The future of Yamal LNG in the Asia-Pacific market

The future of Yamal LNG in the Asia-Pacific market

In December 2017, Novatek launched its much-praised Yamal LNG in the Arctic Circle. Despite difficult permafrost conditions and financial limitations imposed by US sanctions, Yamal LNG was finished on time and on budget. Claims have been made that Yamal LNG will be directed to the Asian market, however, there are several factors that impede its chances of success in the Asia-Pacific.

Pivot to Asia?

Yamal LNG, co-owned by Russia’s Novatek, France’s Total SA and China’s CNPC and Silk Road Fund, is often referred to as Russia’s window  to the Asia-Pacific. The project’s website praises the plant’s unique location as an opportunity for flexible and competitive logistics which will enable year-round energy supplies to the Asia-Pacific and  European markets. In reality, Yamal LNG’s delivery flexibility is constrained by conditions in the Arctic. Between December and April annually, the Northern Sea Route connecting the Yamal Peninsula and the Asia-Pacific is closed. Shipments can only go westwards to European markets in these periods.

During the winter season, deliveries to Asian countries are less profitable and time-consuming. For example, it takes up to 72 days for a cargo to make a round trip to Japan; that’s 4.5 times longer than for a cargo from Australia (16 days). Moreover, in its efforts to reduce reliance on LNG deliveries transiting the Middle East, Japan is unlikely to be encouraged by a cargo route which passes the Strait of Hormuz and the Strait of Malacca – passages hindered by piracy and transportation bottlenecks.

Only from May to November, when the energy demand is usually lower, could vessels deliver to both Asia-Pacific and European markets. These weather-induced time limitations may significantly impact Yamal LNG’s production, which will have to function at a lower rate than its potential capacity. In contrast, Sakhalin-2, Russia’s first LNG project, exports gas to the Asia-Pacific all year-round. In 2016, the plant supplied 6% of Asian LNG demand. Indeed, supplies to Japan and South Korea have covered up to 8.6% and 8% of national demand respectively.

Yamal LNG routes

Subsidies and tax exemptions

The success of Yamal LNG may be remarkable, but it would not be achieved without government subsidies and tax exemptions. The Yamal-Nenets Autonomous Okrug received substantial privileges that made  Yamal commercially profitable even with low fuel prices. Novatek obtained a 12-year tax holiday from the Mineral Extraction Tax (MET) and was exempted from export duties with all Russia’s LNG projects. In addition, the Russian government supported the construction of  port facilities.

It is less surprising to see that LNG projects that did not receive as much government support have been postponed. Gazprom’s Vladivostok LNG, previously a flagship project of Japan-Russia energy relations, is no longer a priority for the Russian monopoly and has been indefinitely postponed. The development of Rosneft’s Far East LNG, once paralyzed by a power struggle between Gazprom and Rosneft, is now commercially unattractive due to high production costs. The final investment decision has been postponed until 2019 and the decision on construction will be possibly made after 2023 or later. Other Russian LNG projects such as Baltic LNG and Pechora LNG are directed to the West only.               

Outlook for expansion

The expansion of Sakhalin-2 – namely  building a third LNG train – is being discussed as a potential project in the framework of Japan-Russia energy cooperation. However, the source for the gas – the South Kirinskoye field – is currently under US sanctions because of its oil reserves. This makes it difficult for Gazprom to find potential investors in the West and its allies.

After its successful launch, Novatek’s CEO Leonid Mikhelson announced the plan to expand the plant’s capacity and to build Arctic LNG-2, which would produce another 19.8 Mt. The construction of Arctic LNG-2 is planned for 2023 with full capacity to be reached by 2026. Currently, France’s Total SA, China’s CNPC, Japan’s Marubeni Corporation and Saudi Arabia’s Saudi Aramco are showing interest in the project. However, according to the Institute of Energy Economics’ outlook for the LNG market, by mid-2020s supply and demand will reach a balance of about 400 Mt. Between 2020 and 2025, Oceania and North America are planning to start operation of their LNG terminals. By 2030, there will be no shortage of LNG supply, as with current projects under plan world LNG supply gets another 370 Mt. In this situation, it will be difficult to find buyers and to attract sufficient investment.

High dependency on China

By 2035, the Russian government plans to increase its share of the Asia-Pacific natural gas trade to 33%. However, so far Russia’s pivot to Asia has largely been a turn to China. China is now substantially involved in Russian gas projects. Chinese lenders provided support of $12 billion out of an overall $27 billion needed for Yamal LNG. Once Yamal is fully operating in 2019, 4 Mt are planned to be exported to China each year. Earlier, in May 2014, Russia also signed a 30-year gas deal with China. If developed on schedule, by 2030 the Power of Siberia and Altai pipelines together would deliver 68 billion cubic meters per annum (bcma), as opposed to 80 bcma to Europe.

