 32 days, according to the EIA, while sailing to northern Europe takes as little as
The Rusanov was originally expected to make port in China on July 17, kallanishenergy.com reported in June.
Information from Novatek on July 19 painted a more positive picture of the time saving. The company claimed that the NSR transit took 19 days compared with 35 days for the Suez Canal route.
Novatek has calculated that eastbound NSR shipping to Asian markets would cost 26 percent less than western passage, based on rates for January-September 2017, Interfax reported last year.
But the proximity to western markets raises questions for the entire strategy.
“The idea of building expensive ice-class tankers to ship LNG to Asia through the Northern Sea Route for part of the year always puzzled me as a commercial matter,” said Chow.
“Why not ship LNG to closer-by markets in Europe and swap for cargoes closer to Asian customers?” he said.
Much of the Yamal LNG is already transshipped and loaded from the ice-class vessels onto conventional LNG tankers to keep from tying up the more expensive ships for long periods to save costs.
Russia’s strategic priorities
Chow noted that Total and CNPC chose not to increase their stakes in the project when the opportunities were presented, and commitments to Arctic LNG-2 have yet to be made.
“Clearly, Russia and China have other than commercial reasons to want to develop transit through the Northern Sea Route. Again, the motivation appears to be more strategic than purely economic,” he said.
Arctic development has been high on the list of Russia’s strategic priorities as it presses its extensive territorial claims in the north.
China has also declared its interest in the northern waters with a white paper in January and plans for a “Polar Silk Road.”
Russian President Vladimir Putin has been an enthusiastic supporter of the Yamal projects and NSR transit.
At an opening ceremony in December, Putin cited plans for a fleet of “leader” icebreakers to break ice of any thickness.
“This means the Northern Shipping Route can serve any part of the world all year round. It can already serve the East six or seven months and the West all year,” Putin said, according to Interfax.
Environmentalists may see conflicting interests in China’s new access to arctic gas, made possible thanks to global warming. But the irony has been effectively lost on government planners who seek to reduce the country’s reliance on coal.
It is unclear how the cost of the new Russian icebreakers would be covered. But Putin has already made clear that high-priced Yamal LNG should not undercut Russia’s interests in selling larger volumes of cheaper pipeline gas.
“Firstly, the production and export of LNG shouldn’t weaken positions on the pipeline gas market we’ve already attained,” Putin said in December at a ceremony in Sabetta.
“The work should be carried out in such a way so that LNG projects do not compete with our pipeline gas. Instead, we need to create conditions to balance and mutually reinforce the two areas in order to maximize returns overall,” he said.
Less advantage for China
The warning suggests that the Yamal projects are designed to be a good deal for Russia and something less advantageous for China.
Behind Putin’s statement lies a long history of attempts to break the export monopoly of the Russian gas giant Gazprom, which plans to start pumping larger gas volumes to China through its U.S. $55-billion (372-billion yuan) Power of Siberia pipeline project in December 2019.
Gazprom fiercely opposed the Yamal LNG project as an infringement on its status before Putin decided to make an exception to the export monopoly in 2013, but only for LNG.
Putin’s statement in Sabetta may be seen as a sign that the concern is still high on Gazprom’s agenda, suggesting that China is unlikely to benefit from any competition among Russian suppliers.
Russia’s state-owned Rosneft oil company has mounted a separate assault on Gazprom’s export monopoly by seeking access to the Power of Siberia pipeline for its own gas.
In 2014, Gazprom signed a contract to supply CNPC with 38 bcm of gas annually over a 30-year period through the 3,000- kilometer (1,864-mile) Power of Siberia pipeline. The Russian company has hopes for a second line through the Altai mountains on a western route for another 30 bcm per year.
Last month, Gazprom CEO Alexei Miller raised the company’s medium-term forecast of China’s annual demand for Russian pipeline gas to 80-110 bcm in 2035 from a previous ceiling of 100 bcm, Platts reported.
Earlier this month, the Chinese Academy of Social Sciences issued a 30-year forecast of the country’s gas growth, estimating that demand will reach 520 bcm in 2030 and 800 bcm in 2050, the official English-language China Daily said.
Please Donate Today
Did you enjoy this article? Then please consider donating today to ensure that Eurasia Review can continue to be able to provide similar content.