In the attempts to find non-Western capital and to diversify energy supplies from the European markets, Russia will become more and more dependent on China. By 2030, China will be the main importer of natural gas, including LNG. China’s rising demand in gas and the lack of new buyers will make Russia more subject to China’s dominating position, whereby Chinese investors can exploit their strong bargaining position over price, routes and supplies.  



About Author

Maria Shagina

Dr. Maria Shagina specializes in European and post-Soviet politics with a particular focus on Eastern Partnership and Russia. She was previously a visiting fellow at the Centre for Russian, European and Eurasian Studies, University of Birmingham and is currently affiliated with the Geneva International Sanctions Network. She holds a double PhD degree from the University of Lucerne and University of Zurich and a M.A. from the University of Dusseldorf.

  • KilonBerlin

    why 72 days?! are they driving slow or are there (ice?) problems in the “arctic waters” ?! 72 days is damn long! I mean okay back they will wait or december – april will be over anyway but 72 days sounds extremely slow… and Oman, Indonesia and the giant Qatar LNG projects (Iran too, with Nr. 2 and 3 on the gas market, Saudi Arabia now is counting gas too like the UAE as they use extreme amounts for winning drinkable water, they need water so urgent that the by far largest, only large oil power plant left, i mean REAL large, they increased its efficiency by a smart way, a western technology I guess, cooling water steam is used as drinkable water… and as there are 14 units with each 400,000 kW or 400 MW each, its really giant… the power plant could cover many countries electric demand alone, it is supplied by the large oil tankers before they get to Sues… dimensions are hard to imagine… 400 million watt, 14 times… as the power plant has to be at the red sea (because oil tankers bring many many millions liters, some tankers can carry over 350 million liters, but it goes to Jeddah close to the coast, and than to Mekka and Medina, you know the “sacred” cities for Moslems… the drinking water is going to Mekkah province too…

    the United Arab Emirates started now to increase gas output on their oil fields or only gas-projects as it had to import gas from Oman and Saudi-Arabia and Saudi Arabia itself had to import it from Qatar or other sources… Qatar as the “baby country” it is can supply the half world and already builds the next generation of the “Q-Max” LNG fleet which at “eco” speed can deliver enough to Spain or France total natural gas demand, but Algeria and Nigeria got their gas pipeline to Italy… there is too much gas, in Poland and Italy at least a bit more gas is used as a private car fuel, a easy switch, you keep gasoline/diesel(don’t know if so easy with diesel, with gasoline motors its easy, you switch even with old models without hightech computers simply by pressing a button, some people who rely on gas (in Germany its a very small market, but if you check the route you always finds one station with the next being in range, we had once a polish registered car in Germany (legal), only the start is needing a short “running warm” period,

    like the lighter needs your hand or any heat source to get 0°C or more so that the liquid gas in the lighter burns, same with the car, or almost same… the gasoline in summer 1 minute is enough if you start driving directly, in winter its better to drive slow but steady for 5 minutes so that for 99,99% the gas is liquid enough for the pumps, price is MUCH cheaper but energy density and consumption combined is 30% more… many people only leave 5 to 10 liter gasoline tanks, over leave full gasoline tank and a LPG tank where the reserve tire usually is or even a larger tank in the back room or at small busses (taxis a few world wide, but they drive with CNG as gas sellers help you out with the more expensive CNG upgrade, since you need a real gas company to get CNG, its much more professional but also the “contract” for taking CNG from this gas company in addition to the very cheap upgrade… they stay diesel or gasoline taxis, but also here with a limited tank or a smaller space which is not such a problem if a CNG (compressed natural gas!) container is visible but safe in the back, and if the visible part has an equivalent of 25 liters gasoline and a 2nd and maybe 3rd hidden in the car not visible so easy, at least you can drive from morning to evening after taking a real big load of CNG…

    thats it… over a billion oil powered vehicles, but electric, gas and whatever else exists is just not enough, so there is a FAR to large offer on the gas market, a bit like with the oil before opec started their anti US/Canada project, but US is producing a new peak it seems… above 50$ they can even make projects at the best shale gas projects, at 60$ I would say almost everyone (or 95% and more) work at least with a little bit profit, but more likely already with a higher profit thanks to trumps new reduced corporate tax….

    Brazil would be a large importer without their ethanol E85, E30 and even some E100… so why not put now in the US and Canada much natural gas cars into service?! Yea the green wave… Tesla and Electric-Vehicles are “in”, even if the energy comes from natural gas burning power plants lol…… as a tesla uses like all E-Vehicles or all vehicles very much energy, sooo many hundred kiloWattHours per month if you drive daily to work and at the weekend a bit here and there… each time up to 90 or 95 kWh loading (even more needed as you always lose a bit during loading accus)